You are on page 1of 74

DANUBIUS HOTELS GROUP ANNUAL REPORT 2011

Contents

Statement by the Chairman Quality in focus -2011 The Board of Directors The Supervisory Board Tourism in 2011 Report of the Board of Directors Report of the Supervisory Board Independent Auditors Report Consolidated statement of financial position Consolidated income statement Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Report on the 2012 business targets

2 5 7 8 9 12 29 30 32 33 34 35 36 37 69

ANNUAL REPORT 2011


Statement by the Chairman for AGM Annual Report 2011

Dear Shareholders,
It is no surprise that 2011 proved to be another extremely challenging year, against the background of the continuing crisis in the Eurozone and the economic problems in Hungary. Nevertheless Danubius Group increased revenues, more than maintained its operating profit and reduced borrowings; all due to extremely tight management of our activities. Our investment policy of the last decade to achieve geographical diversification through the acquisition of health spa businesses in the region continued to sustain the groups results. This policy will also provide important opportunities for development in the future. Hungary has been caught up in the European financial crisis and is currently negotiating with the European Union and the IMF on a range of issues. From the viewpoint of the tourism industry, it is important that Hungary concludes its negotiations on financial aid as soon as possible as uncertainty always raises question marks in the minds of potential tourists and conference organisers. Having said this, the fourth quarter of 2011 produced some positive signs as, helped by the weaker Hungarian forint, both sales revenue and EBITDA were ahead of the previous year. Nevertheless, the underlying problem of the imbalance of supply and demand in Budapest continued the prolonged and aggressive rates war which required an everyday fight from our sales people to hold on to market share. In addition, rising energy prices eroded some of the benefits achieved from various cost-cutting programmes implemented by management over the last three years, including the recent steps in 2011 of further reducing headcount, establishing new clusters Budapest and rationalising structures in the head office and some countryside hotels. Against these continuing efforts to improve the efficiency of our business, it was especially disappointing to learn of the demise of MALEV in February 2012. Whilst several of the budget airlines have quickly stepped into the breach, the transition away from a scheduled national carrier is bound to be painful and will further complicate the competitive position of Hungary in the global tourism market. MICE business and leisure groups will certainly be affected but, even now, it is too early to be sure of the full implications. Turning to the operational results for 2011, our Company continued to prove resilient to extremely testing business conditions and I would highlight the following aspects: Revenues increased by 2%, more than HUF 1 billion compared to 2010, mainly thanks to the strong fourth quarter and weaker Forint. Group occupancy increased by 0.7% compared to 2010, whilst in Hungary the occupancy increase was 1.1% despite an increasingly competitive market. The operating profits and cashflow of the subsidiaries in Czech Republic, Slovakia and Romania played an important role in offsetting difficult trading conditions in Hungary. In spite of the HUF 260 million one-off charge for restructuring, the operational profit of the group improved by 37%. The net cash provided by our operating activities increased from HUF 4.3 billion in 2010 to HUF 4.6 billion in 2011, due largely to effective management of working capital. The overall level of Group borrowings decreased considerably by EUR 7.7 million from the beginning of the year, however interest costs increased due to high EURIBOR prime rates. Management exercised tight control over liquidity.

Statement by the Chairman for AGM Annual Report 2011


Due to the extreme volatility of the forint in the fourth quarter, the largely unrealised foreign exchange loss for the year amounted to HUF 1.9 billion compared to HUF 0.5 billion in 2010. As a result of the financial results, our loss after tax increased from HUF 1.0 billion in 2010 to HUF 2.3 billion, but, despite this, shareholders equity grew by just over 1%, due to translation gains on investments in subsidiaries. Against this background, I would like to mention four developments which can have a positive influence on our future business: First, the Companys results have been boosted over recent months by the relatively weaker forint and Czech Crown. If this continues in 2012, then our revenues and margins will benefit. Secondly, I already mentioned the diversification of our business and I would like to illustrate the importance of this with some figures. In 2011, 42% of revenue arose in the health spas outside Hungary and this figure rises above 60% if the Hungarian spas are included. Of course the Budapest market remains central to our activities, but it is an important advantage that the company is not as dependent on it as it was years ago. Marienbad and Sovata had particularly successful years and the Hungarian spa business performed ahead of 2010. Life was more difficult in Piestany where Slovakias membership of the Euro has intensified competitive pressures. A third factor is that not all markets are slow. The Russian market has continued to boom in Marienbad, with Russian guests now outnumbering German guests, and Russian guest nights in Hungary grew 39%. Poland and Turkey are also in the first tier of the healthier European economies and Hungarian guest nights from these countries were up 27% and 16% respectively on 2010. We will see in due course whether the Governments overtures to China bear fruit, but Chinese guest nights in Hungary were also up 37% on 2010. Occupancy in 2011 compared with 2010 was up in all countries, except Slovakia, but, looking forward, it is absolutely clear that we must accelerate our drive into new markets. and finally a huge opportunity is presented by the constant advance of technology. Not just internet and social media, but smart phones and other mobile devices which are being used more and more to research, make enquiries and book hotels. Whilst the big brands may have an advantage in such developments, in Hungary and our spa business we have much non-branded competition and a great chance to take a lead. In order to capitalise fully on these opportunities, it remains the case that further investment will be required in our properties. We have been able to complete substantial projects in Marienbad, the new Maria Spa, in Piestany, the renewed Balneotherapy section and in Sovata, a new wellness and spa area. In Hungary the climate for investment and crucially for funding investment has continued to be more difficult. We continue to look hard for the right solutions to funding the investment needs of our hotels but it will remain essential that, when we are able to invest, we invest wisely and in a way that will ensure a proper return on that investment. During the last year, I can inform you that CP Holdings increased its overall direct and indirect interest in the Company from 81.40% to 81.72% today, which ensures a 78.03% voting right. Given the 2011 results and the exacting business conditions which continue to face the Group, the Board is not proposing the payment of a dividend this year.

ANNUAL REPORT 2011


Statement by the Chairman for AGM Annual Report 2011

As I have already indicated, I expect that tough business conditions will continue in 2012, particularly in Hungary, where the economic situation is likely to lead to a further tightening of domestic demand. We must hope that the politicians across Europe are able to stabilise the economic situation, so lessening uncertainty and starting the process of rebuilding confidence in markets. I would like to thank the management and all employees of Danubius Group for their perseverance, hard work and loyalty throughout the last year. In Hungary, we are particularly grateful for the continued commitment of our people during a period of organisational change. Sir Bernards grandson and one of your directors, Alexei Schreier, has now been appointed Joint Managing Director of CP Holdings Limited and this is a further signal of the wholehearted commitment of the Schreier family and all at CP Holdings to the Danubius Hotels Group, its management and employees. As we look back on 2011, we can take particular pride in the results of our health spa hotels and the quality of our treatments and customer service which allow us to build further on our position as the leading spa hotel chain in Europe. In Budapest, our team has shown huge enthusiasm in an extraordinarily competitive market. Across the Company, we know that our people will continue to deliver these outstanding efforts during 2012. We will concentrate on improving all those aspects of our business over which we have control and, like many other businesses, look forward to the start of a gradual economic recovery. We are fortunate that our business is underpinned by our unique asset base and this will hold us in good stead for the future.

Sir Bernard Schreier Chairman of the Board

Quality in focus
Mission Statement

Our mission at Danubius Hotels Group, through listening to our guests, is to meet and exceed constantly their expectations. Quality is put at the heart of everything we do, whether at Health Spa Resorts or City Hotels. We give our associates the utmost of attention, knowledge and training.

ANNUAL REPORT 2011

Quality in focus
Mission Statement
We build and strengthen our leadership in operating Health Spa Resorts in European destinations. We create value through innovative international investments and management with social responsibility, efcient and environment friendly operations.

The Board of Directors

Sir Bernard Schreier


Chairman of the Board; Chairman of CP Holdings Limited and subsidiaries; Vice President of Bank Leumi Plc.

Alexei Schreier
Director of CP Holdings Limited

Iris Gibbor
Director of CP Holdings Limited

John Smith
Deputy Chairman of Danubius Hotels Group from 2007; Director of CP Holdings Limited and subsidiaries

Robert Levy
Chief Executive Ofcer of CP Holdings Limited from 2007; Director of subsidiaries

Sndor Betegh
Chief Executive Ofcer of Danubius from 1990 till 2006

Dr. Imre Dek


Senior Vice President of Danubius from 1990, Chief Executive Ofcer from 2006

Jnos Tbis
Vice President, Finance of Danubius as of 1991

Ing. Lev Novobilsky


General Manager of Lcebn Lzne a.s.

Jzsef Lszl
Manager of SAS Skandinavian Airlines in Budapest until 1998; honorary docent

Dr. Istvn Fluck


General Vice President of FEMTEC, Medical Director and Chief Physician of Budapest Spa Zrt.

ANNUAL REPORT 2011


The Supervisory Board

Tibor Antalpter
Chairman of the Supervisory Board from 2002; Ambassador of the Republic of Hungary to London from 1990 to 1995

Dr. Gbor Bor


Chief Executive Ofcer of Investor Holding Zrt. and Interag Holding Zrt.

Lszl Polgr
Auditor, forensic auditor in taxation and accounting

Dr. Andrs Glszcsy


Retired minister

Tourism in 2011

In 2011, the public accommodation establishments registered a slight decline due to lower domestic demand. The number of guests was higher by 1.5% while the number of guest-nights were 0.6% lower compared to previous year. The number of domestic guests decreased by 2.4% while the number of guest-nights lowered by 4.3% compared to last year. The number of foreign guests increased by 6%, while the number of guest-nights was up by only 3.2% compared to 2010. Accommodation establishments showed a 3% increase in revenue at current prices.
Increase of the number of hotel rooms in the period 2000-2011
2000 New rooms built between 20012011

Increase of the number of hotel rooms in the period 2000-2011


2000 New rooms built between 20012011

1 602 20 000 12 818 19 402 77%

10 000 1 805 0 2538 5-star

4-star

8 174

23%

3-star

In 2011, 3.7 million foreign guests spent 9.9 million nights in public accommodation establishments. Concerning major source markets lower number of tourists arrived from Germany, France and Italy, while there was an increase in case of Czech Republic, USA, Australia and United Kingdom. In the course of this period, public accommodation establishments recorded 3.9 million domestic guests and 9.5 million domestic guest-nights, the numbers of tourist arrivals decreased by 3,000, the numbers of guestnights decreased by 157 thousand compared to 2010. In hotels, having a two-third stake from domestic arrivals, the number of guest-nights increased by 3% compared with a year earlier, while boarding houses suffered a signicant, 25% decline. The number of tourist arrivals and guest-nights increased considerably in the wellness hotels.
Distribution of guestnights in commercial accommodations in 2011

Domestic Gernany

11% 4% 51% 2% 3%

Austria 2% Great-Britain 1% USA Italy Spain Other foreign countries

26%

In 2011, room occupancy in hotels was 46.5% on average, within this, 5 star units reached occupancy rate of 63.5%, while 4 star units reached an occupancy of 53.5%. In 2011 the occupancy rate in spa hotels was 54%. In the reference period, the number of guest-nights at Lake Balaton was lower by 6.4% in case of guests from foreign countries, and lower by 9.1% in case of domestic guests compared to previous year.

ANNUAL REPORT 2011


Tourism in 2011

In Budapest in contrast to Balaton because of the pick up in foreign demand the numbers of guest-nights increased by 4.5%.
Change of guestnights in hotels (2011/2010) 15,4% 15% 10% 5% 0% 5% 10% 15% 20% Domestic Germany Austria GreatBritain USA Italy Spain Other Total foreign countries 6,2% 1,3% 1,2% -1,0% -4,3% -6,6% -0,6% 7,3%

In the observed period, public accommodation establishments had gross revenues of HUF 245 billion. Within this, accommodation revenues amounted to HUF 136 billion. Total revenue increased by 3% compared to 2010. The gross average room rate was HUF 15,842, the revenue per available room in hotels (gross REVPAR) was HUF 5,812. In the last year the forint was weaker in average by HUF 4 than in 2010. In the high tourist season (July), the number of accommodation establishments operating in our country was 2,892, the number of available bed places was same than in 2010
Cost and balance of tourism-according to the current account balance (EUR million) 5000 4000 3000 2000 Balance: 2 229 1000 0 Balance: 2 248 Revenue: 4 051 Revenue: 4 030 Balance Cost

2010

2011

Source: Hungarian Central Statistical Ofce

10

Tourism in 2011

Tourism in 2011, Czech Republic The Czech Statistical Ofce reported that during the whole year 2011 compared to previous year, there was a higher number of guests by 5,7% and a number of overnight stays by 3,5%. Foreign tourists arrived 7,9% up and their number of overnight stays rose by 8,1%. There were also more residents guests by 3,4% in collective accommodation establishments but their number of nights went down by 1,1%. An average number of overnight stays is in a long term reducing; this was remarkable in 2011 too. Guests spent in average 3,0 nights in surveyed accommodation establishments. From the point of regions, the highest increase in the number of guests was reported in Capital Prague and Stredocesky region (both equally by 8,2%); a decrease of guests interest in accommodation was shown in Pardubicky region only (by 4,4%). In total number of overnight stays, there was the highest growth in Prague and Vysocina region (by 9,0%). In ve from fourteen regions guests stayed less nights than in 2010 in Pardubicky (by 8,4%), Jihocesky (by 3,6%), Plzensky (by 1,8%), Zlinsky and Kralovehradeckem (both by 1,9%). Czech Statistical Ofce Tourism in 2011, Slovakia According to data by the Slovakian statistical ofce revenues from the tourism sector went up by 3,6% in 2011. The number of accommodation facilities has dropped by 3,7% whilst the capacity of accommodation went up by 0,7% at national level. The number of guests visiting the commercial accommodation places was up by 5,3% (last year it was a an increase by 0,3%). The domestic demand shows a small accession (+2,2%) while the foreign one indicates a notable increase by 10,1%. In Slovakia the majority (59%) of guests are domestic similary to the the previous years. The number of guestnights in 2011 increased by 1,5%. Those arriving from the neighbouring countries (54,9% ) represents the greatest proportion among the foreign guests here (the Czech Republic is still on the top of the foreign guests list by 33% and this gure showed an increase in 2011 , visitors from Poland 12%, fom Hungary and Austria 4-4%). The German demand shows a growth in Slovakia, and at the same time US, Chinese, Russian South Korean, Finnish and Spanish demand indicates an increase too in 2011. Compared to previous year, in 2011 the number of foreign visitors from Europe rose by 9,5%, from Asia by 14% and from America by 20%.

11

ANNUAL REPORT 2011


Report of the Board of Directors
ON THE YEAR 2011 PERFORMANCE OF DANUBIUS GROUP
This report contains consolidated nancial statements for the period ended 31 December 2011 as prepared by the management in accordance with International Financial Reporting Standards as adopted by the EU (EU IFRS). Sales revenue in the fourth quarter improved by 11%, resulting in improved EBITDA both in the quarter and in full year in spite of the signicant one-off effect of headcount reduction measures made in Q4.

HIGHLIGHTS
Danubius Hotels Group (IFRS) Net sales revenues EBITDA Operating profit/(loss) Financial results Loss before tax Operating cash flow CAPEX HUF/EUR HUF million FY 2011 43,952 4,901 489 (2,828) (2,339) 4,577 4,255 279.2 FY 2010 42,921 4,853 356 (1,309) (953) 4,269 2,514 275.4 Ch % 2 1 37 116 145 7 69 1 FY 2011 157.4 17.6 1.8 (10.1) (8.4) 16.4 15.2 EUR million1 FY 2010 155.8 17.6 1.3 (4.8) (3.5) 15.5 9.1 Ch % 1 36 113 142 6 67 n.a.

1 The presentation currency of the Group is HUF. The EUR amounts are provided as a convenience translation using average f/x rates of the

respective periods.

In 2011 total net sales revenues were HUF 44.0 billion, a 2% increase compared to last year, mainly thanks to the improvement of Hungarian market in Q4, together with the full year pick up in our Czech and Romanian markets. In EUR terms there was a slight 1% increase in revenue at Group level. Group occupancy in 2011 was 60.7% compared to 60.0% in 2010. In 2011 both EBITDA and operating performance improved, mainly due to weakening of forint against euro. Segmental performance in 2011 was the following: Hungarian segments revenue for 2011 increased by 1% to HUF 25.3 billion as the occupancy of hotels grew by 1.1% from 57.2% to 58.3%, however the average room rate dropped by 3%. In spite of the one-off cost of headcount reductions the operating loss for the year lessened, due to further cost savings. Czech hotels contributed an impressive revenue increase of 10% in 2011. The operating prot of HUF 622 million in 2011 was also an improvement of 8% compared to the prot of HUF 574 million in 2010. Half of the revenue increase was due to 4% stronger crown on average compared to the forint, which had also a cost increasing effect in HUF terms. Slovakian segments operating revenue increased slightly in 2011 to HUF 9.0 billion; the operating result for 2011 was a prot of HUF 134 million, the same as it was in 2010. In 2011 the total revenue of Romanian segment grew by 11% to HUF 1.6 billion, due to a pick up in occupancy and price increase, in addition operating prot was HUF 260 million, compared to HUF 203 million last year. The Financial result in 2011 was a signicant loss of HUF 2.8 billion compared to a loss of HUF 1.3 billion in 2010, due mainly to unrealised FX differences. In 2011 HUF 1.9 billion FX loss (mostly unrealised) was recognised on monetary assets and liabilities, while in 2010 recognised FX loss was HUF 0.5 billion. Interest expenses increased by 18% to HUF 1.0 billion in 2011 from HUF 0.85 billion in 2010, due to the increase in 3 month EURIBOR rates.

12

Report of the Board of Directors

Loss before tax in 2011 was HUF 2.3 billion, compared to a loss of HUF 1.0 billion in 2010. Net cash provided by operating activities in 2011 was HUF 4.6 billion, 7% improvement compared to 2010, due to better operational performance. During 2011 capital expenditure and investments amounted to HUF 4.3 billion compared to HUF 2.5 billion in 2010, due to considerable spending on spa facilities in Slovakia, Czech Republic and Romania. Since Danubius is committed to increased efciency as a key factor of improved performance, average Group headcount in 2011 further decreased and was 4,487 compared to 4,646 in 2010.

13

ANNUAL REPORT 2011


Report of the Board of Directors

FIGURES AND RATIOS IN HOTEL BUSINESS 2011


Distribution of the number of rooms available
Hungary 67% Czech Republic 10% Czech Republic 19%

Distribution of hotel revenues


Hungary 56%

Slovakia 21% Romania 5% Romania 4%

Slovakia 18%

Hungarian hotels Number of rooms Occupancy Average rate (HUF) Number of staff Average number of staff / rooms Profit of rooms department (HUF million) Profit of F&B (HUF million) Profit of spa department (HUF million) Profit of other minor departments (HUF million) Departmental profit Profit margin 5,345 58.3% 12,301 2,364 0.43 9,885 1,610 458 1 11,954 51.3%

Czech hotels 807 78.8% 19, 909 604 0.75 3,702 275 926 110 5,013 62.9%

Slovakian hotels 1,298 60.5% 12,183 1,187 0.91 2,852 469 1,765 116 5,202 58.8%

Romanian hotels 400 57.7% 7,969 244 0.61 576 300 114 120 1,110 68.0%

FINANCIAL OVERVIEW
Hungarian Segment
HUF million HUNGARY FY 2011 Net sales revenues EBITDA Operating loss Financial results Loss before tax CAPEX 25,322 1,416 (527) (2,593) (3,120) 1,239 FY 2010 25,189 1,449 (554) (1,232) (1,785) 784 Ch % 1 (2) (5) 110 75 58 FY 2011 90.7 5.1 (1.9) (9.3) (11.2) 4.4 FY 2010 91.46 5.3 (2.0) (4.5) (6.5) 2.8 Ch % (1) (4) (6) 108 72 56 EUR million

Total sales revenue and other operating income of 2011 improved by 1% to HUF 25.3 billion, thanks to the higher revenue of fourth quarter which was mainly driven by the weak forint against euro. Room revenue of Hungarian hotels in 2011 was HUF 12.9 billion, no material change compared to 2010 due to the combined result of occupancy increase from 57.2% to 58.3% and the decrease of average room rate

14

Report of the Board of Directors

achieved (ARR) to HUF 12,301, lower by HUF 327 than the comparative figure. The considerable oversupply of room capacity in Budapest and tightening competition in both city and spa-wellness hotels still continue to erode our net EUR prices, in spite of a small improvement in overall market demand. The average length of stay was 2.8 days in 2011, similar to last years figure. The number of guest-nights during the year of 2011 increased to 1,746,358 from 1,699,016, out of which domestic guest-nights represented 19.5%, no material change compared to 2010 level. In 2011 the number of guests from USA, Great Britain and Japan decreased the most; while more guests arrived from Russia, Spain and Poland. Room departmental profitability for 2011 increased by 1% compared to 2010. Food and beverage revenue of hotels and restaurants for 2011 was HUF 7.6 billion, 1% upward change compared to last year, as the positive result of the pick up in occupancy was offset by less banqueting and conferences. This slight increase in revenue was hit by the increase of food cost, due to inflation and quantity increase, which was compensated by lower payroll, therefore F&B departmental profitability of our hotels remained at the same level of last year. Gundels total revenue and income in 2011 increased by HUF 69 million, up by 6%, in addition its operational performance was better by HUF 198 million than in 2010 thanks to further cost cutting measures and last years result was hit by HUF 145 million inventory write-off.
Distribution of guestnights in our Hungarian hotels
Other 9% Hungary 19%

Other Europian 38%

Germany 15% Great-Britain Italy 6% 4%

Austria 5%

USA 4%

Spa revenue was HUF 1.3 billion in 2011, up by 4% compared to 2010, due the slight increase in the number of treatments sold and moderately higher prices. Thanks to this revenue increase the profitability of spa department improved. Revenue from security services was HUF 806 million, up by 4% compared to last year. In spite of the combined effect of ination on materials and the pick up in occupancy, full year raw material expenses increased only by 3% to HUF 5.2 billion in our hotels, within this energy cost was HUF 2.2 billion, the same as last year as energy price increases of second half of 2011 diminished the savings of rst half. As the result of tight cost control the value of services used in 2011 further decreased by 5% to HUF 5.3 billion, within this the amount spent on maintenance work at the hotels decreased by 3% to HUF 586 million and marketing and PR expenses decreased by 2% to HUF 490 million. Personnel expenses of hotel operation in 2011 were HUF 10.1 billion, up by 2%, including HUF 265 million one-off expenses for headcount reduction measures made in Q4 2011. Due to the combined effect of the increase of 3 months EURIBOR, the change in the average borrowings over the period interest expenses increased to HUF 780 million from HUF 688 million in 2010. Primarily as the result of weakening of HUF in 2011 against EUR, in which the majority of our long-term borrowings are denominated, a HUF 1.8 billion foreign exchange loss (mostly unrealised) was recognised in prot and loss, compared to a loss of HUF 0.6 billion in 2010. The recent weakening of the HUF remains an uncertain factor in assessing unrealised exchange losses and hence before tax results.

15

ANNUAL REPORT 2011


Report of the Board of Directors

Capital expenditures were HUF 1.24 billion in 2011, including spending on Hilton Budapest, DHSR Aqua and Hotel Marina compared to HUF 0.8 billion spent in 2010. Overall the loss before tax of Hungarian segment was HUF 3.1 billion in 2011, compared to a loss of HUF 1.8 billion in 2010. Czech Segment
CZECH Total revenue and income EBITDA Operating profit Financial results Profit before tax CAPEX HUF/CZK average CZK/EUR average HUF million FY 2011 7,986 1,554 622 (101) 521 1,617 11.35 24.60 FY 2010 7,273 1,508 574 4 578 853 10.90 25.27 Ch % 10 3 8 n.a. (10) 90 4 (3)

Total sales revenue and other operating income increased by 10% to HUF 8.0 billion in 2011 compared to 2010, almost half of the increase was due to the weakening of forint against Czech crown. Out of total revenue pick-up room revenue increased by 8%, while F&B and Spa revenue increased by 15% and 10%, respectively. Marienbad hotels occupancy is the highest within the group and this year increased to 78.8% from 77.0% last year, however the average room rate achieved (ARR) decreased slightly to CZK 1,753 from CZK 1,766 mainly due to strengthening of crown against EUR. The average length of stay was 9.4 days in 2011, no material change compared to 2010. The number of guest nights was 361,833 in 2011 compared to 338,797 and the drop in German and domestic guests was more than compensated by increasing number of guests arriving from Russian markets.
Distribution of guestnights in our Czech hotels
Other Kazakhstan Ukraine 3% Czech Republic 19% Russia 34% 2% 2% Other Europian 3% Israel 3% Germany 34%

The amount of material expenses and services used in 2011 was HUF 3.6 billion, up by 13%, excluding the translational effect of 4%, it is in line with the ination and the increase in the number of guests served. Within this energy costs increased by 9% to HUF 703 million, maintenance expenses increased by 36% to HUF 601 million, because of the major expenditure on the Maria Spa project. Total personnel expenses in 2011 were HUF 2.3 billion, up by 7% of which 4% is due to translational effect. In 2011 the operational performance of Czech hotels improved considerably by 8% compared to 2010.

16

Report of the Board of Directors

Due to the combined effect of the increase of 3 months EURIBOR and the decrease in the outstanding amount of bank loans, interest expense for 2011 was HUF 51 million, compared to HUF 46 million in 2010. As the result of slight weakening of CZK in 2011 against EUR, a HUF 51 million foreign exchange loss was recognised in prot and loss on monetary assets and liabilities denominated in EUR, compared to a gain of HUF 49 million in 2010. Capital expenditure in 2011 amounted to HUF 1.6 billion, up by 90%, including signicant spending on Maria and Vltava spa facilities. Overall, the prot before tax of Czech operations for 2011 decreased by 10% to HUF 521 million compared to HUF 578 million. Slovakian Segment
SLOVAKIA Total revenue and income EBITDA Operating profit Financial results Profit before tax CAPEX HUF/EUR HUF million FY 2011 9,026 1,440 134 (138) (4) 947 279.21 FY 2010 9,003 1,455 134 (96) 37 458 275.41 Ch % 0 (1) 0 43 n.a. 107 1

The functional currency of the Slovakian subsidiary is Euro as of 1 January 2009. Total sales revenue and other operating income in FY 2010 decreased by 2% to HUF 9.0 billion, mainly due to the stronger forint against euro. Room revenue in EUR increased by 2% in 2009 as the average room rate (ARR) increased to EUR 41.8 from EUR 40.3 while the occupancy decreased from 62.7% to 62.2%. The number of rooms sold decreased from 299,336 to 296,203 in FY 2010. The number of guestnights in FY 2010 was 480,045 compared to 477,515 in FY 2009, the average length of stay in nancial year of 2010 was 10,0 days, the same level of last year. The number of German guests decreased by 15% compared to FY 2009, together with the decrease of guests from neighbouring countries like Austria and Czech Republic, however the number of guests arriving from Israel and Kuwait increased considerably by 23% and 26%, respectively. Comparative FY 2009 revenue included HUF 94 million (EUR 0.3 million) one-off gain on the sale of a land, while there was no sale of xes assets in nancial year of 2010.
Distribution of guestnights in our Slovakian hotels
Austria 2% Other Asian countries 6% Slovakia 43% Other 10% Czech Republic 8%

Israel 11%

Germany 20%

The amount of material expenses and services used in FY 2010 was HUF 3.3 billion, down by 1%, within this, energy cost decreased by 12% to HUF 709 million, mainly due to the implementation of energy savings systems and maintenance expenses were HUF 217 million compared to HUF 212 million in FY 2009. Personnel expenses

17

ANNUAL REPORT 2011


Report of the Board of Directors

for FY 2010 were HUF 3.4 billion, a decrease of 3% in HUF terms, reecting partly the stronger HUF and headcount reduction measures. Due to the decrease of 3 months EURIBOR and the lower average level of borrowings the interest expenses for FY 2010 amounted to HUF 100 million, compared to HUF 152 million in FY 2009. Capital expenditure during nancial year of 2010 was HUF 458 million compared to the HUF 293 million in FY 2009. Overall, the prot before tax of Slovakian operations for FY 2010 was HUF 37 million compared to a prot of HUF 210 million in FY 2009. Romanian Segment
ROMANIA Total revenue and income EBITDA Operating profit Financial results Profit before tax CAPEX HUF/RON average rate RON/EUR average rate HUF million FY 2011 1,618 491 260 4 264 452 65.85 4.24 FY 2010 1,456 442 203 15 217 425 65.41 4.21 Ch % 11 11 29 (71) 22 6 1 1

Total sales revenue and other operating income for 2011 was HUF 1.6 billion, up by 11% in HUF terms compared to last year. In 2011 occupancy was 57.7%, an increase of 1.0% compared to last year, in addition average room rate (ARR) improved signicantly from RON 105 to RON 121. In 2011 room departmental prot improved by 19%. The number of guests during the year of 2011 increased to 43,957 from 36,754 primarily due to the increasing number of leisure and conference tourists. Due to the combined effect of ination and the increase in occupancy, total material expenses and services used in 2011 were HUF 660 million, up by 9% compared to last year. Within this, energy cost was HUF 183 million, up by 25% compared to 2010, due to higher energy need of new spa facilities, and maintenance expenses decreased by 27% to HUF 36 million. Personnel expenses increased by 8%, due to minimum wage requirements and higher number of staff required by new spa facilities.
Distribution of guestnights in our Romanian hotels
Germany Moldavia Hungary 10% Romania 76% 11% 1% Other 2%

18

Report of the Board of Directors

The loan to nance the refurbishment 6-7 years ago has been almost paid back. Due to the combined effect of the increase of 3 months EURIBOR and the lower amount of average outstanding borrowings, the interest expenses for 2011 amounted to HUF 9 million, compared to HUF 17 million in 2010. Capital expenditure during the year of 2011 was HUF 452 million compared to HUF 425 million in 2010, the majority of which represents the nal phase of new spa area. Being the result of the above, the prot before tax of Romanian operations for 2011 was HUF 264 million compared to a prot of HUF 217 million in 2010. Consolidated Balance Sheet Total consolidated asset value amounted to HUF 90.5 billion as of 31 December 2011, a 4% increase compared to the end of year 2010. Current assets include assets held for sale which comprises the net carrying value, less cost of sale, of a hotel and hospitality property in Hungary. The Group expects to sell these assets within the next twelve months. Trade receivables increased by 12% to HUF 1.62 billion from HUF 1.44 billion, due to the higher revenue of November and December. The amount of inventory further decreased by 14% at the end of 2011 compared to 31 December 2010. The amount of other receivables and current assets increased by 15% due to higher amount of prepayments. The amount of property, plant and equipment was HUF 80.0 billion at the end of December 2011, an increase of 5% over the last 12 months, due to the combined effect of HUF 4.1 billion purchases of property, plant and equipment, the HUF 4.2 billion amortisation and approximately HUF 3.7 billion translational effects of foreign subsidiaries assets. Total liabilities at the end of 2011 were HUF 36.8 billion, an 8% increase compared to 31 December 2010, as the amount of borrowing increased due to the weakening of HUF against euro. Also the amount of trade creditors increased by HUF 0.2 billion. The Group had EUR 83.3 million loans, including long-term and short-term portion, as of 31 December 2011. The value of shareholders equity increased by 1% compared to 31 December 2010 being the combined effect of the after tax loss of HUF 2.4 billion of previous 12 months, the HUF 2.7 billion increase of translation reserve and HUF 0.3 billion increase in non-controlling interest.

Cash flow Net cash provided by operating activities in year 2011 was HUF 4.6 billion, a 7% improvement compared to HUF 4.3 billion net cash generated in 2010, due to better operational performance. Capital expenditure in 2011 was HUF 4.3 billion, a signicant improvement compared to 2010, reecting the considerable spending on spa facilities in Slovakia, Czech Republic and Romania to increase the quality of our products and services. During year of 2011 EUR 5.7 million loans were drawn down for corporate or project financing purposes and EUR 13.4 million borrowings were repaid.

19

ANNUAL REPORT 2011


Report of the Board of Directors

APPENDIX I - AUDITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION PREPARED IN ACCORDANCE WITH IFRS (HUF million)
At 31 December 2011 Assets Cash and cash equivalents Trade and other receivables Inventory Long-term assets classified as held for sale Current income tax receivables Total current assets Property, plant and equipment Intangible assets Other investments Deferred tax assets Total non-current assets Total assets Liabilities and Shareholders' Equity Trade accounts payable Advance payments from guests Current income tax payables Other payables and accruals, including derivatives Interest-bearing loans and borrowings Provisions Total current liabilities Interest-bearing loans and borrowings Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Shareholders' Equity Share capital Capital reserve Treasury shares Translation reserve Hedge reserve Retained earnings Attributable to equity holders of the parent Non-controlling interest Total shareholders equity Total liabilities and shareholders' equity 8,285 7,435 (1,162) 10,564 (71) 25,794 50,845 2,847 53,692 90,501 8,285 7,435 (1,162) 7,817 28,203 50,578 2,518 53,096 87,325 2,375 799 3,658 6,586 163 13,581 20,865 1,167 1,196 23,228 36,809 2,205 616 234 3,151 6,130 317 12,653 19,602 1,077 897 21,576 34,229 3,469 2,734 534 70 74 6,881 79,952 3,190 19 459 83,620 90,501 4,186 2,415 620 73 4 7,298 76,448 3,238 24 317 80,027 87,325 At 31 December 2010

20

Report of the Board of Directors

APPENDIX II - AUDITED
CONSOLIDATED STATEMENT OF INCOME PREPARED IN ACCORDANCE WITH IFRS (HUF million)
Year ended 31 2011 Room revenue Food and beverage revenue Spa revenue Other departmental revenue Revenue from wineries Revenue from security services Other income Total operating revenue and other income Cost of goods purchased for resale Material costs Services used Material expenses and services used Wages and salaries Other personnel expenses Taxes and contributions Personnel expenses Depreciation and amortisation Other expenses Changes in inventories of finished goods and w.i.p. Work performed and capitalised Total operating expenses Profit from operations Interest income Interest expense Foreign currency loss Financial loss Loss before tax Current tax expense Deferred tax expense / (benefit) Loss for the year Attributable to: Owners of the Company Non-controlling interest Basic and diluted earnings per share (HUF per share): (2,387) 31 (302) (933) 51 (118) 21,368 13,160 5,926 2,084 161 806 447 43,952 444 9,414 9,779 19,637 11,600 1,458 3,650 16,708 4,412 2,611 119 (24) 43,463 489 41 (985) (1,884) (2,828) (2,339) 100 (83) (2,356) Year ended 31 2010 20,914 12,719 5,801 2,056 132 774 525 42,921 447 8,965 9,612 19,024 11,704 1,197 3,595 16,496 4,497 2,522 74 (48) 42,565 356 77 (850) (536) (1,309) (953) 338 (409) (882)

21

ANNUAL REPORT 2011


Report of the Board of Directors

APPENDIX III AUDITED


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (HUF million)
Year ended 31 2011 Loss for the year Other comprehensive income Foreign currency translation differencies for foreign operations Changes of fair values of hedge derivatives Total other comprehensive income Total comprehensive income for the period Attributable to: Owners of the Company Non-controlling interest Total comprehensive income for the period 289 329 618 530 89 619 3, 045 (71) 2,974 618 1,501 1,501 619 (2,356) Year ended 31 2010 (882)

22

Report of the Board of Directors

APPENDIX IV - AUDITED
CONSOLIDATED STATEMENT OF CASH FLOWS PREPARED IN ACCORDANCE WITH IFRS (HUF million)
Year ended 31 2011 Profit from operations Depreciation and amortisation Change of provisions Impairment of receivables and write-off of inventories Changes in working capital (Increase)/ decrease of accounts receivable and other current assets (Increase)/ decrease of inventory Increase / (decrease) of accounts payable and other current liabilities Interest paid Income tax paid Net cash provided by operating activities Purchase of property, plant and equipment and intangibles Interest received Net cash used in investing activities Receipt of long-term bank loans Repayment of long-term bank loans Net cash provided by financing activities Net increase (decrease) in cash held Cash and cash equivalents at the beginning of the period, net Effect of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the period, net (123) 82 903 (936) (399) 4,577 (4,255) 31 (4,224) 1,774 (4,162) (2,388 (2 035) 3,965 181 2,111 (377) 89 882 (1,076) (69) 4,269 (2,514) 82 (2,432) 3,282 (3,200) 82 1,919 1,981 65 3,965 489 4,412 145 4 Year ended 31 2010 356 4,497 (163) 130

1 Represents the amount of cash and cash equivalents less the amount of bank overdrafts

APPENDIX V
SUBSEQUENT EVENTS There has not been any matter or circumstance occurring subsequent to the end of the reporting period that has signicantly affected, or may signicantly affect, the operations of the Group, the result of those operations or the state of affairs of the Group in future periods.

23

ANNUAL REPORT 2011


Report of the Board of Directors

APPENDIX VI
SHAREHOLDER STRUCTURES AND CHANGES IN ORGANISATION In 2011 there were no signicant organisational changes within the Group.
Shareholder1 CP Holdings and its investments2 Of which: CP Holdings Ltd. Interag Zrt. Israel Tractors Foreign financial investors Domestic financial investors Domestic individuals Treasury shares Total 37.94% 31.45% 6.12% 8.95% 5.75% 3.17% 4.52% 100.00% 37.94% 31.45% 6.12% 9.33% 5.45% 2.98% 4.52% 100.00% 37.94% 31.45% 6.12% 9.36% 4.87% 3.51% 4.52% 100.00% 37.94% 31.45% 6.12% 9.31% 5.02% 3.21% 4.52% 100.00% 37.94% 31.45% 6.12% 8.96% 5.35% 3.14% 4.52% 100.00% Period end of Q4 2010 77.61% Q1 2011 77.72% Q2 2011 77.74% Q3 2011 77.94% Q4 2011 78.03%

1 The table shows shareholders separately if their shareholding reaches or exceeds 5%, according to the Book of Shares. 2 The 78.03% ownership of CP Holdings and its investments results an 81.72% combined direct interest in Danubius Hotels Nyrt. and includes the shares held by Sir Bernard Schreier, the Chairman of CP Holdings.

APPENDIX VII
DECLARATION Danubius Hotels Nyrt. hereby declares that the audited consolidated IFRS Financial Statements as adopted by the EU presented in this report follow the same accounting standards, procedures and estimations of and therefore can be compared with previous year-end and interim IFRS nancial statements. The nancial statements give a true and fair view on the assets, liabilities, nancial position, net income and loss for the period of the Issuer Company and the consolidated subsidiaries. In addition, this report also gives true and fair view on the position, development, performance and risks of the Issuer Company and the consolidated subsidiaries. The nancial statements do not conceal any fact or information that would be substantial in the judgement of the issuer's position. As issuer, Danubius Hotels Nyrt. assumes liability for the contents of the reports. Danubius Hotels Nyrt. declares that it is liable as issuer for the reimbur sement of losses caused by the omission and/or the misleading contents of regular and extraordinary announcements.

Dr. Imre Dek Member of the Board of Directors

Jnos Tbis Member of the Board of Directors

24

Report of the Board of Directors

APPENDIX VIII
BALANCE SHEET OF DANUBIUS HOTELS NYRT. PREPARED IN ACCORDANCE WITH HUNGARIAN ACCOUNTING ACT - Audited
in HUF thousand ID 01. 02. 03. 04. 05. 06. 07. 08. 09. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. NON-CURRENT ASSETS INTANGIBLE ASSETS Capitalised cost of foundation and restructuring Capitalised research and development costs Rights and titles Intellectual property Goodwill Advance payment on intangible assets Revaluation of intangible assets PROPERTY, PLANT AND EQUIPMENT (TANGIBLE ASSETS) Real estates and relating rights Equipments, machines, vehicles Other equipments, fixtures, vehicles Livestock Capital investments and refurbishments Advance payments on capital investments Revaluation of tangible assets NON-CURRENT FINANCIAL INVESTMENTS Long-term investments Long-term loan to related parties Other long-term investments Long-term loan to other investments Other long term loans Long term securities Revaluation of non-current financial assets CURRENT ASSETS INVENTORIES Raw materials Work in progress and semifinished goods Grown, fattened and other livestock Finished products Goods, Commodities Advance payments on stocks RECEIVABLES Receivables from supply of goods and services (customers) Receivables from related parties Receivables from other investment Bills of exchange Other receivables SECURITIES Investment in related parties Other investments Treasury shares Short term securities TOTAL CASH AND CASH EQUIVALENTS Cash at hand, cheques Bank deposits ACCRUALS AND PREPAYMENTS Accrued income Prepaid costs and expenses Deferred expenses TOTAL ASSETS 56,591,142 58,406,353 904,995 318 904,677 27,196 24,205 2,991 362,573 304 362,269 18,759 13,074 5,685 1,161,021 1,161,021 13,586 1,161,021 9,612 1,161,021 610,015 250 596,179 1,655,294 6 1,645,676 2,041 2,300 2,678,072 2,041 3,181,188 2,300 585 286 47,806,349 44,509,016 3,295,518 1,230 49,451,033 47,349,997 2,100,000 750 130,652 130,651 6,051,306 5,912,725 1,700 6,229 5,745,502 5,610,581 417 3,853 28,219 9,871 31 December 2010 53,885,874 28,219 31 December 2011 55,206,406 9,871

25

ANNUAL REPORT 2011


Report of the Board of Directors

ID 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. SHAREHOLDERS' EQUITY SHARE CAPITAL REGISTERED BUT UNPAID CAPITAL Treasury shares at face value SHARE PREMIUM (CAPITAL RESERVE) RETAINED EARNINGS COMMITED RESERVES REVALUATION RESERVE NET PROFIT FOR THE PERIOD PROVISIONS Provisions for expected liabilities Provisions for future expenses Other provisions LIABILITIES BACKLISTED LIABILITIES Backlisted liabilities to related parties Backlisted liabilities to other investment Backlisted liabilities to third parties LONG TERM LIABILITIES Long term loans Convertible bonds Liability from bond issue Capital investment and development loans Other long term loans Long term liabilities to related parties Long term liabilities to other investments Other long term liability SHORT TERM LIABILITIES Short term credits from which: convertible bonds Short term loans Advance payments from customers Creditors, Suppliers Bills of exchange Short term liabilities to related parties Short term liabilities to other investments Other short term liabilities DEFERRALS Deferred revenues Deferred costs and expenses Deferred income TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

31 December 2010 42,127,882 8,285,437 374,523 7,138,139 24,538,671 1,376,815 788,820 110,180 110,180

31 december 2011 42,721,864 8,285,437 374,523 7,138,139 25, 505,866 1,198,440 593,982 197,823 6, 212 191,611

14,207,110

15,236,850 0

10,068,005

11,642,444

10,068,005

11,642,444

4,139,105

3,594,406

3,905,500 22,434 124,283 86,888 145,970 145,970 56,591,142

3,388,723 27,034 82,197 96,452 249,816 249,816 58,406,353

26

Report of the Board of Directors

INCOME STATEMENT OF DANUBIUS HOTELS NYRT. ACCOUNTING ACT - Audited


ID 01. 02. i. 03. 04. ii. iii. 05. 06. 07. 08. 09. IV. 10. 11. 12. V. VI. VII. A. 13. 14. 15. 16. 17. VIII. 18. 19. 20. 21. IX. B. C. X. XI. D. E. XII. F. 22. 23. G. Net domestic sales revenue Export sales revenue Total net sales revenue Change in the stock of own prod. Cap. value of assets of own prod. Cap. value of own production Other income Raw material costs Value of services used Other services Purchase price of goods sold Value of sold services Material expenditures Salaries and wages Other personnel payments Taxes and contributions Total payroll & related costs Depreciation Other expenditures Operating profit Dividend received out of which received from related party Capital gain on the sale of shares out of which received from related party Exchange gain of inv. fin. assets out of which received from related party Other interests received out of which received from related party Other financial income Rev. from financial transact. Exchange loss of inv. fin. assets out of which given to related party Interests payable out of which given to related party Loss of value -securities, deposits Other financial expenses Expenditures of fin. transact. Financial profit or loss Profit from ordinary activities Extraordinary income Extraordinary loss Extraordinary profit or loss Profit before tax Corporate tax payable Profit after tax Dividend paid from profit reserve Dividend payable/ Minority NET PROFIT FOR THE PERIOD

PREPARED IN ACCORDANCE WITH HUNGARIAN

2010 2,765,069 2,765,069

2011 2,865,261 2,865,261

38,241 7,911 702,796 31,224 49,773 791,704 486,919 63,304 146,432 696,655 393,034 239,563 682,354 84,630 84,541 127,923 127,923

147,035 7,007 711,414 20,586 25,232 764,239 394,493 88,885 129,635 613,013 368,747 330,483 935,814 1,584

150,214 138,600 549,075 911,842 4,468 4,468 726,928

161,768 154,590 991,515 1,154,867

658,178

73,480 804,876 106,966 789,320 6,588 7,088 (500) 788,820 788,820

770,358 1,428,536 (273,669) 662,145 42,428 (42,428) 619,717 25,735 593,982

788,820

593,982

27

ANNUAL REPORT 2011


Report of the Board of Directors

Shareholders structure
Shareholders' structure on 31st December 2010
0.00% 3.17% 5.50% 8.78% 78.72% 4.52%

CP Holdings and its investments Foreign financial investors Domestic financial investors Domestic individuals Employees Treasury shares

Trading on the Budapest Stock Exchange


2007 Number of trading days Number of deals Number of securities traded Value of securities traded (HUF million) Average price (HUF) Minimum price (HUF) Maximum price (HUF) Closing price (HUF) 245 8,838 1,851,100 17,610 9,513 6,770 11,000 9,200 2008 251 3,496 840,001 5,550 6,607 3,995 9,150 4,440 2009 251 3,278 401,807 1,,506 3,747 3,370 4,590 3,540 2010 254 4,758 681,848 2,481 3,,638 3,100 4,740 4,500 2011 191 1,978 235,829 887 3,760 2,920 4,540 3,360

28

Report of the Supervisory Board

Report of the Supervisory Board of Danubius Hotels Nyrt. about the 2011 B/S of the Company and the report of the Board of Directors The Supervisory Board submits its report before the AGM - in accordance with the established practice - based on the report of the Board of Directors, the report of the independent Auditor and the Audit Committee, the regular interim control of the operation of the company as well as its own annual work. The Supervisory Board of Danubius pursued its activities set down in the annual work programme considering its obligations stipulated in the prevailing legal provisions. The Supervisory Board held ve meetings in the course of the year together with the Audit committee and the Supervisory Board of Danubius Zrt. The quarter year ash reports of the Board about the operation of the company, the nancial position and the business outlook were listed regularly among the items of the agenda. The attendance of the President, the Senior Vice President, the auditor and the companys internal auditors at the meetings of the Supervisory Board ensured access to profound information of the members. The participation of the chairman of the Supervisory Board at the meetings held by the Board of Directors also contributed to the mutual ow of information. Special focus was put in 2011 as well on the follow up of measures made based on the experience gathered via the ndings of the audits. In addition to the topics regularly listed on the agenda, the Supervisory Board paid special attention to the global nancial position of the Company, the loan stock, signicant investment and reconstruction requirements of the coming years and the possibilities for providing nancial background for these. The co-operation with the trade unions, measures taken as a result of the audit carried out in the Accounting Service Centre, actions taken based on the management letter issued by the auditor and reviewing the work of the human resources area were also put on the agenda. The SB considered and approved the draft prepared for the regulation of internal audit. The Supervisory Board established that the 2011 report of the Board of Directors is reliable and gives a true and fair view of the Companys operations and nancial position, therefore it agrees and proposes it for approval by the AGM and supports the 2012 plans and concepts. The Supervisory Board proposes to the AGM for approval the 2011 annual report prepared by Danubius Hotels Nyrt. in line with the Hungarian Accounting Act with 58,406,353 thousand HUF total assets and 593,982 thousand HUF net prot, as well as the 2011 consolidated report prepared by the Danubius Group in line with the International Financial Reporting Standard with 90,501 million HUF total assets and 2,356 million HUF loss after tax. The Supervisory Board agrees with the proposal of the Board of Directors regarding the allocation of the achieved prot. The Supervisory Board reviewed and proposesd for approval to the AGM the report on Corporate Governance. Budapest, 23 March 2012

Tibor Antalpter Chairman of the Supervisory Board

29

ANNUAL REPORT 2011


Independent Auditors Report

KPMG Hungria Kft. Vci t 99. Telefon: +36 (1) 887 7100 e-mail: info@kpmg.hu H1139 Budapest Telefon: +36 (1) 270 7100 internet: www.kpmg.hu Hungary Telefax: +36 (1) 887 7101 Telefax: +36 (1) 270 7101

To the shareholders of Danubius Hotel and Spa Nyrt.

Report on the Consolidated Financial Statements


We have audited the accompanying 2011 consolidated financial statements of Danubius Hotel and Spa Nyrt. (hereinafter referred to as the Company), which comprise the consolidated statement of financial position as at 31 December 2011, which shows total assets of HUF 90,501 million, and the consolidated statement of income and consolidated statement of comprehensive income, which show loss for the year of HUF 2,356 million, and the consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, as adopted by the EU and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the Hungarian National Standards on Auditing and applicable laws and regulations in Hungary. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

30

Independent Auditors Report

Opinion We have audited the consolidated financial statements of Danubius Hotel and Spa Nyrt., its components and elements and their documentary support in accordance with Hungarian National Standards on Auditing and gained sufficient and appropriate evidence that the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU. In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of Danubius Hotel and Spa Nyrt. and its consolidated subsidiaries as of 31 December 2011, and of their consolidated financial performance and of the consolidated result of their operations for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

Report on the Consolidated Business Report


We have audited the accompanying 2011 consolidated business report of Danubius Hotel and Spa Nyrt. Management is responsible for the preparation of the consolidated business report in accordance with the provisions of the Act on Accounting and accounting principles generally accepted in Hungary. Our responsibility is to assess whether this consolidated business report is consistent with the 2011 consolidated annual report. Our work with respect to the consolidated business report was limited to the assessment of the consistency of the consolidated business report with the consolidated annual report, and did not include a review of any information other than that drawn from the audited accounting records of the Company. In our opinion, the 2011 consolidated business report of Danubius Hotel and Spa Nyrt. is consistent with the data included in the 2011 consolidated annual report of Danubius Hotel and Spa Nyrt. Budapest, 23 March 2012

KPMG Hungria Kft. Registration number: 000202

Pter Szab Partner, Professional Accountant Registration number: 005301

KPMG Hungria Kft., a Hungarian limited liability company and a member rm of the KPMG network of independent member rm afliated with KPMG International, a Swiss cooperative. Company registration: Budapest, no. 01-09-063183

This is an English translation of the Independent Auditors Report on the 2011 IFRS Consolidated Financial Statements of Danubius Hotel and Spa Nyrt. issued in Hungarian. If there are any differences, the Hungarian language original prevails. This report should be read in conjunction with the complete IFRS Consolidated Financial Statements it refers to.

31

ANNUAL REPORT 2011


Consolidated Statement of Financial Position

Danubius Hotel and Spa Nyrt. and Subsidiaries


Consolidated Statement of Financial Position (All amounts in million HUF)

Notes Assets Cash and cash equivalents Trade and other receivables Inventory Long-term assets classified as held for sale Current income tax receivables Total current assets Property, plant and equipment Intangible assets Other investments Deferred tax assets Total non-current assets Total assets Liabilities and Shareholders' Equity Trade accounts payable Advance payments from guests Current income tax payables Other payables and accruals, including derivatives Interest-bearing loans and borrowings Provisions Total current liabilities Interest-bearing loans and borrowings Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Shareholders' Equity Share capital Capital reserve Treasury shares Translation reserve Hedge reserve Retained earnings Attributable to equity holders of the parent Non-controlling interest Total shareholders equity Total liabilities and shareholders' equity 13 12 10 18 11 9 10 11 18 7 8 3 4 5 6

At 31 December 2011

At 31 December 2010

3,469 2,734 534 70 74 6,881 79,952 3,190 19 459 83,620 90,501 2,375 799 3,658 6,586 163 13,581 20,865 1,167 1,196 23,228 36,809 8,285 7,435 (1,162) 10,564 (71) 25,794 50,845

4,186 2,415 620 73 4 7,298 76,448 3,238 24 317 80,027 87,325 2,205 616 234 3,151 6,130 317 12,653 19,602 1,077 897 21,576 34,229 8,285 7,435 (1,162) 7,817 28,203 50,578 2,518 53,096 87,325

14

2,847 53,692 90,501

Budapest, 23 March 2012

Dr. Imre Dek Member of Board of Directors

Jnos Tbis Member of Board of Directors

The notes set out on pages 37 to 69 are an integral part of the consolidated nancial statements.

32

Consolidated Statement of Income

Danubius Hotel and Spa Nyrt. and Subsidiaries


Consolidated Statement of Income (All amounts in million HUF)

Notes Room revenue Food and beverage revenue Spa revenue Other departmental revenue Revenue from wineries Revenue from security services Other income Total operating revenue and other income Cost of goods purchased for resale Material costs Services used Material expenses and services used Wages and salaries Other personnel expenses Taxes and contributions Personnel expenses Depreciation and amortisation Other expenses Changes in inventories of finished goods and w.i.p. Work performed and capitalised Total operating expenses Profit from operations Interest income Interest expense Foreign currency loss Financial loss Loss before tax Current tax expense Deferred tax expense / (benefit) Loss for the year Attributable to: Owners of the Company Non-controlling interest Basic and diluted earnings per share (HUF per share): 19 18 18 7, 8 17 15 16

Year ended 31 December Year ended 31 December 2011 2010 21,368 13,160 5,926 2,084 161 806 447 43,952 444 9,414 9,779 19,637 11,600 1,458 3,650 16,708 4,412 2,611 119 (24) 43,463 489 41 (985) (1,884) (2,828) (2,339) 100 (83) (2,356) (2,387) 31 (302) 20,914 12,719 5,801 2,056 132 774 525 42,921 447 8,965 9,612 19,024 11,704 1,197 3,595 16,496 4,497 2,522 74 (48) 42,565 356 77 (850) (536) (1,309) (953) 338 (409) (882) (933) 51 (118)

The notes set out on pages 37 to 69 are an integral part of the consolidated nancial statements.

33

ANNUAL REPORT 2011


Consolidated Statement of Comprehensive Income

Danubius Hotel and Spa Nyrt. and Subsidiaries


Consolidated Statement of Comprehensive Income (All amounts in million HUF)
Year ended 31 December 2011 Loss for the year Other comprehensive income Foreign currency translation differencies for foreign operations Changes in fair values of hedge derivatives Total other comprehensive income Total comprehensive income for the period Attributable to: Owners of the Company Non-controlling interest Total comprehensive income for the period 289 329 618 530 89 619 3, 045 (71) 2,974 618 1,501 1,501 619 (2,356) Year ended 31 December 2010 (882)

The notes set out on pages 37 to 69 are an integral part of the consolidated nancial statements.

34

Consolidated Statement of Changes in Equity

Danubius Hotel and Spa Nyrt. and Subsidiaries


Consolidated Statement of Changes in Equity
Attributable to equity holders of the parent Share Capital 1 January 2010 Total comprehensive income for the period Loss for the period Other comprehensive income Foreign currency translation differencies for foreign operations Total other comprehensive income Total comprehensive income for the period Transaction with owners, recorded directly in equity Dividend to Non-controlling interests Total transaction with owners 31 December 2010 Total comprehensive income for the period Loss for the period Other comprehensive income Foreign currency translation differencies for foreign operations Changes in fair values of hedge derivatives Total other comprehensive income Total comprehensive income for the period Transaction with owners, recorded directly in equity Dividend to Non-controlling interests Total transaction with owners 31 December 2011 8,285 7,435 (1,162) (22) (22) 25,794 10,564 (71) (22) (22) 50,845 2,847 (22) (22) 53,692 (2,387) 2,747 2,747 2,747 (71) (71) (71) 2,747 (71) 2,676 289 298 298 329 3,045 (71) 2,974 618 (2 387) (2,387) 31 (2,356) 8,285 7,435 (1,162) (16) (16) 28,203 7,817 (16) (16) 50,578 2,518 (16) (16) 53,096 (933) 1,463 1,463 1,463 1,463 1,463 530 38 38 89 1,501 1,501 619 (933) (933) 51 (882) 8,285 Capital Reserve 7,435 Treasury Shares (1,162) Retained Earnings 29,152 Translation Reserve 6,354 Hedge Reserve Noncontrolling Interest 2,317 Total Equity

(All amounts in million HUF)

Total

50,613

52,930

The notes set out on pages 37 to 69 are an integral part of the consolidated nancial statements.

35

ANNUAL REPORT 2011


Consolidated Statement of Cash Flows

Danubius Hotel and Spa Nyrt. and Subsidiaries


Consolidated Statement of Cash Flows (All amounts in million HUF)

Notes

Year ended 31 December 2011

Year ended 31 December 2010

Profit from operations Depreciation and amortisation Change of provisions Impairment of receivables and write-off of inventories Changes in working capital (Increase)/ decrease of accounts receivable and other current assets (Increase)/ decrease of inventory Increase / (decrease) of accounts payable and other current liabilities Interest paid Income tax paid Net cash provided by operating activities Purchase of property, plant and equipment and intangibles Interest received Net cash used in investing activities Receipt of long-term bank loans Repayment of long-term bank loans Net cash provided by financing activities Net increase (decrease) in cash held Cash and cash equivalents at the beginning of the period, net Effect of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the period, net 3 7, 8 7, 8 11

489 4,412 145 4

356 4,497 (163) 130

(123) 82 903 (936) (399) 4,577 (4,255) 31 (4,224) 1,774 (4,162) (2,388) (2,035) 3,965 181 2,111

(377) 89 882 (1,076) (69) 4,269 (2,514) 82 (2,432) 3,282 (3,200) 82 1,919 1,981 65 3,965

The notes set out on pages 37 to 69 are an integral part of the consolidated nancial statements.

36

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

1. The Company and its subsidiaries


Danubius Hotel and Spa Nyrt. ("Danubius" or "the Company") is a company limited by shares which is domiciled in, and incorporated under the laws of the Republic of Hungary. The registered ofce address of the Company is 1051, Szent Istvn tr 11., Budapest, Hungary. The Company and its subsidiaries (the "Group") provide hospitality services in Hungary, Czech Republic, Slovakia and Romania, with an emphasis on 3, 4 and 5 star spa and city hotels. The Companys shares are listed on the Budapest Stock Exchange. At 31 December 2011, 78.03% of the Companys shares were owned by CP Holdings Limited, a UK private company, and companies controlled by CP Holdings Limited other than the Company itself and Sir Bernard Schreier, the Chairman of CP Holdings. The ultimate controlling party of the Group is the Schreier family, having an 81.72% combined direct interest considering the treasury shares held by the Company. The consolidated nancial statements of the Company as at and for the year ended 31 December 2011 comprise the Company and its subsidiaries (together referred to as the Group). The Company's principal subsidiary companies are as follows:
Group interest held at December 31, 2011 100% 100% 78.60% 95.36% 88.85% 99.94% 97.97% 50% Group interest held at December 31, 2010 100% 100% 78.60% 95.36% 88.85% 99.94% 97.97% 50%

Name

Principal Activity

Country of Incorporation

Danubius Szllodazemeltet s Szolgltat Zrt. Gundel Kft. Preventv-Security ZRt Lebn Lzn a.s. Slovensk Lieebn Kpele Piestany a.s. SC Salina Invest SA SC Balneoclimaterica SA Egszsgsziget Kft.

Hotel operator Restaurant operator Security Hotel operator Hotel operator Holding company Hotel operator Project company

Hungary Hungary Hungary Czech Republic Slovakia Romania Romania Hungary

In 2009 Egszsgsziget Kft. became a fully consolidated subsidiary.

37

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

2. Significant accounting policies


Statement of Compliance The consolidated nancial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (EU IFRS). Basis of preparation The consolidated financial statements are presented in millions of Hungarian Forints (HUF), which is the functional currency of the Company. The consolidated financial statements are prepared under the historical cost convention except for derivative financial instruments, which are measured at fair value (see Note 23). The significant accounting policies did not change compared to previous period and have been consistently applied by the Group enterprises, The financial statements were authorised for issue by the Board of Directors on 23 March 2012 and by the Supervisory Board on 23 March 2012. Use of estimates and assumptions The preparation of nancial statements in conformity with EU IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of EU IFRS that have signicant effect on the nancial statements and estimates with a signicant risk of material adjustment in the next year are discussed in Note 25. Basis of consolidation Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which the control is transferred to the Group. Control is the power to govern the nancial and operating policies of an entity so as to obtain benets from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The Group measures goodwill at the acquisition date as: the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less

38

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

the net recognised amount (generally fair value) of the identiable assets and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in prot or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationship. Such amounts generally are recognised in prot or loss. Transaction costs, other than those associated with the issue of the debts or equity securities, that the Group incures in connection with a business combination are expensed as incurred. Any continegent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classied as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value fo the contingent consideration are recognised in prot or loss. Acquisitions of non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result. Adjustments to non-contolling interest arising from transaction that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the nancial and operating policies of an entity so as to obtain benets from its activities. The consolidated nancial statements of subsidiaries are included in the consolidated nancial statements from the date that control commences until the date that control ceases. The consolidated nancial statements include the nancial statements of the Company and its subsidiaries after elimination of all inter-company transactions and balances, including any unrealised gains and losses. Associates Associates are those entities in which the Group has signicant inuence, but not control, over the nancial and operating policies. Associates are accounted for using the equity method and are initially recognised at cost. The Groups investment includes goodwill identied on acquisition, net of any accumulated impairment losses. The consolidated nancial statements include the Groups share of the total recognised gains and losses and equity movements of associates after adjustments to align the accounting policies with those of the Group, from the date that signicant inuence commences until the date that signicant inuence ceases. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Groups interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Investments Investments in which the Group has less than 20% ownership are classified as available for sale financial assets and carried at cost, less provision for impairment, where such investments are unquoted and fair value cannot be reasonably estimated. Otherwise they are measured at fair value using the quoted bid price of the investment.

39

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

Financial statements of foreign operations The functional currencies of the Groups foreign operations differ from the functional currency of the Company. Assets and liabilities of foreign operations including goodwill and fair value adjustments arising on acquisitions on or after 1 January 2005 (the effective date of revised IAS 21), are translated to HUF at foreign exchange rates effective at the reporting date. Goodwill and any fair value adjustments arising on acquisitions prior to 1 January 2005, the effective date of revised IAS 21, are treated as assets and liabilities of the acquiring entity and therefore are not retranslated. The income and expenses of foreign operations are translated to HUF at the exchange rate that approximates the rate at the date of the transaction. Foreign exchange differences arising on translation of foreign operations are recognised directly in equity. When a foreign operation is disposed of, in part or in full, the relevant amount in the translation reserve is transferred to prot or loss. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency of the relevant Group company at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the measurement currency at foreign exchange rates ruling at the dates the fair value was determined. Foreign exchange differences arising on translation are recognised in the statement of income. Non-derivative financial instruments Financial assets within the scope of IAS 39 are classied as nancial assets at fair value through prot or loss, loans and receivables, held to maturity investments, or available for sale nancial assets, as appropriate. When nancial assets and liabilities are recognized initially, they are measured at fair value, plus, in the case of nancial assets and liabilities not at fair value through prot or loss, directly attributable transaction costs. The Group considers whether a contract contains an embedded derivative when the entity rst becomes a party to it. The Group determines the classication of its nancial assets and liabilities on initial recognition and, where allowed and appropriate, re-evaluates this designation at each nancial year end. Purchases and sales of investments are recognized on settlement date which is the date when the asset is delivered to the counterparty. Financial assets at fair value through prot or loss Financial assets at fair value through prot or loss includes nancial assets held for trading and nancial assets designated upon initial recognition as at fair value through prot and loss. Financial assets are classied as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated embedded derivatives, are also classied as held for trading unless they are designated as effective hedging instruments or a nancial guarantee contract. Gains or losses on investments held for trading are recognised in the statement of income. Financial assets may be designated at initial recognition as at fair value through prot or loss if the following criteria are met: (i) the designation eliminates or signicantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or losses on them on a different basis; or (ii) the assets are part of a group of nancial assets which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management strategy.

40

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets which carry fixed or determinable payments and fixed maturities and which the Group has the positive intention and ability to hold to maturity. After initial measurement, held to maturity investments are measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount, less allowance for impairment. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. Gains and losses are recognised in the statement of income when the investments are derecognised or impaired, as well as through the amortisation process. Loans and receivables Loans and receivables are non-derivative nancial assets with xed or determinable payments that are not quoted in an active market. After initial measurement, loans and receivables are subsequently carried at amortised cost using the effective interest method less any allowance for impairment. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognised in the statement of income when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Available-for-sale nancial investments Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for- sale or are not classified in any of the three preceding categories. After initial measurement, available for sale financial assets are measured at fair value with unrealised gains or losses, other than impairment losses and foreign currency differences on available-for-sale monetary items, being recognised directly in equity. When the investment is disposed of, the cumulative gain or loss previously recorded in equity is recognised in th statement of income. Fair value The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted closing bid price at the reporting date. When there is no quoted market price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment. Classication and derecognition of nancial instruments Financial assets and financial liabilities carried on the consolidated statement of financial position include cash and cash equivalents, marketable securities, trade and other accounts receivable and payable, long-term receivables, loans, borrowings, and investments. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies found in this Note. Financial instruments (including compound nancial instruments) are classied as assets, liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains, and losses relating to a nancial instrument classied as a liability, are reported as expense or income as incurred. Distributions to holders of nancial instruments classied as equity are charged directly to equity. In case of compound nancial

41

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

instruments the liability component is valued rst, with the equity component being determined as a residual value. Financial instruments are offset when the Company has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously. The derecognition of a financial instrument takes place when the Group no longer controls the contractual rights that comprise the financial instrument, which is normally the case when the instrument is sold, or all the cash flows attributable to the instrument are passed through to an independent third party. Derivative financial instruments The Group holds derivative nancial instruments to hedge its interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the denition of a derivative, and the combined instrument is not measured at fair value through prot or loss. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in prot or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Cash ow hedges Changes in the fair value of the derivative hedging instrument designated as a cash ow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in prot or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs, or became ineffective. When the hedged item is a non-nancial asset or liability, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to prot or loss in the same period that the hedged item affects prot or loss. Property, plant and equipment Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset, including borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads directly attributable to bringing the asset to a working condition for its intended use. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount and are recognised net within other income in prot or loss. Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benets embodied within the part will ow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the dayto-day servicing of property, plant and equipment are recognised in prot or loss as incurred.

42

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

Depreciation Depreciation is provided using the straight-line method over the estimated useful lives of each part of an item of property, plant and equipment. The depreciation rates used by the Group are from 2% to 5% for buildings and leasehold improvements and 14.5% to 33% for machinery and equipment. Land and construction in progress are not depreciated. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Depreciation methods, useful lives and residual values are reassessed at each reporting date. Leased assets Leases under which the Group assumes substantially all the risks and rewards of ownership are classied as nance leases. Plant and equipment acquired by way of nance lease is measured upon initial recognition at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Intangible assets Goodwill All amounts of goodwill recognised in these nancial statements were determined based on rules effective prior to 1 January 2010, the date the revised IFRS 3 Business combination became effective Acquisitions prior to 31 March 2004, the date that IFRS 3 became effective The Group applied IFRS 3 to business combinations that occurred on or after 31 March 2004. In respect of business combinations that occurred before that date goodwill represents the amount recorded previously by the Group in accordance with IAS 22 (original cost less accumulated amortisation to 31 December 2005) less accumulated impairments (if any). Acquisitions between 31 March 2004, the date that IFRS 3 became effective and 1 January 2010 when the revised IFRS 3 became effective For acquisitions on or after 31 March 2004, goodwill represents the excess of the cost of the acquisition over the Groups interest in the net fair value of the identiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in prot or loss. Goodwill is stated at cost less any accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment. Acquisitions of non-controlling interests, prior to 1 January 2010, the date the revised IFRS 3 Business combination became effective No goodwill was recognised when acquiring the non-controlling interest in a subsidiary. The difference between the acquisition price and the carrying value of the non-controlling interest was recorded directly in equity. Other Intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses (see below).

43

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

Where the Group has the legal right to use a particular property the value of these rights is amortised over the term for which the Group holds the rights. These include property rights on Margaret Island, Budapest which are being amortised over 100 years. Software is amortised on a straight line basis over its expected useful life of 3-4 years. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benets embodied in the specic asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in prot or loss as incurred. Inventory Inventory is stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated selling expenses. The cost of inventory is determined on the weighted average cost basis and includes expenditure incurred in acquiring the inventory and bringing it to its existing location and condition. Cash and cash equivalents Cash equivalents are liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Groups cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash ows. Trade and other receivables Trade and other receivables are stated initially at their fair value and subsequently at their amortised cost less impairment losses (see below). Impairment Financial assets A nancial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A nancial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash ows of that asset. An impairment loss in respect of a nancial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash ows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale nancial asset is calculated by reference to its current fair value. Individually signicant nancial assets are tested for impairment on an individual basis. The remaining nancial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in prot or loss. Any cumulative loss in respect of an available-for-sale nancial asset recognised previously in equity is transferred to prot or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For nancial assets measured at amortised cost and available-for-sale nancial

44

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

assets that are debt securities, the reversal is recognised in prot or loss. For available-for-sale nancial assets that are equity securities, the reversal is recognised directly in other comprehensive income. Non-nancial assets The carrying amounts of the Groups non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the assets recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in the statement of income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro-rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a after-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Imparment loss on property, plant and equipment is included in depreciation and amortisation, while impairment on trade and other receivables is included in other expenses. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Non-current assets held for sale Non-current assets (or disposal groups comprising assets and liabilities) that are expected to be recovered primary through sale rather than through continuing use are classied as held for sale. Immediately before classication as held for sale, the assets (or components of a disposal group) are remeasured in accordance with the Groups accounting policies. Thereafter generally the asset (or disposal group) is measured at the lower of carrying amount and fair value less costs to sell. Any impairment loss on a disposal group rst is allocated to goodwill, and then to remaining assets and liabilities on a pro-rata basis, except that no loss is allocated to inventories, nancial assets, deferred tax assets, employee benet assets, which continue to be measured in accordance with the Groups accounting policies. Impairment losses on initial classication as held for sale and subsequent gains or losses on remeasurement are recognised in prot or loss. Gains are not recognised in excess of any cumulative impairment loss. Provisions A provision is recognised in the statement of nancial position when, as a result of a past event, the Group has a legal or constructive obligation that can be reliably measured and it is probable that an outow of economic benets will be required to settle the obligation. Provisions are determined by discounting the expected future cash ows at a pre-tax rate that reects current market assessments of the time value of money and the risks specic to the liability.

45

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

Trade and other payables Trade and other payables are initially measured at fair value and then subsequently at amortised cost. Interest-bearing loans Interest bearing loans are recognised initially at fair value of the proceeds received, less attributable transaction costs. In subsequent periods, they are measured at amortised cost using the effective interest method. Any difference between proceeds received (net of transaction costs) and the redemption value is recognised in the statement of income over the period of the borrowings on an effective interest basis. Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a change in equity. Repurchased shares are classified as treasury shares and presented as a deduction from total equity. Revenue recognition Goods sold and services rendered Room revenue (based on completed guest nights), food and beverage, spa revenue, winery, security and other departmental revenues are each recognised as the service is provided. Government grants Grants that compensate for expenses incurred are recognised in prot or loss as other income on a systematic basis in the same periods in which the expenses are recognised. Grants related to assets are presented in the statement of nancial position as deferred income and the grant is recongised as other income over the life of a depreciable asset. Operating lease payments Payments made under operating leases are recognised in the statement of income on a straight-line basis over the term of the lease. Lease incentives received are recognised in the statement of income as an integral part of the total lease expense. Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Financial Income and expenses Financial income comprises interest income on funds invested, dividend income, gains on the disposal of available-for-sale nancial assets, and gains on hedging instruments that are recognised in prot or loss. Interest income is recognised as it accrues, using the effective interest method. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, impairment and losses on hedging instruments that are recognised in prot or loss. All borrowing costs are

46

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

recognised in prot or loss using the effective interest method, except for borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. Foreign currency gains and losses are reported on a net basis. Income taxes Income tax on the prot or loss for the year comprises current and deferred tax. Income tax is recognised in the statement of income except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised in equity or other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for nancial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable prot, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Employee benefits Dened contribution plan The Company operates a defined contribution pension plan for Hungarian employees. Pension costs are charged against profit or loss as other personnel expenses in the period in which the contributions are payable. The assets of the fund are held in a separate trustee administered fund and the Group has no legal or constructive obligation with regard to the plan assets outside of its defined contributions. Dened benet plans and other long-term employee benets A dened benet plan is a post-employment benet plan other than a dened contribution plan. The Group operates dened post-employment benet programmes for retirement and provides jubilee benets. None of these programmes require contributions to be made to separately administered funds. The Groups net obligation in respect of long-term employee benets is the amount of future benet that employees have earned in return for their service in the current and prior periods; that benet is discounted to determine its present value. The principal actuarial assumptions are the discount rate used to determine the net present value of cash outows and the average salary increase. The average discount rate used was 7% for both 2011 and 2010, while the average salary increase was 5% at 31 December 2011 and 5% at 31 December 2010, respectively. Assumptions regarding future mortality and job leavers are based on published statistics and mortality tables.

47

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

In Hungary the jubilee benet scheme ceased by the end of 2011, therefore neither time value of money nor actuarial assumptions were considered in determining the estimated value of liability at the end of 2010. The cost of providing benefits is determined separately for each programme using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised as income or expense immediately in case of jubilee programs while gains and losses only outside the corridor of 10% are recognised as income or expense immediately in case of retirement plans. Past service costs, resulting from the introduction of, or changes to the defined benefit scheme are recognised as an expense immediately. Termination benets Termination benets are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to pay additional termination benets to certain retirees. Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. Segment reporting Group operations are presented in respect of geographical areas identied by location of assets and operational segments that are separately evaluated for management reporting purposes. Management considers that the Group operates primarily in the hotel and hospitality segment. In Hungary the Group also has a security segment through its Preventv Security Zrt. subsidiary. A segment is a distinguishable component of the Group that is engaged either in providing related products or services (operational segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments. Segment information is presented in respect of the Groups operational and geographical segments. The Groups primary format for segment reporting is based on geographic segments identied by location of assets. The operational segments are determined based on the Groups management and internal reporting structure. Inter-segment pricing is determined on an arms length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. New standards and interpretations not yet adopted as at 31 December 2011 A new amendment to standards is not yet effective for the year ended 31 December 2011, and has not been applied in preparing these consolidated nancial statements: Amendments to IFRS 7 Disclosures - Transfers of Financial Assets (Effective for annual periods beginning on or after 1 July 2011).

48

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

The Amendments require disclosure of information that enables users of nancial statements: (1) to understand the relationship between transferred nancial assets that are not derecognised in their entirety and the associated liabilities; and (2) to evaluate the nature of, and risks associated with, the entitys continuing involvement in derecognised nancial assets. The Amendments dene continuing involvement for the purposes of applying the disclosure requirements. The Group does not expect the amendments to IFRS 7 to have material impact on the nancial statements, because of the nature of the Groups operations and the types of nancial assets that it holds.

3. Cash and cash equivalents


31 December 2011 Bank balances Call deposits Cash and cash equivalents Overdraft (see Note 10) Cash and cash equivalents, net (per cash flow statement) 3,422 47 3,469 (1,358) 2,111 2010 1,856 2,330 4,186 (221) 3,965

4. Trade and other receivables


31 December 2011 Trade receivables, net Recoverable taxes and duties, except for income taxes Advance payments to suppliers Receivables from employees Other receivables 1,618 246 113 30 727 2,734 2010 1,441 240 56 26 652 2,415

The ageing of trade receivables at the reporting date was:


31 December 2011 Gross Not past due Past due 0-60 days Past due 61-90 days Past due 91-120 days More than 121 days 1,044 515 62 21 119 1,761 Impairment (3) (21) (119) (143) Net 1,044 515 59 1,618 Gross 1,058 356 30 17 119 1,580 31 December 2010 Impairment (3) (17) (119) (139) Net 1,058 356 27 1,441

Reconciliation of allowance for doubtful receivables:


Opening balance, 1 January 2010 Impairment loss recognised Write-offs Closing balance, 31 December 2010 Impairment loss recognised Write-offs Closing balance, 31 December 2011 223 15 (99) 139 4 143

49

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

5. Inventory
31 December 2011 Food and beverages Wine in barrels Materials Goods for resale 223 4 191 116 534 2010 282 106 148 84 620

The net carrying amount of wine in barrels as at 31 December 2010 reect a write down to the net realisable value in the amount of HUF 115 million recognised in respect of Gundel wine, the majority of which has been sold during 2011.

6. Long-term assets classified as held for sale


Long-term assets classified as held for sale comprises the lower of the net carrying value and the fair value less cost to sell, of a hotel and hospitality property in Hungary, called Hotel Hullm that has been advertised for sale and which the Group expects to sell within the next twelve months.

50

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

7. Property, plant and equipment


Land At 1 January 2010 Gross book value Accumulated depreciation and impairment Net book value For year ended 31 December 2010 - Additions and capitalisations - Effect of movements in exchange rates - Depreciation charge for the year - Disposals - Other Closing net book value At 31 December 2010 Gross book value Accumulated depreciation and impairment Net book value For year ended 31 December 2011 - Additions and capitalisations - Effect of movements in exchange rates - Depreciation charge for the year - Disposals - Other Closing net book value At 31 December 2011 Gross book value Accumulated depreciation and impairment Net book value 692 (22) 13,297 . 13,297 13,297 103,077 41,958 61,119 27,245 23,514 3,731 1,898 93 1,805 145,517 65,565 79,952 3,518 2,559 (2,761) (22) 11 61,119 1,388 350 (1,386) (23) 12 3,731 (831) 69 (19) (31) 1,805 4,075 3,670 (4,166) (98) 23 79,952 12,627 12,627 94,330 36,516 57,814 24,990 21,600 3,390 2,673 56 2,617 134,620 58,172 76,448 20 250 12,627 773 1,289 (2,774) (66) 57,814 958 101 (1,459) (9) 19 3,390 587 31 (44) 2 2,617 2,338 1,646 (4,277) (9) (45) 76,448 12,382 12,382 91,104 32,512 58,592 23,970 20,190 3,780 2,041 2,041 129,497 52,702 76,795 Buildings and improvements Furniture, fittings and equipment Constructions in progress Total

The net book value of property, plant and equipment pledged as loan security was HUF 39,985 million as of 31 December 2011 and HUF 28,815 million as of 31 December 2010. The amount of borrowing cost capitalised in 2011 was HUF 53 million (2010: HUF 44 million), the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was 4.4% in 2011 (2010: 3.4%).

51

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

8. Intangible assets
Goodwill At 1 January 2010 Gross book value Accumulated depreciation and impairment Net book value Year ended 31 December 2010 - Additions and capitalisations - Effect of movements in exchange rates - Amortisation charge for the year - Other Closing net book value At 31 December 2010 Gross book value Accumulated depreciation and impairment Net book value Year ended 31 December 2011 - Additions and capitalisations - Effect of movements in exchange rates - Amortisation charge for the year - Other Closing net book value At 31 December 2011 Gross book value Accumulated amortisation and impairment Net book value 2,175 2,175 564 190 374 2,573 1,932 641 5,312 2,122 3,190 2,175 (13) 374 180 8 (233) 10 641 180 8 (246) 10 3,190 2,175 2,175 595 208 387 2,333 1,657 676 5,103 1,865 3,238 2,175 (18) 387 176 2 (202) 72 676 176 2 (202) 72 3,238 2,175 2,175 595 190 405 2,116 1,488 628 4,886 1,678 3,208 Land usage rights Software and other intangibles Total

At 31 December 2011 intangible assets include HUF 374 million, net of amortisation (2010: HUF 387 million) for land usage rights relating to two hotels on Margaret Island held under licenses given by the Municipality of Budapest. Goodwill relates to the following acquisitions:
31 December 2011 Lebn Lzn a.s. Gundel Kft. Egszsgsziget Kft. Preventv-Security Zrt. Total goodwill 565 944 549 117 2,175 2010 565 944 549 117 2,175

The Group determines whether goodwill is impaired on an annual basis or when there is an indication that it might be impaired. This requires an estimation of the recoverable value of the cash-generating units (CGUs) to which the goodwill is allocated. The higher of fair value, less cost to sell or value in use is the base of any impairment. Value in use was determined by discounting the future cash flows generated from

52

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

the continuing use of the unit and was based on the following key assumptions: Cash flows were projected based on actual operating results and the 5-year business plan, which includes an annual 3 percent growth rate on average. Cash flows for a further indefinite period were extrapolated using a constant growth rate of 3 percent, which does not exceed the long-term average growth rate for the industry. Management believes that this indefinite forecast period was justified due to the long-term nature of the Groups hospitality business. An average weighted average cost of capital (WACC) of 9.2 percent (2010: 9.4%) was applied in determining the net present value of future cash flows of cash generating units located in Hungary, while 9.6% was used in case of CGUs located in Czech Republic (2010: 8.9%). The discount rate was estimated based on the risk free interest rate, market risk premium, industry beta and companys leverage. In 2011 and 2010 no impairment loss was recognised in respect of goodwill as the estimated recoverable amount of each CGU the goodwill relates to exceed its carrying amount. Management has identified the key assumptions for which there could be a reasonably possible change that could cause the carrying amount to exceed the recoverable amount. The table below shows the amount that these assumptions are required to change individually in order for the estimated recoverable amount to be equal to the carrying amount.
In percentage CGU Lebn Lzn a.s. - change of after-tax discount rate - change of EBITDA Gundel Kft. - change of after-tax discount rate - change of Revenue Egszsgsziget Kft. - change of market value of the land Preventv-Security Zrt. - change of after-tax discount rate - change of EBITDA 46 (8.3) 60 (4.8) (12.5) (12.5) 34 (2.7) 29 (2.2) 44 (6.2) 67 (8.1) Change required for carrying amount to equal the recoverable amount 2011 2010

The values assigned to the key assumptions represent managements assessment of future trends and are based on both external sources and internal sources (historical data).

9. Other payables and accruals, including derivatives


31 December 2011 Wages and salaries Social security Taxes payable, excluding income taxes Accrued expenses Derivatives Government grants 1 Other 937 437 380 1,107 71 65 661 3,658 1 The government grants recongized in prot or loss as other income was HUF 7 million in 2011 (2010: HUF 129 million). 2010 1,036 429 318 865 9 503 3,151

53

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

10. Interest-bearing loans and borrowings


Non-current liabilities Secured bank loans Obligation due to written put option to acquire the remaining 50% shareholding in Egszsgsziget Kft. 1 31 December 2011 20,302 563 20,865 31 December 2011 5,228 1,358 6,586 2010 5,909 221 6,130 2010 19,100 502 19,602

Current liabilities Current portion of secured bank loans Bank overdrafts

1 In August 2009 Danubius entered into a put and call option agreement with CP Holdings to purchase the remaining shareholding in Egszsgsziget Kft. The amount to be paid by Danubius under the option agreement is EUR 1.7 million. The option agreements provide for an option fee of EUR 110,000 and 3 month EURIBOR + 1% interest from August 2010.

As of 31 December 2011 the Groups secured bank loans are denominated in Euro (EUR), total EUR 83.3 million (2010: EUR 91.0 million) and fall due for repayment, as follows:
31 December 2011 Within 1 year 1 to 2 years 2 to 5 years over 5 years Total debt Less total current debt Total non-current debt 6,586 4,991 14,309 1,002 26,888 (6,586) 20,302 2010 6,130 11,056 6,731 1,313 25,230 (6,130) 19,100

The interest rates for all bank borrowings are floating and determined by 3 months EURIBOR + margin between 0.6% to 1.8% in Czech Republic and Slovakia, 0.75% to 3.85% in Hungary and 4.5% in Romania. The weighted average margin is 2.69% at 31 December 2011 (2010: 2.22%), while the average rate of interest is 4.1% (2010: 3.2%).

54

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

11. Provisions
Acquisition of Piestany Balance at 31 December 2009 Provision made during the year Provision used during the year Effect of movements in exchange rates Unwinding of discounts Balance at 31 December 2010 Provision made during the year Provision used during the year Effect of movements in exchange rates Balance at 31 December 2011 Current portion 2010 Non-current portion 2010 Current portion 2011 Non-current portion 2011 664 19 683 70 753 683 753 Employee benefits 491 4 (155) 3 11 354 191 545 140 214 102 443 Restructuring 217 22 (62) 177 32 (177) 32 177 32 Other 5 (5) 29 29 29 Total 1,377 26 (222) 22 11 1,214 252 (177) 70 1,359 317 897 163 1,196

Acquisition of Piestany In 2002 a provision for legal cases of HUF 621 million was initially recognised at the acquisition of Piestany from which HUF 11 million was utilized in 2003 as a result of a lost legal case. At the end of 2006 HUF 163 million of the provision was released as it was no longer considered probable that an outow of resources embodying economic benets will be required to settle certain cases. The timing of the resolution of the remaining cases is uncertain. The increase in the amount of provision in HUF terms is only due to foreign exchange translation effect. Employee benets Group companies in Hungary, the Czech Republic and Slovakia operate benefit programmes that provide lump sum benefits to employees after every five years employment and upon retirement. The amount of the benefits is determined by the base and average monthly salary and the length of service period. None of these programmes have separately administered funds. As of 31 December 2010 and 2011 the Group has recognised a provision of HUF 354 million and HUF 545 million, respectively to cover its estimated obligation regarding future retirement and jubilee benefits payable to current employees. Restructuring The efciency improvement project to further optimize Danubius workforce continued in 2011 as well. As management was committed to these changes and the restructuring plan was communicated in detail to parties involved, the Group recognized a provision of HUF 177 million as of 31 December 2010 for future redundancy payments and related tax and contribution, all of which was used during year 2011. In addition HUF 265 million redundancy payment was made in the fourth quarter of 2011 against which there was no provision recognised in previous periods. The HUF 32 million balance as of 31 December 2011 represents cash outows to be incurred in 2012 in respect of redundancy.

55

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

12. Share Capital


The registered share capital at December 31, 2011 and 2010 consists of 8,285,437 authorised, issued and fully paid ordinary shares, each of par value of HUF 1,000. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company.

13. Reserves
Capital reserve The capital reserve was established in 1991, when the company was privatized and transformed to a public limited company. Treasury shares The reserve for treasury shares comprises the cost of the Companys shares held by the Group. As at 31 December 2011 and 2010 the Group held 374,523 of the Companys shares, purchased at a cost of HUF 1,162 million. Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the nancial statements of foreign operations. Retained Earnings Dividends are available for distribution from Danubius Hotels Nyrt.s company only retained earnings calculated according to the Hungarian Accounting Law. The amount available for distribution as dividends at December 31, 2011 is HUF 25,921 million (2010: HUF 25,327 million). If dividends are paid to non-resident shareholders, a withholding tax of up to 20% must be paid. The rate applicable is dependent on the country of residence of the shareholder, the period in which the dividend is paid and the number of shares held. The withholding tax is also payable by individual shareholders who are resident in Hungary (resident legal entities are exempt).

14. Non-controlling interest


31 December 2011 Preventv-Security Zrt. Lebn Lzn a.s. Slovensk Lieebn Kpele Piestany a.s. SC Salina Invest SA and SC Balneoclimaterica SA 68 786 1,973 20 2,874 2010 61 666 1,781 10 2,518

15. Material costs


2011 Materials used in providing guest services Utility costs (gas, electricity, fuel and water consumption) Other materials used 5,170 3,182 1,062 9,414 2010 4,797 3,110 1,058 8,965

56

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

16. Services used


2011 Washing, cleaning services Maintenance services Safety services Professional and membership fees Hospitality services Marketing, PR services Rental of buildings, equipment and vehicles Travel agency and other commissions Bank and insurance charges Hire of temporary personnel Telecommunications services Software, IT support Delivery and transport fees Training Other 1,354 1,518 901 591 685 798 628 522 436 250 279 415 182 91 1,129 9,779 2010 1,322 1,359 828 616 643 835 616 668 447 225 291 305 190 145 1122 9,612

17. Other expenses


2011 Taxes and contributions, except for income taxes Write-off of inventories Damages Impairment of trade receivables Other 2,161 5 4 441 2,611 2010 1,933 115 14 15 445 2,522

18. Income tax


The tax charge / (benet) for the year comprises:
2011 Current tax Deferred tax 100 (83) 17 2010 338 (409) (71)

57

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

A reconciliation of the difference between the income tax expense and taxation at the statutory tax rate, is shown in the following table:
2011 Loss before tax Income tax using effective corporation tax rate of the parent Effect of different effective tax rates Non-deductible expenses Tax exempt revenues Effect of other tax rate changes, net Current year losses for which no deferred tax asset was recognised Tax loss utilised Change in unrecognised differences Tax allowances Other 13% 2,339 (304) 73 269 (240) 34 134 43 8 17 10% 2010 (953) (95) 112 103 (76) (52) 50 (3) (105) (6) 1 (71)

In 2010 the Hungarian government changed the corporate tax rate from 19% to 10%, to be applied only to taxable prot under HUF 500 million, and effective from 2013 to be applied to all taxable prot. In 2011 the Hungarian government withdrew the application of 10% corporate tax on taxable prot over HUF 500 million from year 2013, therefore effective tax rates are calculated for each individual Hungarian companies and applied in calculating relevant deferred tax assets and liabilities. Deferred tax assets and liabilities Deferred tax assets and liabilities as at 31 December 2011 and 31 December 2010 are attributable to the following:
Assets 2011 Property, plant and equipment Repairs and maintenance provision Legal provisions Provision for doubtful debts Provision for employee benefits Loan revaluation Tax loss carry forwards Other Offset of assets and liabilities within individual legal entities 52 145 14 97 59 668 3 1,038 (579) 459 2010 44 130 13 44 97 401 16 745 (428) 317 Liabilities 2011 1,718 28 1,746 (579) 1,167 2010 1,281 211 13 1,505 (428) 1,077 2011 (1,666) 145 14 97 59 668 (25) (708) (708) Net 2010 (1,237) (211) 130 13 44 97 401 3 (760) (760)

58

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

Movement in temporary differences during the year:


Recognised in Balance 1 Recognised in other compreJanuary 2010 profit or loss hensive income Property, plant and equipment Repairs and maintenance provision Legal provisions Provision for doubtful debts Provision for employee benefits Loan revaluation Tax loss carry forwards Other (1,611) (195) 126 35 87 426 1 (1,131) 399 1 (22) (43) 97 (25) 2 409 (25) (17) 4 (38) Balance 31 December 2010 (1,237) (211) 130 13 44 97 401 3 (760) Recognised in Recognised in other compreprofit or loss hensive income (385) 211 1 53 (38) 267 (26) 83 15 (2) (31) Balance 31 December 2011 (1,666) 145 14 97 59 668 (25) (708)

Lebn Lzn a.s. records a provision for repairs and maintenance in its Czech statutory accounts related to the future repair expenses of its premises, which is a deductible expense in Czech tax legislation. This provision was not included in these nancial statements and a deferred tax liability of HUF 211 million was set up for this temporary difference as of 31 December 2010. Due to the signicant maintenance work done in 2011 and the revision of future spendings Lebn Lzn a.s. reversed the whole amount of related provision, and therefore also the temporary difference at the end of 2011. As at 31 December 2011 HUF 1,666 million deferred tax liabilities are recognised in respect of temporary differences between the tax base of Property, plant and equipment (primarily hotel buildings) and their carrying amount recorded in these nancial statements. At 31 December 2011 tax loss carry forwards of HUF 668 million can be utilised over indenite period of time, however no deffered tax asset was recognised on negative tax base of HUF 1.1 billion as it is not expected to reverse within reasonable period of time (10 years), due partly to the recent change of Hungarian corporate taxation, according which, starting from 2012 the amount of tax loss carry forwards utilised is maximised to 50% of taxable income of the period.

19. Earnings per share


The calculation of basic earnings per share is based on the net loss attributable to ordinary shareholders of HUF 2,387 million in 2011 (2010: a net loss of HUF 933 million) and the weighted average number of qualifying ordinary shares outstanding was 7,910,914 during 2011 and 2010.
31 December 2011 Weighted average number of issued ordinary shares Weighted average number of treasury shares Weighted average number of qualifying ordinary shares Net profit/(loss) for the year in million HUF Basic earnings per share (HUF/share) 8,285,437 (374,523) 7,910,914 (2,387) (302) 2010 8,285,437 (374,523) 7,910,914 (933) (118)

There are no dilutive factors to earnings per share disclosed above.

59

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

20. Commitments and contingencies


As of 31 December 2011 and 31 December 2010 there were no material contractual commitments for the acquisition of property, plant and equipment. The Group did not have any significant contingent liabilities as at 31 December 2011 and 31 December 2010. As at 31 December 2011 and 31 December 2010 the Group had no lease obligation that is due over a year, leasing agreements can be abandoned at any time without significant penalty suffered.

21. Pension Plans and other post-employment benefits


The Groups employees participate in state pension plans to which employers and employees are required by law to pay contributions based on a percentage of each employees employment earnings. The pension liability resides with the state in Hungary, the Czech Republic, Slovakia and Romania. The Group has a defined contribution pension plan in addition to the state plan, which is available for all Hungarian employees after six months employment. The Group pays contributions equal to 5% of the salary of employees who are members of the fund (2010: 5%). The contribution expense in 2011 was HUF 214 million (2010: HUF 260 million). The assets of the fund are held in separate trustee administered funds and are not included in these financial statements. The Group also has a Health Fund, which is available for all Hungarian employees after six months employment. The Group pays contributions equal to 1% of the salary plus HUF 4,000 per month for employees who are members of the fund. The total contribution expense was HUF 131 million in 2011 (2010: HUF 166 million). The assets of the fund are held in separate trustee administered funds and are not included in these financial statements. There are no Group pension or health plans for employees of the Czech, Slovak and Romanian subsidiaries. See employee benefit section of Note 11 for further details of other post-employment benefits.

22. Related Party Transactions


Transactions with related parties are summarised as follows:
Expenses / (revenues) Management fee to CP Holdings Limited Interest to CP Holdings Management support fee from CP Regents Park Two Limited. Rental fee to Interag Zrt. Services provided by Interag Zrt. Service provided to Interag Zrt. 2011 346 11 (70) 158 17 (24) 2010 331 14 (77) 155 17 (23)

Related party receivables and payables, except for the HUF 563 million put option (see Note 10) liability were not signicant as at 31 December 2011 and 2010. Interag Zrt. and CP Regents Park Two Limited. are each subsidiary companies of CP Holdings Limited The pricing of all transactions with related parties is at arms length.

60

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

Transactions with key management personnel Total remuneration is included in personal expenses:
2011 Short-term employee benefits Post employment benefits Total 305 6 311 2010 352 8 360

23. Financial instruments and financial risk management


A) Categories of financial instruments The following table sets out the nancial instruments as at the reporting date:
2011 Financial Asset Loans and receivables 1 Financial Liability measured at Amortised cost3 Fair value through profit and loss2
1

2010 6,361 30,341 -

5,956 32,710 71

Includes the total amount of cash and cash equivalents and trade and other receivables in the statement of nancial position, except for recoverable taxes and duties. 2 includes the fair value of derivatives 3 Includes the total amount of trade accounts payable, other payables and accruals, interest bearing loans and borrowings recognised in the statement of nancial position, except for taxes payable.

Carrying value and fair value for all of the Groups financial assets at 31 December 2011 and 2010 are deemed to be equal. The carrying amount of cash and cash equivalents, trade and other current receivables and payables and other liabilities approximates their relative fair values due to the relatively short-term maturity. Derivative assets and liabilities are carried at fair value. All non-current borrowings have floating interest rates, so their fair values are not significantly different from their amortised cost and consequently carrying value is deemed to approximate fair value. B) Financial risk management The Group has documented its financial risk management policy. This policy sets out the Groups overall business strategies and its risk management philosophy. The Groups overall financial risk management programme seeks to minimise potential adverse effects on the Groups financial assets and liabilities. The Board of Directors provides written principles for overall financial risk management and written policies covering specific areas, such as market risk (including foreign exchange risk, interest rate risk), credit risk, liquidity risk, use of derivative financial instruments and investing excess cash. Such written policies are reviewed annually by the Board of Directors and periodic reviews are undertaken to ensure that the Groups policy guidelines are complied with. Risk management is carried out by the Finance Departments under the policies approved by the Board of Directors. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

61

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

I) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of giving credit to counterparties with good payment history and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The expense of individual hotels exposure and the credit ratings of their counterparties are continuously monitored. Credit exposure is controlled by the counterparty limits that are continuously reviewed by credit managers. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of customers and advance payment is encouraged and enforced. The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The Group defines counterparties as having similar characteristics if they are related entities. At the end of 2011 HUF 576 million (2010: HUF 432 million), or approximately 30 percent of the Groups total trade receivables, is attributable to sales transactions with the top 30 customers. However, geographically there is no concentration of credit risk. The carrying amount of trade receivables and other financial assets recorded in the financial statements represents the Groups maximum exposure to credit risk. II) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Groups approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Groups reputation. The Group has yearly, monthly and weekly cash flow forecasts and continuously monitors liquidity. For cash flow optimisation purposes in 2011 the repayment of approximately half of the borrowings has been rescheduled, the original amount of instalments in 2012 will be reduced by half. At the reporting date the Group has the following unused loan facilities:
31 December 2011 Overdraft Long-term loan 2,962 558 2010 1,653 -

The following are the contractual maturities of nancial liabilities, including estimated interest payments:
31 December 2011 Financial liabilities Interest bearing loans and borrowings Liability due to put option Bank overdrafts Trade payables Other payables and accruals Total 25,530 563 1,358 2,375 2,884 32,710 27,858 563 1,358 2,375 2,884 35,038 2,024 1,358 2,375 2,884 8,641 4,115 4,115 5,734 563 6,297 14,983 14,983 1,002 1,002 Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years

62

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

31 December 2010 Financial liabilities Interest bearing loans and borrowings Liability due to put option Bank overdrafts Trade payables Other payables and accruals Total

Carrying amount 25,009 502 221 2,205 2,404 30,341

Contractual cash flows 26,483 517 221 2,205 2,404 31,830

6 months or less 2,123 221 2,205 2,404 6,953

6-12 months

1-2 years

2-5 years

More than 5 years 1,343 1,343

4,486 4,486

11,473 517 11,990

7,058 7,058

It is not expected that the cash ows included in the maturity analysis could occur signicantly earlier, or at signicantly different amounts, however negotiations are currently in progress with nancial institutions to modify the current loan repayment schedule in order to postpone part of the repayable amounts due within 2 years.

III) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Groups income or the value of its holdings of nancial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. i) Currency risk The Group is exposed to currency risk on sales and borrowings that are denominated in a currency other than the respective functional currencies of Group entities, primarily the Euro, but also Pound Sterling (GBP). At the reporting date, the carrying amounts of nancial assets and nancial liabilities denominated in currencies other than the respective group entities functional currencies are as follows:
HUF million Euros Sterling USA dollars Financial instruments denominated in foreign currency Total financial instruments Financial liabilities 2011 27,371 109 27,480 32,710 2010 26,088 26,088 30,341 Financial assets 2011 1,161 21 14 1,196 5,956 2010 1,024 4 1,028 6,361 Net asset/(liability) 2011 (26,210) (88) 14 (26,284) (26,754) 2010 (25,064 ) 4 (25,060) (23,980)

The Group's sales prices are primarily quoted in Euro and income is received in foreign currency or local currency. This provides a natural hedge against foreign exchange movements for the interest and capital installments of loans and borrowings the majority of which are denominated in EUR. Management periodically reviews the merits of entering into foreign currency hedging contracts or other derivative products. Based on the approval of Board of Directors the Group may use forward exchange contracts to hedge its currency risk in respect of sales revenues, with a maturity of less than one year from the reporting date. The effect of such hedges is not material in 2011 and 2010.

63

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

Foreign currency sensitivity The following strengthening of the Euro against each of the following currencies at 31 December would have increased (decreased) prot or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates and margins, remain constant. When analysing foreign currency sensitivity the changes of functional currencies of operational segments against the euro are monitored, as the euro has the highest possible exposure on the Companys operational performance.
Strengthening 31 December 2011 Hungarian forint (HUF) Czech Crown (CZK) Romanian Lei (RON) 31 December 2010 Hungarian forint (HUF) Czech Crown (CZK) Romanian Lei (RON) 11% 5% 5% ( 2,129) 53 10 (1,570) 11% 6% 5% 2,128 117 6 (1,776) Profit and Loss effect Effect on translation reserve

The weakening of the Euro against the above currencies by the above shifts at 31 December would have had the equal but opposite effect, on the basis that all other variables remain constant. ii) Interest rate risk The interest rates for all bank borrowings are floating and determined by 3 months EURIBOR + margin between 0.6% to 1.8% in Czech Republic and Slovakia, 0.75% to 3.85% in Hungary and 4.5% in Romania. The weighted average margin is 2.69% at 31 December 2011 (2010:2.22%), while the average rate of interest is 4.1% (2010: 3.2%). Since June 2006 the Company has used an interest rate swap to manage the relative level of its exposure to cash flow interest rate risk associated with floating interest-bearing borrowings. The agreement in effect as of 31 December 2009 had a notional amount of EUR 27.8 million and had a 3 months EURIBOR floor of 3.35% and cap of 4.75%. Having this instrument meant that the Company did not have to pay more than 4.75% interest + margin for the covered amount, but cannot pay less than 3.35% interest + margin. As the underlying loan facilities have been rescheduled and the collar agreement was not modified accordingly, the collar was not amortising in line with the underlying loan facilities, therefore, starting from year 2008 no hedge accounting was applied, any change in its fair value was included in the profit or loss. The Companys interest rate swap (Collar) agreement expired on 31 December 2010. SLKP a.s. has entered into an interest rate swap agreement in 2011 to manage its exposure to interest rate risk associated with floating interest-bearing borrowings. As of 31 December 2011, according to the agreement the notional amount was EUR 10.4 million and the 3 months EURIBOR floating interest rate was swapped with a fixed rate of 2.55%. The fair value of the agreement was a liablitiy of HUF 71 as of 31 December 2011, which - meeting the criterias of hedge accounting - is recognised in equity.

64

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

Interest rate sensitivity 3 months EURIBOR was 1.387% as of 31 December 2011 and 1.013% as of 31 December 2010. A change of 20 basis points in interest rates (2010: 11 basis points) at the reporting date would have increased (decreased) prot or loss by the amounts shown below. Starting from year 2008 the Collar agreement is considered not effective for IFRS reporting purposes, hence the change in the fair value of the Collar agreement affects the Companys prot or loss. This analysis assumes that all other variables, in particular foreign currency rates and interest margins, remain constant. The changes of interest rates effect only the prot or loss of the Company and have no effect on equity.
Profit and Loss 31 December 2011 20 basis points increase 20 basis points decrease 31 December 2010 11 basis points increase 11 basis points decrease (27) 27 (49) 49

C) Capital Management The Groups policy is to maintain a capital base which is sufcient to maintain investor and creditor condence and to sustain future development of the business. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. Therefore Groups target to keep shareholders equity to total liablities and shareholders equity ratio anytime above 55%, as of 31 December 2011 this ratio was 59.3% (2010: 60.8%). There were no changes in the Groups approach and processes to capital management during the year. The Corporate Act requires that the equity of the Company has to be higher than two third of the share capital, otherwise the share capital should be decreased or transformation of the Company into other legal form should be undertaken. As of 31 December 2011 and 2010 the Company complied with this requirement.

65

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

24. Segment reporting


Hungarian operations 2011 Hotel & HosSecurity segpitality segment ment 24,516 550 25,629 1,928 (563) (2,593) (778) (3,156) 37,960 1,273 925 201 2,417 70 42,846 1,569 261 21,019 417 23,266 1,239 806 356 1,126 15 36 (3) 36 63 109 108 3 120 403 121 9 130 Total Czech operations Slovakian operations Romanian operations Inter-segment transfers Total

Revenue Sales to external customers Inter segment sales Total operating expenses of which Depreciation and amortisation Operating profit Financial results of which interest expense Profit/(loss) before tax Assets and liabilities Property, plant and equipment Cash and cash equivalents Accounts receivables Inventories Intangibles Assets held for sale Other non-allocated assets Total assets Trade accounts payable Advance payments from guests Interest bearing loans and borrowings Provisions Other non-allocated liabilities Total liabilities Capital expenditure 38,023 1,382 1,033 204 2,537 70 43,249 1,690 261 21,028 417 23,396 1,239 16,564 1,158 137 111 608 18,578 224 284 1,997 116 2,621 1,617 22,987 424 402 203 40 24,056 366 210 4,297 826 5,699 947 2,378 505 46 16 5 2,950 95 44 129 268 452 79,952 3,469 1,618 534 3,190 70 1,668 90,501 2,375 799 27,451 1,359 4,825 36,809 4,255 25,322 906 26,755 1,943 (527) (2,593) (781) (3,120) 7,986 7,364 932 622 (101) (51) 521 9,026 8,893 1,306 134 (138) (144) (4) 1,618 1,358 231 260 4 (9) 264 (906) (906) 43,952 43,463 4,412 489 (2,828) 985 (2,339)

66

Notes to the Consolidated Financial Statements


(All amounts in million HUF)

24. Segment reporting (continued)


Hungarian operations 2010 Hotel & Hospitality segment Security segment Total Czech operations Slovakian operations Romanian operations Intersegment transfers Total

Revenue Sales to external customers Inter segment sales Total operating expenses of which Depreciation and amortisation of which impairment of receivables and write-off of inventories Operating profit Financial results of which interest expense Profit/(loss) before tax Assets and liabilities Property, plant and equipment Cash and cash equivalents Accounts receivables Inventories Intangibles Assets held for sale Other non-allocated assets Total assets Trade accounts payable Advance payments from guests Interest bearing loans and borrowings Provisions Other non-allocated liabilities Total liabilities Capital expenditure 38,672 1,803 691 303 2,478 73 44,020 1,184 232 19,998 472 21,886 778 63 100 93 4 121 381 103 16 119 38,735 1,903 784 307 2,599 73 44,401 1,287 232 20,014 472 22,005 778 14,767 1,167 314 105 587 16,940 399 197 1,215 1,811 853 21,105 671 311 196 51 22,334 462 153 4,296 472 5,653 458 1,841 445 32 12 1 2,331 57 34 207 298 425 76,448 4,186 1,441 620 3,238 73 1,319 87,325 2,205 616 25,732 1,214 4,462 34,229 2,514 24,415 720 25,717 1,986 130 (582) (1,232) (685) (1,814) 774 356 1,102 16 28 1 (2) 29 25,189 1,076 26,819 2,002 130 (554) (1,231) (687) (1,785) 7,273 6,699 934 574 4 (46) 578 9,003 8,869 1,322 134 (97) (100) 37 1,456 1,254 239 203 15 (17) 217 (1,076) (1,076) 42,921 42,565 4,497 130 356 (1,309) (850) (953)

Eliminations principally comprise the equity consolidation and inter group loans. Inter-segment pricing is determined on an arms length basis. Other non-allocated assets and liabilities include deferred tax assets and liabilities and many, individually not material items that were not allocated to segments in this presentation.

67

ANNUAL REPORT 2011


Notes to the Consolidated Financial Statements
(All amounts in million HUF)

25. Key sources of estimation uncertainty


The Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are described below. Deferred tax assets The Group recognizes deferred tax assets in its statement of nancial position relating to tax loss carry forwards. The recognition of such deferred tax assets is subject to the future utilization of tax loss carry forwards. The utilization of certain amounts of such tax loss carry forwards might be subject to statutory limitations and is dependent on the amount of future taxable income. If the future taxable income is signicantly less than the amount estimated the deferred tax asset may need to be written down (see Note 18). Impairment of property, plant and equipment and intangible assets The carrying amounts of the Groups property, plant and equipment and intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. Such value is measured based on discounted projected cash flows. The most significant variables in determining cash flows are discount rates, terminal values and the period for which cash flow projections are made, as well as the assumptions and estimates used to determine the cash inflows and outflows. For property, plant and equipment the recoverable amount is determined to be the fair value rather than the value in use. The estimated fair value of the Groups assets or group of assets significantly exceeds its net carrying amount. The Group considers that the accounting estimate related to asset impairment is significant due to the need to make assumptions when estimating the recoverable amount and the material impact that recognising impairment could have on the results of the Group. See Notes 7 and 8 for more information. Depreciation Property, plant and equipment and intangible assets are recorded at cost and are depreciated or amortised on a straight-line basis over their estimated useful lives. The determination of the useful lives of assets is based on historical experience with similar assets. The appropriateness of the estimated useful lives is reviewed annually. Due to the significance of property, plant and equipment in the asset base of the Group, the impact of any changes in these assumptions could be material to the results of operations (see Note 7 and 8). Provisions The Group establishes provisions where management considers that it is probable that an outow of economic benets will be required to settle obligations arising from past events. The estimated amounts of provisions are reviewed on an ongoing basis. Changes in estimates are recognised in the statement of income and such changes could be material to the net results reported in a particular year. See Note 11 for more information.

26. Post Balance Sheet events


No event occurred after the balance sheet date that would have material effect on the nancial statements presented.

68

Report on the 2012 business targets

Report on the 2012 business targets


Following four long and difficult years, the hotel industry remains in a challenging situation in year 2012. Hotel industry investments carried out in the past decade significantly increased hotel capacity in the Central-East European region, both in city and wellness-spa segments and demand is only expected to adjust after several years. Hotels are experiencing fierce competition in retaining market share and beside a rates war, increasing efficiency, cutting and streamlining costs play a major role. Danubius plans for 2012 again fully reflect its strong response to these tough market conditions. Retaining the effect of the cost cutting measures undertaken in 2009 and 2011 as a reaction to the crisis and a further increase in cost efficiency whilst continuing to provide our guests with our usual high quality are key goals for the Danubius Group in the year 2012. The operating performance of the Group is at all times influenced by the strengthening and weakening of the forint and other national currencies compared to the euro. When preparing the 2012 budget, management calculated with the average HUF/EUR rate of year 2011. Generally, 4.0% inflation and, at the time of preparing the budget, a low 2% increase of Gross Domestic Product (GDP) were prognosticated. In our Hungarian hotels, during 2012 we will continue measures to rebuild the lost turnover of previous years, especially in Budapest, which was affected by the largest drop in business and meeting tourism and leisure groups, where we are expecting a moderate recovery. In our spa and wellness hotels, we expect more domestic demand, due mainly to the weaker forint, new government incentives offered by Szchenyi card and an increase in number of guests arriving from the German markets, which have been dropping for the past years. We trust that in the mid term, the recent Malv bankruptcy will not affect negatively the number of guests arriving to the country. In addition, we hope Ryanair, the newcomer in the airline market to and from Hungary, will contribute to the pick up in visitors. Due to the increase of living standards and personnel wealth, customers from former Soviet Union and Arabic countries are expected to increase further in 2012. All these factors are expected to lead to a moderate 1.3 percentage point increase of occupancy from 58.3% in 2011 to 59.6%. The implementation of new operating software will continue in 2012 and 2013 with the aim of providing greater efficiency in the fields of operations, sales, guest relations and accounting and finance. In addition, the company is focusing on increasing the turnover through electronic sales channels, especially through our website, which showed an impressive improvement in 2010 and 2011 with the highest average daily rate (ADR) achieved. A further goal is to achieve an adequate ratio of leisure and business guests in the city hotels, while in the hotels of the Danubius Health Spa Resort brand we plan to achieve better results by introducing new products and concepts, such as family friendly hotel programs. In spite of the strong competition on the market, our objective is slightly to raise prices in euro. Besides monitoring the competition, our rates are flexibly adjusted to the requirements of market demand. Special attention is paid in our sales strategy to driving cross selling to keep as much business as possible within the Company and the Group. This is strengthened by the application of the Central Reservation System (CSR) in more and more hotels. In addition to maximising revenues, minimising costs will continue to have a special role in 2012. Seasonality is of great importance in both our Budapest and country hotels and so we have adjusted the constant hotel headcount to the staff requirement in the low occupancy months and, at times when the number of guests goes up, we provide the expected high quality services by employing temporary manpower. Danubius management plans to increase wages to compensate the majority of employees for their losses caused by

69

ANNUAL REPORT 2011


Report on the 2012 business targets

new personnel tax legislation. This measure amounts for approximately 70% of the 4% wage increase budgeted. Hotels have traditionally suffered from high fixed costs, so all flexible costs are monitored closely and have been significantly reduced in previous years. The electricity and gas prices for 2012 increased considerably by more than 11% and 15%, respectively, resulting significant additional expense for Hungarian hotels. Considering the 1.3 percentage point increase in occupancy and a moderate increase of average rates in HUF terms, we plan approx. 2.5% revenue increase on the Hungarian segment in 2012, which alongside the increase of personnel expenses, 4% general inflation and considerable energy price increase will result in a similar level of departmental profits compared to 2011. In Czech Republic we expect that the drop in German market will bottom out due to the 3% growth of the German economy in previous year. However the 0.4% outlook for 2012 creates further uncertainty. The demand from Russian market increased in 2011, by an unexpected 30%, our Marienbad hotels expect to keep this important segment at last years level. They also expect an increasing number of guests via electronic channels, including the new Danubius web site. The potential future markets for the Czech hotels are guests from the domestic market, the surrounding countries, Israel and the former Soviet states, although visa obligations could make sales difficult. Due to the change of state pension funding processes, we are budgeting a lower number of clients from Czech insurance companies and due to the tough competition we expect a slight decrease in MICE segment. Considering all factors in the market, the number of sold rooms is expected to decrease by 3%, while the average room rate is expected to be over 2011 level. The net slight revenue increase will not be fully compensated by cost reductions, therefore operating performance is expected to decrease slightly. However our Czech subsidiary will have significant contribution to Groups operational profit in 2012, as in 2011. The impact of quality enhancing developments completed in the hotels in Piestany, mainly in the spa areas is reflected in the 2012 budget expectations of the hotels. The number of domestic guests financed by social insurance companies is expected to decline further, at the same time, shorter leisure stays by Slovakian guests will become more popular and the number of guests from the Arabic and Russian markets are is expected to go up. Alongside a 2% increase in average occupancy, we expect average rates to go up by 1.5% in 2012. As a result of more revenues and the headcount reduction measures introduced in the last quarter of 2011, the budget indicates an improvement of both gross and net operating profit. In Romania the number of business and conference guests is likely to continue to recover in 2012, following a major reduction after the banking crisis. Spa and leisure guests still give a stable revenue and profit contribution to the company. The Sovata destination is unique, the infrastructure of surrounding areas is developing and therefore more and more visitors are expected every year. Despite the fact that the Romanian economy is still facing very serious difficulties and domestic tourism will not receive enough incentives from the government, we expect the competitiveness of the hotels in Sovata will allow our profit level to be maintained. In view of the above mentioned, we plan to increase slightly Group operating revenues over the 2011 level and retain operating profits in 2012 at a similar level to 2011. Limited financing opportunities following the economic crises, the extended return period and the difficult business climate have forced the management of Danubius Nyrt. to distribute investment resources carefully. Among planned investments, the implementation of the new operating software is a significant element. In Hungary, work on fire life safety system of Hilton hotel will proceed and a moderate programme of necessary maintenance and certain important quality improving works will be undertaken in 2012. In Czech Republic a new project to recreate the historical building of Hotel Tatra is under consideration.

70

Report on the 2012 business targets

The management of the Group aims to support developments to minimise energy use and provide extra services required by the customers that generate revenues. The size of such investment programs will depend on business performance and financing sources. The Groups liquidity position in the continuing testing market will be kept under strict control. Our 2012 budget is subject to the market and economic environment not deteriorating significantly during the entire year, despite the uncertain economic and international political outlook. Certain factors e.g. increasing energy prices are mounting up further difficulties to retaining profitability. Besides the planned change in operating profit, interest costs are expected to grow owing to the increasing EURIBOR rates, but the amount of outstanding loans is expected to remain around the level of the previous year. Through the loan translations, the recent extreme changes in the forint/euro rate may considerably affect the financial profit and thus the profit before tax. The overall cost base of Danubius has been considerably reduced thanks to the actions made in previous years as a reaction to the challenges of the economic crisis. This also gives a profit opportunity to the Company when revenues start to grow again. However, it should be emphasized that the outlook for 2012 remains extremely uncertain due to the increasing trend of late booking and unpredictable developments in the international and domestic economies.

71

ANNUAL REPORT 2011


Danubius Hotels Group

Contact persons:

Dr. Imre Dek President & CEO Phone: (+36-1) 889 4001 Fax: (+36-1) 889 4005

Jnos Tbis Vice President for Finance Phone: (+36-1) 889 4004 Fax: (+36-1) 889 4005

Panni Vadasi Investors Relations Phone: (+36-1) 889 4007 Fax: (+36-1) 889 4005

E-mail: investor.relations@danubiushotels.com

72

DANUBIUS HOTELS NYRT. danubiushotels.com 1051 Budapest, Szent Istvn tr 11. Telefon: (+36-1) 889-4000 Fax: (+36-1) 889-4005