FSC OFFICE

6394 AUD DOC

UDRUZENA BEOGRAD~KA BANKA NEW YORK ASEN~.}Y
F.inancial Statements
Independertt Audit~r’s Report
Years Ended December 31,~ 1988~and 1987
December 31~ 1988
198’7

Touche Ross

CONFIDENTIAL DT 001978

DFS-Monter 000841
 FORM ~a¢~. ~IN~N¢IA~ SERV)¢=~ O~1~ TOUCHE ROSS & CO. INQUIRY NO. ~?~
.~m= ~ ~ r ~ REPORT DOCKET
~’DESCRI~ION OF REPORT (WILL APPEAR ~N COVERS IF ANY ARE REQUIRED)

i REPORT 1"0
I.E o, o
FINAL REPORTS ONLY

Prof. Standards RevieweO ~

Review
liD. OF HOW DATE OF
COPIES ADORESS DELIVERED DELIVERY

....
!
!
CENTRAL FILESI BASENENT PIERCE
DATE REC’D I DATE SENT DATE SENT

I BOX #
I
~’/(’ ;l~ ~,
1 FSG Offie= Cow
[] NEW DOCUMENT

[~ SUPE RCOPY
Oirect~ofAdvisow ~ceslAIl~icComl~ni~

Tam Col=lee R~uired

(S~e S=~.ia~ Routing for Fina~ Copies)

APPROVED FOR TYPING: FINAL REMARKS:

DATE
REQUIRED
SIGNATURE
~] S’I’API.E
~] SPIRAL BIND

LETTERHEAD TO BE USED

[] FINANCIAl.
OFFICE SERVICF.~

~ N EI, NA R K
C~ OTHER (Sl~e~)/v):

_ CCPIES Deliver Final Copies to:

N eede(:l Fo~
FSG CENTRAL FILES

CONFIDENTIAL DT 001979

DFS-Monter 000842
 UDEUZENA BEOGRADSKA BANKA
NEW YORK AGENCY

FINANCIAL STATEMENTS-AND
INDE£ENDENT AUDITOr’S REPORT.

YEARS ENDED DECEMBER 31, 1988 AND 1987

CONFIDENTIAL DT 001980

DFS-Monter 000843
 UDRUZENA BEOGRADSKA BANKA
NEW YORK AGENCY

FINANCIAL STATEMENTS AND

INDEPENDENT AUDITOR’S REPORT

YEARS ENDED DECEMBER 31, 1988 AND 1987

CONFIDENTIAL DT 001981

DFS-Monter 000844
 Touche Ross &
Financial Services Center
One World Trade Center, 93rd Floor
Touche Ross
New York, NY 10048-0562
Telephone: 212 839-6600
Telex: 226704 TRCO UR

Independent Auditor’s Report

Udruzena Beogradska Banka - New York Agency

635 Madison Avenue
New YOrk, New York 10022

Attention: Dr. Teodosije Celenkovlc, Agent

Mr. Vladimir Lincerski, Deputy General Manager
we have audited the accompanying balance sheets of Udruzena Beogradska Banka -
New York Agency as of December 31, 1988 and 1987, and the related statements of
income and changes in capital funds for the two years then ended, cash flows
for the year ended December 31, 1988 and changes in financial position for the
year ended December 31, 1987. These financial statements are the responsibility
of the Agency’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
we conducted our audits in accordance with generally accepted auditing
s~andards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examinin@, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. ,

In our opinion, the financial statements referred to above present fairly, in

all material respects, the financial position of Udruzena Beogradska Banka -
New York Agency as of December 31, 1988 and 1987, and the results of its
operations for the two years then ended, its cash flows for the year ended
December 31, 1988 and its changes in financial position for the year ended
December 31, 1987 in conformity with generally accepted accounting principles.

As mentioned.in Note l, the Agency has presented a statement of cash flows for
the year ended December 31, 1988 and a statement 0£ changes in ~inancial
position for the year esded December 31, 1987.

The financial statements referred to above have been prepared from the separate
records maintained by the New York Agency and may not necessarily be indicative
of the conditions that would have existed or the results of operations if the
Agency had been operated as an unaffiliated entity. Transactions and
relationships between the Agency and its Head Office are described in Notes 1
and 2.

New York, New York

March 8, 1989

Touche Ross International

CONFIDENTIAL DT 001982

DFS-Monter 000845
 - 2 -

UDRUZENA BEOGRADSKA BANKA - NEW YORK AGENCY

BALANCE SHEETS

December 31,
ASSETS z98___/~ 198___!7
$ 6,734,699 $ 3,677,860
Cash and due from banks
Placements with banks (Note 3) 159,700,000 174,500,000
Due from Head Office (Note 2) 30,786,351 113,011,017
Loans, less allowance for loan losses of
$120,000 and S40,000 (Note 4) 89,806,189 74,287,406
Customers’ acceptance liability ~0,004,004 22,613,667
Interest receivable and other assets 2,730,453 1,460,469

LIABILITIES AND CAPITAL FUNDS

Due to banks 5,405,204 $ 3,325,291

Customer credit balances 9,060,879 1,866,829
Due to Head Office (Note 2) 134,870,190 139,196,481
Time deposits (Note 6) 87,305,835 160,022,856
Acceptances outstanding 30,004,004 22,613,667
Other borrowed funds (Note 7) 47,520,000 58,203,749
Interest payable and other liabilities 1,563,350 1,151,058

315,729,462 386,379,931

Commitments and contingent liabilities (Note I0)

Capital funds:
Allocated funds from Head Office (Note 2) 3,000,000 3,000,000
Retained earnings 1,032,234 170,488

4,032,234 3,170,488

S319,761,696 $389,550.419

See notes to financial statements

CONFIDENTIAL DT 001983

DFS-Monter 000846
 - 3 -

UDRUZENA BEOGRADSKA BANKA - NEW YORK AGENCY

STATEMENTS OF INCOME
Year ended
December
1987
Interest income:
Loans and advances to Head Office $ 5,212,639 $ 8,319,097
Other loans 7,611,193 6,003,735
Placements with banks 13,456,508 7,145,184

26,280,340 21,468,016
Interest expense:
Funds borrowed from Head Office I0,322,603 9,129,526
Time deposits and other borrowed, funds 13,084,271 9,766,144

23,406,874 18,895,670

Net interest income 2,873,466 2,572,346

Provision for loan losses (Note 4) 80,000 -

Net interest income after provision for

loan losses 2,793,466 2.572,346

Other income - principally fees on letters of

credit and foreign exchange : 1,155,2~0 75~,246

Other expenses:
Salaries and employee benefits 1,033,019 1,221,035
Occupancy 446,942 ~52,943
Head office administration 708,000 950,000
Other operating expenses 678,219 514,879

2,866,180 3,138,857

Income before income taxes and

extraordinary item 1,093,526 187,735

Income taxes (Note 8) 716,980 17,247

Income before extraordinary item 376,546 170,488

Extraordinary item - utilization of tax loss

carryforward (Note 8) 485,200 -

NET INCOME 861.746 $ 170.488

See notes to financial statements

CONFIDENTIAL DT 001984

DFS-Monter 000847
 - 4 -

UDRUZENA BEOGRADSKA BANKA - NEW YORK AGENCY

STATEMENTS OF CHANGES IN CAPITAL FUNDS

YEARS ENDED DECEMBER 31, 1988 AND 1987

Allocated
Funds £rom Retained
Head Office Earninqs Total

Balance. January i. 1988 $3,000,000 $ - S3,000,000

Net income 170,488 170,488

Balance. December 31. 1988 3.000.000 170,488 3,170,488

Net income 861,74@ 861.7~6

Balance. December 31. 1988 Z3.000.O00 ~ S4.032.234

See notes to financial statements

CONFIDENTIAL DT 001985

DFS-Monter 000848
 - 5 -

UDRUZENA BEOGRADSKA BANKA - NEW YORK AGENCY

STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 1988

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income 861,746

Adjustments to reconcile net income to net cash

provided by operating activities:
Provision for loan losses 80,000
Increase in interest receivable and other assets (1,269,984)
Increase in interest payable and other liabilities 412,292

Net cash provided by operating activities 84,054

CASH FLOWS FROM INVESTING ACTIVITIES:

,Net decrease in placements with banks 14,800,000

Net decrease in due from Head Office 82,224,666
Principal collected on loans to customers 289,925,904
Loans advanced to customers (305,524,687)
Net increase in customers’ acceptance liability (7,390,337)

Net cash p~ovided by investing activities 74,035,546

CASH FLOWS FROM FINANCING ACTIVITIEB:

Net increase in due to banks 2,079,913

Net increase in customer credit balances 7,194,050
Net decrease in due to Head Office .(4,326,291)
Net decrease in customer time deposits (72,717,021)
Net increase in acceptances outstanding 7,390,337
Net decrease in other borrowed funds (10,683,749)

Net cash utilized by financing activities (71.062,761)

Net increase in cash during the year 3,056,839

Cash at the beginning of the year 3,677,860

Cash at the end of the year 6,734.699

See notes to financial statements

CONFIDENTIAL DT 001986

DFS-Monter 000849
 - 6 -

UDRUZENA BEOGRADSKA BANKA - NEW YORK AGENCY

STATEMENTS OF CHANGES IN FINANCIAL POSITION

YEAR ENDED DECEMBER 31, 1987

Financial resources provided by (applied to):

Operations:
Net income 170,488
Noncash charges - provision for loan
losses, depreciation and amortization 107,703

Financial resources provided by operations 278,191

Capital transactions:
Funds remitted to Head Office
Financial resources provided by
operations and capital 278,191

Deposits and financing activities:

Due to Head Office (53,143,840)
Time deposits 69,168,765
Other borrowed funds 14,836,195

30,861,120

Other activities:
Cash and due from banks (1,510,151)
Interest receivable and other assets (714,232)
Due to banks 1,809,516
Customer credit balances (239,301)
Interest payable and other liabilities 358,340

(301,838)
Increase in financial resources invested
in earning assets
Increase (decrease) in earning assets:
Placements with banks 89,500,000
Due [rom Head Office (53,030,803)
Lo~n~ (5,031,724)

$ 30.837.47.3

See notes to financial statements

CONFIDENTIAL DT 001987

DFS-Monter 000850
 - 7 -

UDRUZENA BEOGRADSKA BANKA - NEW YORK AGENCY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1988 AND 1987

i. ORGANIZATION AND SUMMARY OF SrGNIFICANT ACCOUNTING FOLIC£ES

Orqanization
The Udruzena Beogradska Banka - New York Agency (the "Agency") is licensed
under Article V of the Banking Laws of New York State. Udruzena Beogradska
Banka (the "Bank") is an associated bank with its Head Office in Belgrade,
Yugoslavia.

Allocation of Head Office Expenses

The allocation of Head Office expenses in the statements of income is

comprised of direct and indirect administrative expenses incurred by the
Head Office.

Loans and Allowance for Loan Losses

Loans are stated at the principal amount outstanding net of the allowance
for loan losses. Interest on loans is recognized on the accrual basis.

The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans and commitments to
extend credit, based on evaluations of their collectibility and prior loss
experience. ~

Premises and Equipment

Premises and equipment are .stated at cost, less accumulated depreciation and
amortization. Depreciation of equipment is computed by the straight-line
method based on the estimated useful lives of the assets. Leasehold improve-
ments are being amortized using the straight-lin~ method over the terms Of
the leases.

Statement of Cash Flows

The Agency has adopted cash flow reporting as called for in Statement o£
Financial Accounting Standards No. 95, Statement of Cash Flows ("FASB 95").
The balance sheet caption "cash and due from banks" is considered to be cash
and cash equivalents as defined in FASB 95.

CONFIDENTIAL DT 001988

DFS-Monter 000851
 - 8 -

Foreig,D Currency Translation

Assets and liabilities denominated in foreign currencies are translated into
United States dollars at exchange rates prevailing as of the balance sheet
date. The profit or loss resulting from the difference between contract
exchange rates and the market rates is included in the statements of income
in other income.

Income Taxes

The tax provision for the years ended December 31, 1988 and 1987 was
computed in accordance with the accounting standards o£ AS8 Opinion No. ii. ¯
Effective January I, 1990, the Bank must adopt the iscome tax accounting
standards set forth in FASB Statement No. 96, which supersedes Opinion
No. Ii. The Bank is in the process of evaluating the effects of the new
pronouncement on its financial statements, but expects these effects to be
immaterial.

The Bank is subject to U.S. federal, taxation on that portion of income which
is effectively connected with the operations in the United States.

2. TRANSACTIONS WITH HEAD OFFICE

The Agency, in accordance with Yugoslav banking regulations, accepts dollar

time deposit accounts and other interest-bearing accounts from Head Office
and redeposits dollars at Head Office, which Head Office relends to Yugoslav
entities. The obligations between Head Office and the Agency are generally
matched as to maturity with an interest differential.to the Agency to cover
administrative costs. Funds allocated as capital funds bear interest at 3%.
The majority of transactions of the Agency are effected with Head Office.
Balances in these accounts are:

December 31,
1988 1987
Due from (short term):
Loans and advances 39,786,351 $i13,011,017
Interest receivable 114,027 28,720
30,900,378 SI13.039.737
Due to (short term):
Time accounts $133,253,046 $138,284,445
Other liabilities 1,617,144 946,201
Debt restructuring - 912,030
Interest payable 287,312 134,662
$,135,157,502 $140,277,344

PLACEMENTS WITH BANKS

Included in placements with banks are overnight placements of $56,500,000

and $44,500,000 at December 31, 1988 and 1987, respectively.

CONFIDENTIAL DT 001989

DFS-Monter 000852
 - 9 -

LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at December 31, 1988 and 1987 are summarized as follows:

December 31,
: 19~.__~ 198___!
Yugoslav banks, including
restructured loans $ 2,31&,286 $ 2,697,017
Yugoslav commercial entities 87,611,903 71,630,389
89,926,189 7%,327,&06
Allowance for loan losses (120,000) (40,000)

S89.806.189 S74,287,406

Loans to Yugoslav commercial entities are principally extended under

guarantee of the "basic banks" in the Udruzena Beogradska Banka system.

Changes in the allowance for loan losses are as follows:

Year ended
December 31,
198___~8 1987

Halance, beginning of year $ ~0,000 $40,000

Provision charged to operations 80,000 -

Balance, end of year S120.000 ~

51. DEBT RESTRUCTURING OF CERTAIN YUGOSLAV BANKS

During 1983, the Agency received funds from Head Office and other major
Yugoslav banks in connection with the external debt restructuring of certain
other Yugoslav banks. The following amounts are included in balance sheet
accounts in connection with th~se transactions;
December 31,
1988 1987

Loans and advances - Yugoslav banks Z - ~ 39,874

Other borrowed funds - Yugoslav banks 111,553

Due to Head Office 912,036

$1,023,589

Other borrowed funds and amounts due to Head Office bear interest at market
rates; dollar loans and advances are charged prime rate (principal correspon-
dent bank’s prime) and loans and ’advances denominated in other currencies
are charged market rate plus 1/2%.

CONFIDENTIAL DT 001990

DFS-Monter 000853
 - I0 -

6. TIME DEPOSITS
Time deposits, except for $5,345,835 in 1988 and $17,963,000 in 1987,
respectively, are short-term deposits from the National Bank of Yugoslavia.

During ig88, the Agency paid interest of S22,658,134 on time deposits, other
borrowing and funds borrowed from the Head Office.

7. OTHER BORROWED FUNDS

Other borrowed funds consist principally of short-term borrowings from banks.

8. INCOME TAXES
The net income for financial reporting purposes is adjusted pursuant to
applicable tax legislation in order to derive taxable income or loss. The
most significant adjustment provides that the interest exp~nse deductible
for tax purposes be computed in accordance with a specified formula and,
accordingly, such interest expense can be significantly different from that
recorded in the Agency’s financial statements.

Reconciliation of book to taxable income and income taxes in the statements

o£ income are a~ follows=
December 31,
1988 1987

Income before income taxes and extraordinary

item $i,093,526 $ 187,735

Net permanent differences relating principally

to interest income and expense adjustments 722,135 (318,432)

Federal taxable income (loss) SI.815.661 S(130,697)

Federal tax at statuto[y rate of 34% 617,325

Less: Tax benefit of net operationg loss

utilized (485,200)

Federal tax 132,125

New York State tax 51,389 8,969

New York City tax 48,266 8,278

Tax provision included in financial

statements net of benefit of operating
loss utilized $231.780 S 17,247

CONFIDENTIAL DT 001991

DFS-Monter 000854
 ii -

Income tax benefits of $485,200 and $- resulting from the recognition of net
operating loss carryforwards from prior years have been reflected as extra-
ordinary items in the statements of income for the years ended December 31,
1988 and 1987, respectively. Based on the 1987 federal tax return, net
operating loss carryforwards are available at December 31, I988 amounting to
approximately $I0,254,000, of which $5,72~,000 expires in 1988, $2,874,000
expires in 1989, $751,000 expires in 1990, $774,000 expires in 1991, and
$131,000 expires in 2002.

During 1988, the Agency paid income tax of $126,230.

9. EMPLOYEE PENSION PLAN

The Agency has a noncontributory money purchase pension plan covering

substantially all eligible employees who are not already covered under the
Head Office’s plan. The Agency makes annual contributions to the plan equal
to 5.8 percent of the participants’ compensation up to the social security
wage base and an additional 5 percent to the extent the participants’ annual
compensation exceeds such wage base. Pension costs and benefit obligations
are not material to the financial statements.

I0. COMMITMENTS AND CONTINGENT LIABILITIES

The Agency is obligated under leases for premises which expire on
December 31, 1990. The minimum rental commitment at December 31, 1988 is
$598,000 ($299,000 in each of the years 1989 and 1990). Rent expense for
the years ended December 31, 1988 and 1987 was S402,000 and $367,000,
respectively.

In the normal course of business, the Agency makes various commitments

and incurs certain contingent liabilities that are not presented in the
accompanying financial statements. These commitments and contingent
liabilities include various commitments to extend credit under standby
letters of credit. At December 31, 1988 and 1987, commitments under
standby letters of credit are $I1,521,000 and $15,979,000, respectively.
Management does not anticipate any material losses as a result of these
transactions. , :~

CONFIDENTIAL DT 001992

DFS-Monter 000855