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August 21, 1996

THOMSON ACCOUNTANTS DISCREDIT INDRA’S “PROFITABLE” FIGURES

By CBR Staff Writer

The report on the Spanish electronics group Indra SA, compiled at the request of French defense electronics company Thomson-CSF SA by Barbier, Frinault & Associates, Arthur Andersen & Co’s representatives in France, dropped like a bomb on to management desks at Teneo SA, the Spanish state holding company, which has a 63% stake in Indra. The document, written in English and stamped provisional and preliminary, generally discredited recent accounts presented by Indra and which were audited and passed by KPMG Peat Marwick LLP, pointing to discrepancies of between $73m and $100m. Not surprisingly, the report’s findings created considerable disquiet at the French state-owned defense electronics company, and the Spanish Ministries of Defense and Industry have swiftly stepped in with the aim of pouring oil on troubled waters in a conflict that threatened to jeopardize co-operation between the Spanish and French companies, two leading players in the realignment of the European military sector. In July 1995 Thomson agreed to put up $25m to take a 24.9% stake in Indra, making its investment as Indra decided to increase issued share capital by the equivalent of $82m. As is customary in agreements of this nature, particularly those involving Teneo, Thomson was given free rein to inspect Indra’s accounts for a period of two years from July 1995. It was foreseen that if after this term Thomson were to show any disagreement with the accounts, the mediation of a third party – Price Waterhouse & Co – would be required to resolve the conflict. At Indra’s shareholders’ meeting held on June 24, Thomson representatives refused to ratify the accounts corresponding to fiscal 1995, in which Indra reported its first profit for three years – of $4.3m – on revenue nominally up 7% at $478.4m. Nevertheless, at the request of the Industry and Defense ministries and to avoid Thomson’s position being misinterpreted, representatives of the French group confirmed their interest in participating in Indra.

Faith in KPMG

They did however insist that their analysis was yet to be concluded, and that this would require a significant period of time. If Thomson considers the evaluations of the Arthur Andersen report to be definitive, the French group could call for Teneo – a group of industrial companies belonging to the National Institute of Industry – to pay the resultant difference in the value of Indra either into Indra SA or directly to Thomson. General manager of Teneo, Ignacio Urquijo, expressed his satisfaction with the management of Indra over the last year due to the results achieved, the organizational streamlining completed and the productivity of the company, while he put his faith in the auditing of Indra’s accounts by KPMG Peat Marwick, since this had been completed in accordance with the accounting criteria generally accepted in Spain. Above all, when the Spanish ministries of Industry and Defense issue a statement against the backdrop of the conflict saying that they are prepared to reconsider the agreement with Thomson and the French group’s business relations with the Spanish defense sector, there is no doubt that Thomson is obliged to tread carefully; Thomson has a 49% holding in Amper Programas SA, the subsidiary of the Madrid -based communications equipment group Amper SA, and this subsidiary has obtained contracts worth $54.7m to supply radio telephones to the Spanish army; the French group is also engaged in modernizing the Spanish air force’s Mirage F-1 fighter planes by virtue of a contract worth $132.8m signed immediately after it took a stake in Indra; through Amper Programas, once again Thomson is in competition to win a contract worth almost $220m to establish a communications network for the Spanish army, one of the Ministry of Defense’s most important medium-term investments and work that is vital to the gradual recovery of Amper Programas. The final forceful observation – or diktat – on the conflict from the Spanish Ministry of Industry was that there will be willingness on the part of both sides to come to an agreement. á

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