TIDMECDC
RNS Number : 7992H
European Convergence Develop. CoPLC
25 June 2013
25 June 2013
EuroPean convergence development company plc
("ECDC" OR "THE COMPANY")
Final Results for the Year ended 31 December 2012
European Convergence Development Company plc ("ECDC", the
"Company" or the "Group"), a property company focused on investing
in commercial, retail and industrial property in South-East Europe,
announces its final results for the year ended 31 December
2012.
For further information please contact:
European Convergence Development +44 (0)1624
Company plc 640200
Anderson Whamond
+44 (0)207
Charlemagne Capital 518 2100
Varda Lotan
+44 (0)1624
Galileo Fund Services Limited 692600
Ian Dungate, Company Secretary
+44 (0)20
Panmure Gordon 7886 2500
Hugh Morgan
Grishma Patel
+44 (0)20
Smithfield Consultants 7360 4900
Ged Brumby
Henry Wallers
Website: www.europeanconvergencedevelopment.com
Chairman's Statement
Financial Performance
The Report and Accounts of European Convergence Development
Company PLC (ECDC) set out the financial performance for the year
ending 31(st) December, 2012, along with the ongoing development
and ongoing active management of its commercial assets.
The audited NAV per share at the 31 December 2012 was EUR0.3010
(2011: EUR0.3059) reflecting a reduction of EUR0.0049 per
share.
The Financial Statements for the year to 31 December 2012
indicate a loss attributable to equity shareholders of EUR0.0078
(2011: EUR0.0621).
In line with a number of listed property companies focused on
Eastern Europe, uncertainty surrounding liquidity of the underlying
assets and continuing difficult market conditions has led to the
share price trading at a very significant discount to stated Net
Asset Value.
Dividend
The Board of Directors resolved not to award a dividend but
retain the funds within the company to protect its current
investments and possibly make further investments where beneficial
to equity shareholders.
Operating Activities
The second half of the year has been as difficult as the first
six months of 2012. Although general macroeconomic conditions may
have improved, it is taking a long time to feed through to the
areas where our investments trade.
The political dispute in Romania between the President and the
ruling coalition gave rise to some concern over the continuation of
a functioning democracy in Romania. The elections and subsequent
impeachment of the President was referred to the Constitutional
Court which invalidated the public vote. In December, further
elections were held and the centre left USL coalition gained a
comfortable majority in both the Chamber of Deputies and the
Senate. The President nominated and Parliament ratified Victor
Ponta as the new Prime Minister of Romania.
The lack of liquidity and bank lending in both countries in
which ECDC operates make the acquisition and development of new
projects extremely difficult and the lack of a robust investment
market is hampering the possibility of disposing of current assets
at reasonable prices.
In Romania two transactions dominated the investment market
which otherwise saw a small number of transactions below the EUR15
million mark. Bulgaria saw no transactions of note in the
commercial market for three quarters. Both the commercial and
investment markets are struggling against uncompetitive lending
terms, low levels of liquidity and limited institutional interest.
It is therefore particularly difficult to get a realistic view on
capital values. The Board has used independent consultants to
arrive at the market value of ECDC's assets which have suggested a
small increase in the carrying value of Cascade and a small
impairment of the assets in Bulgaria.
Rental levels for commercial property in central Bucharest have
remained stable during the second half of the year trading within a
range of EUR17.50 to EUR18.50 per sqm per month and contributions
towards tenant fitting out have started to decline. In the retail
market rental levels are under pressure as landlords struggle to
hold onto tenants using rent free periods and rental concessions to
retain tenants.
The Bulgarian retail market has been dominated by some
significant openings at the end of 2012 and the beginning of 2013.
With average rental levels declining between 6% and 8% during 2012
vacancy levels in the rest of the country, ex Sofia ended the year
at 21.6%. Average rental levels outside of Sofia are trading around
EUR10.00 to EUR11.00 per sqm per month.
Within the individual projects Cascade occupancy increased to
98.6% at the end of the year with a further 355 sqm let in quarter
4 at market rental levels. The asset continues to meet all its
financial obligations with the banks and produces excess cash which
may enable the additional debt to be repaid early. Your Board
continues to discuss with the Manager how to progress with this
asset in the best interests of the shareholders.
The 65,700 sqm Era Shopping Park in Oradea completed the
development of its 16,000 sqm shopping mall in spring 2012. This
was followed by the opening of the 8,000 sqm Mobexpert store in May
which, along with other stores means that the Era Shopping Park is
the leader for home decorations and furnishing in the region.
Leasing conditions are difficult with competition from two other
centres in the city and a lack of fit out contributions whilst
negotiations are ongoing with the lending banks.
The 49,500 sqm Era Shopping Centre in Iasi faces increasing
competition with the opening of a new centre in the city.
Nevertheless the centre is trading at 98% occupancy though
competitive pressures will probably ensure the tenant concession
granted to date will not dissipate in the near future. A further
28,000 sqm mall development is dependent upon finalising the
necessary funding facility with the lending banks.
For the 48,000 sqm Mall in Plovdiv, occupancy levels increased
to 64% by the end of the year with a further 4,200 sqm of new lease
agreement signed which should open in the new year, taking
occupancy levels to around 75%. The importance of this threshold is
that it will trigger rental payments for the three major tenants in
the scheme. The company continues to negotiate with the bank to
restructure the banking facility, which is presently in default and
there appears to be a consensus to find a solution.
The 20,500 sqm Mega Mall, Rouse increased occupancy levels to
60% by the year end with the reletting of the old Piccadilly
supermarket and new leases for additional retail on the first
floor. Both units had a favorable impact on the footfall at the
centre. The Company continues to negotiate with the Bank on
restructuring the facility which is currently in default.
There has been no further development at Sliven or Bourgas as
any expenditure at either of these two sites will be dependent upon
and improvement in both the tenant and financing markets. An
agreement has been reached with the Partner at Sliven to distribute
profits generated from interest receipts as a means of part
repaying his outstanding loan. In May 2013 the Company received a
part repayment.
Outlook
Although the outlook for 2013 is slightly better than the year
just gone, there is likely to be a divergence between the
performances of Romania and Bulgaria. The Bulgarian government
resigned in February 2013, four months before the end of its term,
following mass protests against high power prices and falling
living standards following the introduction of austerity measures
including the freezing of wages and pensions. Half of the
population is perceived to be at risk of being in poverty. The
President has appointed an interim government and early elections
were held on 12th May. The rightist GERB party held the lead in
Bulgaria's election on 12(th) May 2013 but its prospects of forming
another government, after the last one was ousted by protests,
looked uncertain after its potential partner ruled out a deal.
Unemployment in Bulgaria is at 12.4%, almost an eight year high
and consumption has fallen back in the final quarter of 2012.
Inflation appears to be under control but GDP is stagnant at best
and there is declining foreign investment in the country compared
to 2012. However, the Government's decision to restrict the budget
deficit and government debt places the economy in a more favourable
position than most European countries.
The recent financial crisis that has befallen Cyprus has the
potential to negatively impact the investments that ECDC has made
in the Iasi and Oradea Shopping Centres. The second largest bank in
the country, Cyprus Bank Popular (Laiki Bank), has been closed and
effectively taken over by Bank of Cyprus, which in turn has seen
large deposits of over EUR100,000 frozen and may be subject to an
impairment at a later date if it is deemed necessary to meet
capital adequacy requirements. One of the main members of the
banking syndicate financing both Iasi and Oradea is now the Bank of
Cyprus. Although these banking facilities are fully drawn, the
planned restructuring of both the facilities may have an impact on
the future relationship with Argo Real Estate Opportunities Fund
(AREOF). On 12th April 2013, the Company through its investment
vehicle issued Put notices to AREOF requiring AREOF to purchase all
of the respective shares and make payment of a preferred return at
the expiration of the notice period. The Put option period expires
6 months from the date of the notice.
In the year ahead the Company will focus its attention on
maximising the benefit derived for shareholders from Cascade,
Bourgas, Sliven and oversee the investments in Iasi and Oradea and
work to find solutions for Plovdiv and Rousse.
Anderson Whamond
Chairman
24 June 2013
Report of the Manager
Economic and Political Overview
Romania
Political tensions in the middle of 2012 have been resolved
following the parliamentary elections which were held in December.
The USL coalition gained a comfortable majority with more than 60%
of the seats in both the Chamber of Deputies and the Senate. Victor
Ponta was nominated by the president and ratified by Parliament as
the new Prime Minister of Romania. The election results meant that
the President and the Prime Minister resolved their differences and
the USL coalition now have a clear mandate to run the country.
Annualised Gross Domestic Product (GDP) remained flat over 2012
with only 0.3% year-on-year growth, mainly due to poor agricultural
output caused by the severe drought earlier in the year. The IMF
predicts real GDP growth of 1.6% in 2013 and 2.0% in 2014, which is
in line with the Government forecast.
In July 2012 inflation in Romania was 2.04% and has continued on
an upward trajectory ending 2012 at 4.95%. In January 2013
inflation peaked at 6.0% before falling back to 5.3% in March and
remained at that level in April. The annual inflation rate is
expected to stabilize towards the end of the year to an estimated
4.0% which is still above the Central Bank's tolerance margin of
2.5% plus or minus 1.0%.
The Budget deficit at the end of 2012 was equivalent to 2.5% of
GDP which was within the Government's targets. Exports have climbed
steadily from a low point in December, 2012 of EUR3,135 million to
EUR4,005 million in March but this is still below the EUR4,200 high
in November. Imports climbed dramatically between February and
March ending at EUR4,573 million. As a result of the increased
level of imports, the trade balance was in deficit of EUR5,568
million in March. Over 70% of Romania's trade is with the European
Union with France, Germany and Italy being the biggest contributors
and with the German economy slowing the forecasts are not expected
to improve significantly.
Retail sales in March decreased by 0.8% compared to the same
month in 2012 and represented the second month in eighteen when a
year on year decline was recorded.
Since March 2012, interest rates have remained unchanged at
5.25% and at the most recent Central Bank meeting in April the
Governor announced that from 1(st) July 2012 the Bank will start
lowering rates on the assumption that there were no fundamental
changes to economic conditions.
The nationalisation and dismantling of Bank of Cyprus and the
closing of Cyprus Bank Popular (Laiki Bank), as part of the bail
out of Cyprus by the European Union and the IMF had limited direct
effect on Romania as together both banks control approximately 1.3%
to 1.5% of assets. Nevertheless, statements made by both European
and local high ranking Central Bank officials sent out unsettling
messages to larger depositors above the EUR 100,000 guaranteed
threshold. The actions taken do have an impact on our two
investments in Iasi and Oradea which are discussed later.
The events in Cyprus brought added pressure to a banking system
that last year is estimated to have accumulated a total loss of EUR
476 million. This is the largest loss recorded since the beginning
of the crisis in 2008. Non-performing loans (NPLs) remained on a
clear upward trajectory during 2012 (18.2% at the end of the year,
up from 14.3 % at the end of 2011). The pace in the growth in NPLs
accelerated during 2012 which was consistent with other statistics
that showed an increasing number of companies entering the
insolvency procedure in 2012 when compared with 2011.
Bulgaria
Bulgaria's gross domestic product has stagnated for the last
three years with growth peaking in 2011 at 1.7%. In 2012, GDP
growth was just 0.5% in the wake of the slump in the Euro Zone.
Some experts believe that growth rates below 3% will not sustain
the employment numbers and the rate for 2013 is forecast to remain
well below this threshold and may return to 2% to 3% in 2014. This
forecast comes on the heels of local analysts warning that
Bulgaria's economy will be struggling to survive another difficult
year after three years of stagnation. Standard & Poor's Ratings
Services stated in mid December 2012 that it expects real GDP
growth of about 1.7% in 2013 and an average of 2.0% from 2013-2015,
supported by a recovery in both domestic and external demand. The
agency expects the current account deficit to remain close to
balance in 2012, before slipping back into a deficit as domestic
demand gradually recovers and the trade deficit widens over the
next three years.
The decline in GDP over the last twelve months is starting to
feed into the unemployment rate which at the end of quarter 4 stood
at 12.4%, an increase of 0.9% from quarter 3. The stronger pace of
job contraction was broadly visible in the majority of economic
industries and reflected in a further increase in the rate to 13.8%
in quarter 1, 2013. The Ministry of Finance is forecasting further
increases in unemployment during 2013.
To compound matters, the Bulgarian government resigned in
February 2013, four months before the end of its term, after mass
protests over living standards, corruption and organized crime.
Half of the population is perceived to be at risk of being in
poverty. The President appointed an interim government to run the
country and elections were held on 12th May 2013. Against the
backdrop of one of the lowest turnouts, no party gained a majority
and as a result the country currently has no elected Government.
Bulgaria urgently needs a new government to negotiate EU funds for
the next seven years, draft the 2014 budget and address popular
anger.
Inflation, measured by the Consumer Price Index (CPI) in
Bulgaria, increased 0.3% to 4.2% in December 2012 following a two
month decline of 1% to 3.9% in November 2012. Annual average
inflation during 2012 was 3.0%.
Consumer Confidence in Bulgaria fell 4.3 points in the final
quarter of 2012 to -42.3 from -38.0 in the third quarter.
Following limited global appetite for investment risk and the
problems within the EU, Foreign Direct Investments (FDI) for 2012
remained low at EUR 1,398 million or 3.5% of GDP compared to EUR
1,746 million or 4.5% of GDP in 2011. This decline has continued
into 2013 with January and February recording a 90% plus decline
against a similar period in 2012.
Property Market Overview
Romania
Office Market
In quarter 4 only two small office buildings totalling c. 4,800
sqm were delivered to the market which took the total annual office
supply to 49,000 sqm. According to Jones Lang LaSalle Inc this
represents 54% of the 2011 supply and only 17% of the supply in
2010. A number of deliveries and completions were postponed during
2012 which affected the annual supply.
In quarter 4 the total take up of office space reached 77,000sqm
within which, renewals represented 60%. New leases contributed
approximately 20,000 sqm with the average leased area not exceeding
800 sqm. Only 20% of leases signed exceeded 1,000 sqm. Full year
take up reached 240,000 sqm, slightly below 2011 however, there was
a significant shift in the constituent parts with 26% represented
by new leases in 2012 against 50% in 2011, while lease renewals
increased from 22% in 2011 to 30% in 2012.
Prime headline rent remained unchanged at the end of the final
quarter of 2012 at EUR 18.5 per sqm per month. These levels are
expected to soften slightly during the first half of 2013.
Incentive packages offered by landlords continue to be common
practice although the value will vary significantly depending upon
the type of space being let. The overall vacancy rate in the City
of Bucharest is estimated at 16% but there are significant
variations depending on submarket and even by property.
Currently the 2013 office pipeline is estimated at 130,000 -
150,000 sqm with approximately 50,000 sqm already preleased. For
2014, the supply is estimated to increase by a further 70,000 -
90,000 sqm. The specification of new buildings is improving and
most developers are looking for energy efficient and green
certificated buildings, following both occupier and investor
interest for such improvements.
Retail
In the fourth quarter of 2012 the main activity was provided by
hypermarket operators with three new openings in Bucharest:
Kaufland on Soseaua Mihai Bravu; Cora on Soseaua Alexandriei; and
Auchan City in Giulesti. Outside of Bucharest two new openings
occurred, Ploiesti Shopping City and Cora Bacau. Including these
openings, shopping centre stock increased to 0.83 million sqm in
Bucharest and to 1.53 million sqm for the rest of the country.
International retailers continued their aggressive expansion
plans and are taking advantage of the availability of prime retail
space and the current suppressed market conditions. Fashion
retailers such as H&M, Inditex, Takko, Deichman, C&A and
food retailers such as Mega Image, Profi and Carrefour were among
the most active during this period.
The takeover by Auchan of the Real operations in Eastern Europe
will create the 3rd largest retailer in the market after Metro and
Kaufland, with 31 units across the country. The merger is currently
awaiting the Competition Council's green light for completion.
Prime shopping centre rents were quoted at EUR 60 - 70 per sqm
per month and high street units around EUR 60 - 65 per sqm per
month. Rents are expected to soften during 2013 especially for high
street units.
The supply pipeline is estimated at 132,000 sqm in 2013 and
166,000 sqm in 2014. The low estimated supply compared with
previous years is materially affected by the lack of adequate
financing facilities.
Bulgaria
Retail
The Bulgarian retail market is starting to develop leisure led
shopping malls with the successful opening of Bulgaria Mall (Gross
Lettable Area (GLA) 33,000 sqm) in December 2012. There are another
four shopping centres scheduled for completion by the end of 2013
three in Sofia - Paradise Center (GLA 80,000 sqm) which opened in
March, South Ring Mall (GLA 72,000 sqm) and Mega Mall (GLA 24,000
sqm) and one in Bourgas - the Strand (GLA 30,500). The Strand is
Bulgaria's first open air shopping centre. Also opened in quarter 4
was the 12,700sqm GLA Carrefour Centrel in Stara Zagora. With the
opening of these malls the average leasable area per 1,000
inhabitants by the end of 2013 will have increased to approximately
115 sqm which compares to 247 sqm for the rest of Europe as a whole
or 200 sqm in CEE. The forthcoming year is likely to be extremely
challenging for the retail sector with 215,000 sqm under
construction throughout the country.
The continued decreasing consumer spending power and
discretionary spending is reflected in declining demand for retail
space in shopping malls. The lower demand is also attributable to
lower levels of liquidity reflected in the provision of finance for
local businesses and franchisees. Expansion tends to be in areas
with a proven return on investment or malls with strong anchor
tenant(s) which will increase footfall. Global financial
difficulties ensured that there were fewer new entrants to the
market in 2012 which in turn led to lower levels of leasing
activity. The oversupply, exacerbated by the quarter 4 openings has
given retailers the opportunity to negotiate favourable lease
terms.
The lack of demand for space has resulted in steadily decreasing
rental levels throughout 2012. Average rental levels throughout
Bulgaria have fallen 8% on a year on year basis to approximately
EUR 12.00 per sqm whilst in Sofia the decline has been slightly
less at 6% year on year. The largest decline during 2012 was
recorded in Stara Zagora where rental levels declined 18% to EUR
11.00 per sqm.
The delivery of Bulgaria Mall in Sofia has increased the vacancy
rate in the capital to 11% or 28,700 sqm. The amount of space being
marketed in the capital is significantly higher than this because
the other Malls which are coming on stream during the current year
are also vying for tenants and the total is estimated at 141,000
sqm or 32.6% of total space. The vacancy rate in the rest of the
country, ex Sofia, fell 2.9% in quarter 4 from quarter 3 ending the
year at 21.6%. This decline was achieved through cities such as
Rousse and Plovdiv where aggressive lease terms were given to
secure tenants. (Source: MBL CBRE).
The major factor in the overall decline in vacancy rates has
been the constant decrease in rental levels. In quarter 3 rental
levels remained virtually unchanged but it is not clear if rents
have reached sustainable levels. Average rental levels in Bulgaria
are around EUR12.20 per sqm per month, a decline of 10% year on
year. Outside of Sofia the average monthly rental has declined by
almost 20% to EUR10.30 per sqm per month.
The level of activity in the Bulgarian commercial property
market, similar to other CEE markets remained idle throughout 2012.
High borrowing costs and increasing uncertainty over the future of
economic growth within the EU were the main reasons for low market
liquidity. Across Europe the main asset allocation during 2012 was
towards offices as opposed to retail and it is anticipated that
risk-averse strategies in strong markets for core product will be
the maintained throughout 2013.
Project Reviews
Galleria Plovdiv
In December 2012, 3,800 sqm, representing approximately 7% of
the retail area, opened for trading, while around 4% of the GLA
closed during quarter 4. This had a net positive effect on overall
occupancy increasing it to 64% of the leasable area. During quarter
4 2012, Galleria Plovdiv managed to sign new lease agreements
totalling 4,200 sqm of retail area which opened to the public
during January 2013, driving occupancy close to 75% of the leasable
area. The importance of this threshold is that it will/[should?]
trigger letting threshold conditions for the three major tenants in
the scheme in respect of rental payment.
The Company continues to negotiate with the bank to restructure
the banking facility, which is presently in default and there
appears to be a consensus to find a solution. The Directors, on
behalf of the Company have committed to inject further loans,
alongside our partners once a solution has been found to the
restructuring. Any further equity injection by the Company will be
subject to strict conditions and will require advance approval of
the Directors of the Company.
The shareholders have provided limited temporary funding to
support the project in terms of necessary capital investment for
the fit-out works related to the new retail space as well as to
cover the operational shortfall until the end of 2012.
Mega Mall Rousse
During quarter 4 2012, occupancy increased to approximately 60%
with the reopening of the supermarket, the opening of 1,650 sqm of
retail space and the first unit in the food court area.
Despite the achieved increase in occupancy additional leasing is
still proving to be difficult. At the moment an additional 1,200
sqm or 6% of the GLA is under detailed negotiation but, as
previously announced is highly dependent upon fit-out
contributions.
The Company continues to negotiate with the bank to restructure
the banking facility, which is presently in default.
Trade Centre Sliven
The company's cash is still deposited in three banks to maintain
security but at the expense of higher interest revenue. The
operating company made a distribution of retained profits in
quarter 1 2013 which enabled our partner to partially repay the
outstanding loan to ECDC.
As previously announced, there has been no change in the
position regarding the development itself and the Manager is
considering various alternatives for the site.
Bourgas Retail Park
There has been no further progress made with this
development.
Romanian Assets
Cascade
During quarter 4 2012, another 355 sqm was let, which took the
occupancy levels to 98.6%. Rental levels achieved were in line with
market rates for properties located in this region. The remaining
available space has been let earlier this year.
The company is able to meet all of its current banking
obligations and all operational expenses are fully serviced from
the cash flow of the company. The new loan should be fully repaid
by April 2014.
The Manager and the partner are actively looking to improve the
profile of the asset through various asset management
initiatives.
Oradea Shopping Centre
The Oradea construction bank loan facility is fully drawn and
Argo has requested a rescheduling of payments and an interest rate
reduction. In addition, the availability period for the standby
facility of EUR1.3m required for tenant fit out works needs to be
extended as five leases which have been signed cannot be completed
through a lack of fit out contributions. Although the majority of
terms are accepted by the lenders, the interest rate reduction
seems to be the main issue in resolving the restructuring.
Mobexpert, Naturlich and other furniture stores opened this year
and are trading above expectations. This part of the scheme has
been branded as ERA Home Centre and now offers the largest
selection of home decoration and furnishings in the region.
Iasi Shopping Centre
Competition in the City increased with the opening of the 45,000
sqm Palas scheme in the city centre. This attracted a number of new
retailers to the city and reduced traffic and sales in the other
shopping centres in the city. Although traffic at ERA has now
returned to pre Palas opening, it is clear that sales for the
fashion retailers have declined. This fact is also true for the
other two main shopping centre schemes in the City. Occupancy
remains at 97.8% after the manager had secured a further 21
lettings in 2012.
Construction of the 28,000 sqm Mall extension has been delayed
pending finalisation of the debt facility. The restructuring of the
existing facility has received credit committee approvals, although
the lenders have delayed finalisation until completion of the
Oradea re-structuring. The Mall currently has all permits necessary
to commence construction and negotiations are progressing with a
number of contractors. Assuming finalisation of the facility, the
current construction program envisages delivery of Phase 1, 15,000
sqm in twelve months and Phase 2 of 13,000 sqm in the next eight
months.
Argo Real Estate Opportunities Fund
In June 2012 the Fund announced a new facility of EUR29.3m with
Proton Bank with an improved interest rate. The first interest
period was to 31st December 2012. The Fund has subsequently
announced that because of difficulties it has experienced in
up-streaming excess cash from its development in Odessa Ukraine, it
has requested a two month deferral to 28th February 2013 of the
interest payment which was due on 31st December 2012. On 12th April
2013, the Company, through its investment vehicle, issued Put
notices to AREOF requiring AREOF to purchase all of the respective
shares and make payment of a preferred return at the expiration of
the notice period. The Put option period expires 6 months from the
date of the notice.
Asmita Gardens
The Company is not expected to recover any of its investment
following the insolvency process.
Baneasa
There have been no significant developments in this project
since the last Shareholders Report.
Charlemagne Capital (IOM) Limited
24 June 2013
Report of the Directors
The Directors hereby submit their annual report together with
the audited consolidated financial statements of European
Convergence Development Company plc (the "Company") and its
subsidiaries and joint venture associates (together, the "Group")
for the year ended 31 December 2012.
The Company
The Company is incorporated in the Isle of Man and was
established to enable investors to take advantage of opportunities
that exist in the property markets of South-East Europe.
Results and Dividends
The results and position of the Group and the Company at the
year end are set out on pages 19 to 44 of the financial
statements.
The Directors will decide in respect of any 12 month accounting
period as to what percentage of the Company's realised net profits
available for distribution (if any) they will recommend as the sum
for payment as a dividend. This decision will take into account the
opportunities available to the Company for further investment. The
Directors may pay half-yearly interim dividends if they believe
that the financial position of the Company justifies it. If the
Company's funds are fully invested, the Directors may re-invest
some of the Company's profits into the maintenance of the Company's
property portfolio or on further investments.
The Directors do not intend to declare a dividend at this
time.
Directors
The Directors during the year and up to the date of this Report
were:
James Rosapepe
Donald McCrickard
Anderson Whamond
Directors' and Other Interests
Anderson Whamond is a non-executive director of the Manager, and
a shareholder of Charlemagne Capital Limited ("CCL"), the parent of
the Manager and Placing Agent. Additionally, Mr Whamond has an
indirect family interest in shares of CCL. There are no service
agreements between Mr Whamond and CCL that are not determinable
within one year.
None of the Directors have a direct or indirect interest of the
shares in the Company.
Charlemagne Capital (Investments) Limited (a subsidiary of
Charlemagne Capital Limited), holds 125,000 shares of the Company.
A number of companies managed by the Manager also have holdings in
the Company.
Save as disclosed above, none of the Directors had any interest
during the year in any material contract for the provision of
services which was significant to the business of the Company.
Independent Auditors
Our auditors, KPMG Audit LLC, being eligible, have expressed a
willingness to continue in office.
Corporate Governance
The Company is not required to follow the provisions of the
Combined Code as set out in the UK Financial Conduct Authority
Listing Rules, however, the Board is committed to high standards of
corporate governance and a summary of the main elements of
corporate governance are described below:
Board of Directors
The composition of the Board is set out above. The Board
currently comprises a non-executive chairman and two other
non-executive directors.
The Board meets regularly and is provided with relevant
information on financial, business and corporate matters prior to
meetings.
Audit Committee
The Audit Committee consists of the Board members. To be
quorate, at least two offshore Directors must be present, with the
majority of the committee also being independent of the management
of the Company. The Committee overviews the adequacy of the
Company's internal controls, accounting policies and financial
reporting and provides a forum through which the Company's external
auditors report to the Company.
Internal Control
The Directors are responsible for establishing and maintaining
the Company's system of internal control. This system of internal
control is designed to safeguard the Company's assets and to ensure
that proper accounting records are maintained and that financial
information produced by the Company is reliable. There are inherent
limitations in any system of internal control and such a system can
provide only reasonable, but not absolute, assurances against
material misstatement or loss. The Directors, through the Audit
Committee, have reviewed the effectiveness of the Company's system
of internal controls.
On behalf of the Board
Anderson Whamond
Chairman
24 June 2013
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Directors'
Report and the Consolidated Financial Statements in accordance with
applicable law and regulations. In addition, the Directors have
elected to prepare the Group and Parent Company financial
statements in accordance with International Financial Reporting
Standards as adopted by the EU.
The Group and Parent Company's financial statements are required
to give a true and fair view of the state of affairs of the Group
and the Parent Company and of the profit or loss of the Group for
that period.
In preparing these financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with
International Financial Reporting Standards as adopted by the EU;
and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and Parent
Company will continue in business.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Parent
Company's transactions and disclose with reasonable accuracy at any
time its financial position. They have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation governing the preparation and
dissemination of financial statements may differ from one
jurisdiction to another.
On behalf of the Board
Anderson Whamond
Chairman
24 June 2013
Report of the Independent Auditors, KPMG Audit LLC, to the
members of European Convergence Development Company plc
We have audited the consolidated financial statements of
European Convergence Development Company plc for the year ended 31
December 2012 which comprise the Consolidated Income Statement,
Consolidated Statement of Comprehensive Income, the Consolidated
and Company Statements of Financial Position, the Consolidated
Statement of Changes in Equity and the Consolidated Statement of
Cash Flows and the related notes. The financial reporting framework
that has been applied in their preparation is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by
the EU.
This report is made solely to the Company's members, as a body.
Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of Directors and Auditor
As explained more fully in the Statement of Directors'
Responsibilities set out on page 16, the Directors are responsible
for the preparation of consolidated financial statements that give
a true and fair view. Our responsibility is to audit, and express
an opinion on, the consolidated financial statements in accordance
with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing
Practices Board's (APB's) Ethical Standards for Auditors.
Scope of the audit of the consolidated financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the consolidated financial statements sufficient to
give reasonable assurance that the consolidated financial
statements are free from material misstatement, whether caused by
fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group's circumstances
and have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
Directors; and the overall presentation of the financial
statements.
Opinion on the consolidated financial statements
In our opinion the consolidated financial statements:
-- give a true and fair view of the state of the Group's and
Parent Company's affairs as at 31 December 2012 and of the Group's
loss for the year then ended; and
-- have been properly prepared in accordance with IFRSs as adopted by the EU.
Emphasis of matter
Without qualifying our audit opinion we draw to your attention
the following matters:
As disclosed in note 4.1 to these consolidated financial
statements, the global financial crisis and the deteriorating
economic environment in the jurisdictions within which the Group
operates have increased the intensity of the risk factors to which
the Group is exposed. In particular, there is now increased
uncertainty as to the valuation of property assets held by equity
accounted investees, along with the recoverability of loans made by
the Group to third parties. Further, a significant reduction in the
availability of loan finance has resulted in equity accounted
investees needing to re-negotiate terms with banks and to seek
additional capital contributions from the Group in order that
ongoing projects can be completed. The Board have made a number of
estimates and assumptions in respect of future events, the outcome
of which remains uncertain in light of the challenging economic
climate and further impairments may be necessary.
The ability of the equity accounted investees to secure
continued funding is a significant factor influencing the estimates
derived.
KPMG Audit LLC
Chartered Accountants, Heritage Court, 41 Athol Street, Douglas,
Isle of Man IM99 1HN
25 June 2013
Consolidated Income Statement
Note Year ended Year ended
31 December 2012 31 December 2011
EUR'000 EUR'000
----------------------------------------------------------------------- ----- ------------------ ------------------
Net changes in fair value on financial assets at fair value through - -
profit or loss
Annual management fees 7.3 (472) (606)
Audit fees 8.4 (163) (75)
Legal and professional fees (67) (115)
Directors' fees 15 (72) (75)
Administration fees 8.2 (57) (58)
Other operating expenses 8.3 (371) (295)
Administrative expenses (1,202) (1,224)
----------------------------------------------------------------------- ----- ------------------ ------------------
Net operating loss before net financing income (1,202) (1,224)
----------------------------------------------------------------------- ----- ------------------ ------------------
Financial income 33 38
Financial expenses - -
----------------------------------------------------------------------- ----- ------------------ ------------------
Net financing income 5 33 38
----------------------------------------------------------------------- ----- ------------------ ------------------
Share of profit of equity accounted investees 9 448 289
Impairment in value of equity accounted investees 9 (1,234) (10,557)
Uplift in value of equity accounted investees 9 1,258 5,669
----------------------------------------------------------------------- ----- ------------------ ------------------
Loss before tax (697) (5,785)
----------------------------------------------------------------------- ----- ------------------ ------------------
Income tax (expense)/credit 16 (4) 167
Retained loss for the year (701) (5,618)
----------------------------------------------------------------------- ----- ------------------ ------------------
Basic and diluted loss per share (EUR) 12 (0.0078) (0.0621)
----------------------------------------------------------------------- ----- ------------------ ------------------
The Directors consider that all results derive from continuing
activities.
Consolidated Statement of Comprehensive Income
Note Year ended Year ended
31 December 31 December
2012 2011
EUR'000 EUR'000
----------------------------------- ------------- -------------
Loss for the year (701) (5,618)
Other comprehensive income
Currency translation - -
differences
---------------------------- ------ ------------- -------------
Total comprehensive loss
for the year (701) (5,618)
------------------------------------ ------------- -------------
Consolidated Statement of Financial Position
Note At 31 December 2012 At 31 December 2011
EUR'000 EUR'000
------------------------------------------ ----- -------------------- --------------------
Investment in equity accounted investees 9 23,185 22,083
Property, plant and equipment 1 1
Total non-current assets 23,186 22,084
Loans to third parties 10 330 313
Trade and other receivables 58 67
Cash and cash equivalents 4.4 3,677 5,461
------------------------------------------ ----- -------------------- --------------------
Total current assets 4,065 5,841
------------------------------------------ ----- -------------------- --------------------
Total assets 27,251 27,925
------------------------------------------ ----- -------------------- --------------------
Issued share capital 11 71,644 72,412
Share premium 10,577 9,841
Foreign currency translation reserve 4 4
Retained losses (55,272) (54,571)
------------------------------------------ ----- -------------------- --------------------
Total equity 26,953 27,686
------------------------------------------ ----- -------------------- --------------------
Trade and other payables 13 298 239
Total current liabilities 298 239
------------------------------------------ ----- -------------------- --------------------
Total liabilities 298 239
------------------------------------------ ----- -------------------- --------------------
Total equity & liabilities 27,251 27,925
------------------------------------------ ----- -------------------- --------------------
Approved by the Board of Directors on 24 June 2013
Director Director
Company Statement of Financial Position
Note At 31 December 2012 At 31 December 2011
EUR'000 EUR'000
------------------------------------------ ----- -------------------- --------------------
Investment in equity accounted investees 9 2,163 2,557
------------------------------------------ ----- -------------------- --------------------
Total non-current assets 2,163 2,557
------------------------------------------ ----- -------------------- --------------------
Intragroup balances 7.5 24,826 25,156
Trade and other receivables 13 16
Cash and cash equivalents 4.4 43 30
------------------------------------------ ----- -------------------- --------------------
Total current assets 24,882 25,202
------------------------------------------ ----- -------------------- --------------------
Total assets 27,045 27,759
------------------------------------------ ----- -------------------- --------------------
Issued share capital 11 71,644 72,412
Share premium 10,577 9,841
Retained losses (55,268) (54,567)
------------------------------------------ ----- -------------------- --------------------
Total equity 26,953 27,686
------------------------------------------ ----- -------------------- --------------------
Trade and other payables 13 92 73
------------------------------------------ ----- -------------------- --------------------
Total current liabilities 92 73
------------------------------------------ ----- -------------------- --------------------
Total liabilities 92 73
------------------------------------------ ----- -------------------- --------------------
Total equity & liabilities 27,045 27,759
------------------------------------------ ----- -------------------- --------------------
The loss made by the Company for the year ended 31 December 2012
was EUR701 thousand after an impairment charge against intragroup
balances amounting to EUR1.7 million (primarily a result of the
provisions made against the investments held by the Company's
subsidiaries) (2011: EUR5.6 million loss with an impairment charge
of EUR7.1 million).
Approved by the Board of Directors on 24 June 2013
Director Director
Consolidated Statement of Changes in Equity
Share capital Share premium Foreign currency Retained earnings Total
translation reserve
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Balance at 1 January 2011 72,412 9,841 4 (48,953) 33,304
Loss for the year - - - (5,618) (5,618)
Other comprehensive income
Foreign exchange - - - - -
translation differences
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Total comprehensive loss - - - (5,618) (5,618)
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Shares cancelled following - - - - -
market purchases
Total transactions with - - - - -
owners in the year
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Balance at 31 December
2011 72,412 9,841 4 (54,571) 27,686
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Balance at 1 January 2012 72,412 9,841 4 (54,571) 27,686
Loss for the year - - - (701) (701)
Other comprehensive income
Foreign exchange - - - - -
translation differences
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Total comprehensive loss - - - (701) (701)
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Shares cancelled following
market purchases (768) 736 - - (32)
Total transactions with
owners in the year (768) 736 - - (32)
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Balance at 31 December
2012 71,644 10,577 4 (55,272) 26,953
--------------------------- -------------- -------------- --------------------------- ------------------ --------
Consolidated Statement of Cash Flows
Note Year ended Year ended
31 December 2012 31 December 2011
EUR'000 EUR'000
------------------------------------------------------------------ ----- ------------------ ------------------
Operating activities
Group loss for the year (701) (5,618)
Adjustments for:
Net financial income (33) (38)
Net rent and related income - -
Income tax expense/(credit) 4 (167)
Share of gain of equity accounted investees 9 (448) (289)
Net (uplift)/impairment in value of equity accounted investees 9 (24) 4,888
Operating loss before changes in
working capital (1,202) (1,224)
Decrease/(increase) in trade and other receivables 9 (14)
Increase/(decrease) in trade and other payables 59 (231)
Cash used in operations (1,134) (1,469)
Financial income received 33 38
Tax (paid)/reclaimed (4) 167
------------------------------------------------------------------ ----- ------------------ ------------------
Cash flows used in operating activities (1,105) (1,264)
------------------------------------------------------------------ ----- ------------------ ------------------
Investing activities
Disposal/(acquisition) of equity accounted investees 9 - (278)
Increase in loans to equity accounted investees 9 (630) (34)
(Increase)/decrease in loans to third parties 10 (17) 11
Disposal of property, plant & equipment - 1
------------------------------------------------------------------ ----- ------------------ ------------------
Cash flows used in investing activities (647) (300)
------------------------------------------------------------------ ----- ------------------ ------------------
Financing activities
Proceeds from the issue of ordinary share capital - -
Purchase of own shares 11 (32) -
Share issue expenses - -
------------------------------------------------------------------ ----- ------------------ ------------------
Cash flows used in financing activities (32) -
------------------------------------------------------------------ ----- ------------------ ------------------
Net decrease in cash and cash equivalents (1,784) (1,564)
Cash and cash equivalents at beginning of year 5,461 7,025
------------------------------------------------------------------ ----- ------------------ ------------------
Cash and cash equivalents at end of year 3,677 5,461
------------------------------------------------------------------ ----- ------------------ ------------------
Notes to the Consolidated Financial Statement
1 The Company
European Convergence Development Company plc (the "Company") was
incorporated and registered in the Isle of Man under the Isle of
Man Companies Acts 1931 to 2004 on 26 July 2006 as a public company
with registered number 117309C. On 3 March 2008 the Company was
de-registered as an Isle of Man 1931-2004 company and re-registered
as a company governed by the Isle of Man Companies Act 2006 with
registered number 002391v.
Following the close of the Company's first placing of Ordinary
Shares on 12 September 2006 38,071,000 shares were issued. On 21
September 2007, a further 63,157,894 Ordinary Shares were issued
and placed, bringing the Company's total issued share capital to
101,228,894 Ordinary Shares.
During the year to 31 December 2008 the Company purchased
9,593,424 of its own shares for cancellation at an average price of
EUR0.52. On 6 March 2009 the Company purchased a further 1,120,000
of its own shares for cancellation at an average price of EUR0.18.
During the year to 31 December 2012 the Company purchased 960,000
of its own shares for cancellation at an average price of EUR0.033.
At the year end the Company had 89,555,470 shares in issue.
The Company's agents and the Manager perform all significant
functions. Accordingly, the Company itself has no employees.
Duration
In accordance with the Company's Articles of Association,
Shareholders will be given the opportunity to vote on the life of
the Company after approximately 10 years.
Dividend Policy
The Directors will decide in respect of any 12 month accounting
period as to what percentage of the Company's realised net profits
available for distribution (if any) they will recommend as the sum
for payment as a dividend. This decision will take into account the
opportunities available to the Company for further investment. The
Directors may pay half-yearly interim dividends if they believe
that the financial position of the Company justifies it. If the
Company's funds are fully invested, the Directors may re-invest
some of the Company's profits into the maintenance of the Group
property portfolio or on further investments.
Financial Year End
The financial year end of the Company is 31 December in each
year.
2 The Subsidiaries
For efficient portfolio management purposes, the Company
established the following subsidiary companies:
Country of Incorporation Percentage of shares held
--------------------------------------------------- -------------------------- --------------------------
European Property Development Corporation SRL Romania 100%
European Convergence Development (Cayman) Limited Cayman 100%
Convergence Development (Cyprus) Limited Cyprus 100%
European Convergence Development (Malta) Limited Malta 100%
European Real Estate Development Invest SRL Romania 100%
European Property Acquisitions EOOD Bulgaria 100%
Asmita Holdings Limited Cyprus 100%
ECD Management (Cayman) Limited Cayman 100%
RD Management (Cayman) Limited Cayman 100%
--------------------------------------------------- -------------------------- --------------------------
3 Joint Ventures ("JV")
The Group as at the date of this document had acquired an
interest in the following companies:
Country of Incorporation Percentage of shares held
------------------------------------ -------------------------- --------------------------
Asmita Gardens SRL Romania 50%
Cascade Park Plaza SRL Romania 40%
Convergence Development Invest SRL Romania 50%
Galleria Plovdiv AD Bulgaria 40%
Mega Mall Rousse AD Bulgaria 50%
Trade Centre Sliven EAD Bulgaria 42.5%
Turgovski Park Kraimorie AD Bulgaria 60%
NEF3 (IOM) 1 Limited Isle of Man 55%
NEF3 (IOM) 2 Limited Isle of Man 55%
NEF3 (IOM) 3 Limited Isle of Man 55%
------------------------------------ -------------------------- --------------------------
Notwithstanding the Group's percentage holdings, the above
companies have not been consolidated as the Group's control is
restricted by Joint Venture Agreements.
4 Significant Accounting Policies
The principal accounting policies adopted in the preparation of
the consolidated financial statements are set out below.
The annual report of the Company for the year ended 31 December
2012 comprises the Company, its subsidiaries and joint ventures
(together referred to as the "Group").
The annual report was authorised for issue by the Directors on
24 June 2013.
4.1 Basis of presentation
These financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") promulgated by
the International Accounting Standards Board and as adopted by the
European Union. Management has concluded that the report fairly
represents the Group's financial position, financial performance
and cash flows.
The preparation of the financial statements in conformity with
IFRS as adopted by the EU requires the use of certain critical
accounting estimates. Actual results may differ from these
estimates. It also requires the Board of Directors to exercise its
judgement in the process of applying the Company's accounting
policies. The Directors consider that the valuation of the Group
investments in equity accounted associates is an area where
critical accounting estimates are required. Further detail on the
valuation of the investments can be found in notes 9 and 17.
The activities of the Group, including its equity accounted
investees, are subject to a number of risk factors. The global
financial crisis and the deteriorating economic environment in the
jurisdictions within which the Group operates have increased the
intensity of these risk factors. The future economic outlook
presents specific challenges in terms of the significant reduction
in the volume of property transactions in the jurisdictions within
which the Group operates, the significant reduction in the
availability of loan finance for property transactions in those
jurisdictions and the consequent impact on the valuations of
property held by equity accounted investees.
In the prevailing market conditions, there is a greater degree
of uncertainty as to the valuation of property assets than that
which exists in a more active and stronger market. These factors
have adversely impacted the compliance of equity accounted
investees with their borrowing covenants and a number of these
facilities have been renegotiated, whilst the Group has made
additional capital available to certain entities in order that
ongoing projects can be completed. Collectively, these factors
contribute to a greater degree of uncertainty as to the valuation
of holdings in equity accounted investees.
4.1 Basis of presentation continued
These factors have also impacted on the ability of joint venture
partners to repay loans made by the Group and as a result have
caused repayment terms for these facilities to be
re-negotiated.
The valuations of property held by the equity accounted
investees are based on a number of assumptions, including those in
respect of projected occupancy levels and rental yields achievable,
along with the ability of the Group to renegotiate funding to allow
the equity accounted investees to continue in operation. In light
of the challenging economic climate, the ultimate outcomes of these
estimates remains uncertain and therefore further impairments
against the Group's holding in equity accounted investees may be
necessary.
The financial statements have been prepared on a going concern
basis, taking into account the level of cash and cash equivalents
held by the Group and the level of capital commitments to joint
venture entities.
4.2 Functional and presentation currency and foreign currency translation
Euro (EUR) is the currency of the primary economic environment
in which the entity operates (the "functional currency"). This is
also the functional currency of the subsidiaries.
Euro is also the currency in which the annual financial
statements are presented (the "presentation currency").
Monetary assets and liabilities denominated in foreign
currencies as at the date of these financial statements are
translated to EUR
at exchange rates prevailing on that date. Realised and
unrealised gains and losses on foreign currency translations are
charged or credited to the income statement as foreign currency
gains and losses. Transactions in foreign currencies are translated
into EUR based on exchange rates on the date of the
transaction.
Components of equity are translated at the date of the relevant
transaction and not retranslated. All resulting exchange
differences are recognised in equity.
4.3 Deposit interest
Deposit interest is accounted for on an accruals basis.
4.4 Cash and cash equivalents
Cash and cash equivalents comprise cash deposited with banks and
bank overdrafts repayable on demand.
4.5 Revenue and expense recognition
Interest income is recognised in the financial statements on an
accruals basis. Dividend income is recorded when the right to
receive payment is established.
Rental income from investment property leased out under an
operating lease is recognised in the income statement on a
straight-line basis over the term of the lease.
Expenses are accounted for on an accrual basis. Expenses are
charged to the income statement except for expenses incurred on the
acquisition of an investment property which are included within the
cost of that investment. Expenses arising on the disposal of an
investment property are deducted from the disposal proceeds.
4.6 Basis of consolidation
Subsidiaries
Subsidiaries are those enterprises controlled by the Company.
Control exists where the Company has the power, directly or
indirectly, to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities. The
financial statements of subsidiaries are included in the
consolidated financial statements from the date that control
effectively commences until the date that control effectively
ceases.
Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised gains
arising from intra-group transactions, are eliminated in preparing
the consolidated financial statements.
Joint ventures (equity accounted investees)
Investments in joint ventures are initially recognised at cost.
Joint ventures are those entities over whose activities the Group
has joint control, established by contractual agreement and
requiring unanimous consent for strategic financial and operating
decisions. Associates and joint ventures are accounted for using
the equity method (equity accounted investees). The consolidated
financial statements include the Group's share of the income and
expenses of the equity accounted investees, after adjustments to
align the accounting policies with those of the Group, from the
date that significant influence or joint control commences until
the date that significant influence or joint control ceases. When
the Group's share of losses exceeds its interest in an equity
accounted investee, the carrying amount of that interest (including
any long-term investment) is reduced to nil and the recognition of
further losses is discontinued except to the extent that the Group
has an obligation or has made payments on behalf of the
investee.
Unrealised gains on transactions between the Company and its
equity accounted investees are eliminated to the extent of the
Company's interest in the equity accounted investees. Unrealised
losses are also eliminated unless the transaction provides evidence
of an impairment of the asset transferred. Accounting policies have
been changed where necessary to ensure consistency with the
policies adopted by the Company. In particular, borrowing costs
related directly to the acquisition or construction of qualifying
assets are capitalised.
Investments in joint ventures and associates are kept under
review for impairment. Where, in the opinion of the directors, the
net realisable value of an investment falls below the carrying
value, a provision is made against the investment and charged to
the income statement.
Financial statements of foreign operations
The assets and liabilities of foreign operations, including
goodwill and fair value adjustments arising on consolidation, are
translated to EUR at the foreign currency exchange rates ruling at
the statement of financial position date. Foreign exchange
differences arising on translation are recognised directly in
equity.
4.7 Dividends
Dividends are recognised as a liability in the year in which
they are declared and approved. Any interim dividends declared do
not need to be approved by the members. There was no dividend
declared as at 31 December 2012 (2011: EUR Nil).
4.8 Financial assets
The Group classifies its financial assets in the following
categories: at fair value through profit or loss, loans and
receivables, cash and cash equivalents, and available-for-sale. The
classification depends on the purpose for which the financial
assets were acquired. Management determines the classification of
its financial assets at initial recognition.
Financial assets at fair value through profit or loss are
recognised on the trade date - the date on which the Group becomes
a party to the contractual provision of the investment. Investments
are initially recognised at fair value and transaction costs for
all financial assets at fair value through profit or loss are
expensed as incurred in the income statement. Subsequent to initial
recognition, all financial assets at fair value through profit or
loss are measured at fair value based on quoted prices. All related
realised and unrealised gains and losses arising from changes in
fair value of the financial asset are included in the income
statement in the period in which they arise, net of transaction
costs. The computation of realised gains and losses on sale of
investments is made on the average cost basis.
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They are included in current assets, except where their
maturities are greater than 12 months after the statement of
financial position date. These are classified as non-current
assets. The Group's loans and receivables comprise 'loans to third
parties' and 'trade and other receivables' in the balance
sheet.
A financial asset not classified as at fair value through profit
or loss, including an interest in an equity-accounted investee, is
assessed at each reporting date to determine whether there is
objective evidence that it is impaired. A financial asset is
impaired if there is objective evidence of impairment as a result
of one or more events that occurred after the initial recognition
of the asset, and that event(s) had an impact on the estimated
future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired includes
default or delinquency by a debtor, restructuring of an amount due
to the Group on terms that the Group would not consider otherwise,
indications that a debtor or issuer will enter bankruptcy, adverse
changes in the payment status of borrowers or issuers, economic
conditions that correlate with defaults or the disappearance of an
active market for a security.
4.9 Trade and other receivables
Trade and other receivables and loans to third parties are
stated at their cost, less any impairment losses.
4.10 Trade and other payables
Trade and other payables are stated at their cost.
4.11 Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair
value, less attributable transaction costs. Subsequent to initial
recognition, interest-bearing borrowings are stated at amortised
cost with any difference between cost and redemption value being
recognised in the income statement over the period of the
borrowings on an effective interest basis.
Borrowing costs directly attributable to assets in the course of
construction are capitalised.
4.12 Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of ordinary shares are
recognised as a deduction from equity, net of any tax effect.
When share capital recognised as equity is repurchased, the
amount of the consideration paid, which includes any directly
attributable costs, net of any tax effects, is recognised as a
deduction from equity. Any resulting surplus or deficit on the
transaction is presented in share premium.
4.13 Segmental reporting
The Company has one segment focusing on maximising total returns
through investing in the property markets of South East Europe.
Further analysis of the Group's exposure in this region is provided
in notes 9 and 10. No additional disclosure is required in relation
to segment reporting, as the Company's activities are limited to
one business and geographic segment.
4.14 Adoption of new and revised International Financial Reporting Standards (IFRSs)
a) The Group has adopted the following amendments to IFRSs that
were effective for the first time and were required to be applied
for annual reporting periods beginning on 1 January 2012:
Disclosures - Transfers of Financial Assets (Amendments to IFRS
7) - Makes amendments to IFRS 7 Financial Instruments: Disclosures
resulting from the IASB's comprehensive review of off balance sheet
activities.
Presentation of Items of Other Comprehensive Income (Amendments
to IAS 1) - The amendments require that an entity present
separately the items of OCI that may be reclassified to profit or
loss in the future from those that would never be reclassified to
profit or loss.
b) The Group has not applied the following new and revised IFRSs
that have been issued but are not yet effective in these financial
statements:
IFRS 10 Consolidated Financial Statements: Insights into IFRS -
Part of a new suite of standards on consolidation and related
standards, replacing the existing accounting for subsidiaries and
joint ventures (now joint arrangements), and making limited
amendments in relation to associates.
IFRS 10 supersedes IAS 27 Consolidated and Separate Financial
Statements and SIC-12 Consolidation - Special Purpose Entities. It
provides a single model to be applied in the control analysis for
all investees, including entities that currently are SPEs in the
scope of SIC-12.
IFRS 11 Joint Arrangements: Insights into IFRS - Part of a new
suite of standards on consolidation and related standards,
replacing the existing accounting for subsidiaries and joint
ventures (now joint arrangements), and making limited amendments in
relation to associates.
IFRS 12 Disclosure of Interests in Other Entities: Insights into
IFRS - Part of a new suite of standards on consolidation and
related standards, replacing the existing accounting for
subsidiaries and joint ventures (now joint arrangements), and
making limited amendments in relation to associates.
Contains the disclosure requirements for entities that have
interests in subsidiaries, joint arrangements (i.e. joint
operations or joint ventures), associates and/or unconsolidated
structured entities.
IFRS 13 Fair Value Measurements - New standard to replace
existing guidance on fair value measurement in different IFRSs with
a single definition of fair value, a framework for measuring fair
values and disclosures about fair value measurements.
Standard applies to assets, liabilities and an entity's own
equity instruments that, under other IFRSs, are required or
permitted to be measured at fair value or when disclosure of fair
value is provided.
Fair value defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date, i.e. an exit
price.
IAS 28 Investments in Associates and Joint Ventures (2011) - IAS
28 is amended to clarify the disclosures required by an investor in
an associate that accounts for its investment in an associate at
fair value through profit or loss in accordance with IAS 39.
IAS 28 is amended to clarify how to account for impairment
losses and reversals on an investment in an associate.
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)
- The amendments exempt an investment entity from the requirement
to consolidate the investments that it controls. Instead, it
accounts for these investments at fair value through profit or
loss.
IFRS 9 Financial Instruments: Insights into IFRS - First
chapters of new standard on accounting for financial instruments
which will replace IAS 39 Financial Instruments: Recognition and
Measurement.
The standard contains two primary measurement categories for
financial assets:
- amortised cost; and
- fair value.
The Directors do not expect the adoption of the standards and
interpretations to have a material impact on the Company's
financial statements in the period of initial application.
5 Net Financing Income
Net financing income consists of bank interest earned of
EUR32,983 (2011: EUR38,480) and loan arrangement fees of EURnil
(2011: EURnil).
6 Net Asset Value per Share
The net asset value per share as at 31 December 2012 is
EUR0.3010 (2011: EUR0.3059) based on 89,555,470 (2011: 90,515,470)
ordinary shares in issue as at that date.
7 Related Party Transactions
7.1 Directors of the Company
Anderson Whamond is a non-executive director of the Manager, and
a shareholder of Charlemagne Capital Limited ("CCL"), the parent of
the Manager and Placing Agent. Additionally, Mr Whamond has an
indirect family interest in shares of CCL. There are no service
agreements between Mr Whamond and CCL that are not determinable
within one year.
A subsidiary company of the Manager, Charlemagne Capital
(Investments) Limited, holds 125,000 shares of the Company and
holds 356,751 shares in Trade Center Sliven (coinvested with the
Group and a JV partner). Charlemagne BRIC Plus Property Company
plc, an investment company also managed by the Manager, holds
218,014 shares in Trade Center Sliven.
Charlemagne Global Opportunities Limited, the Templeton World
Charity Foundation and Magna UAF Fund, investment companies also
managed by the Manager, hold 7,626,320, 1,981,359 and 165,000
shares respectively in the Company at 31 December 2012.
CCL, a company incorporated in the Cayman Islands, is listed on
the Alternative Investment Market ('AIM') of the London Stock
Exchange.
Save as disclosed above, none of the Directors had any interest
during the year in any material contract for the provision of
services which was significant to the business of the Company.
7.2 Directors of the Subsidiaries
Certain directors of the Manager have been appointed as
directors of some of the subsidiaries. In compliance with local
regulations, certain subsidiaries have appointed directors who are
employees of or are associated with, the relevant registered office
service provider.
7.3 Manager fees
Annual fees
The Manager is entitled to an annual management fee of 2% of the
net asset value of the Company, payable quarterly in arrears.
The Manager shall also be entitled to recharge to the Company
all and any costs and disbursements reasonably incurred by it in
the performance of its duties including costs of travel save to the
extent that such costs are staff costs or other internal costs of
the Manager. Accordingly, the Company shall be responsible for
paying all the fees and expenses of all valuers, surveyors, legal
advisers and other external advisers to the Company in connection
with any investments made on its behalf. All amounts payable to the
Manager by the Company shall be paid together with any value added
tax, if applicable.
Annual management fees payable during the year ended 31 December
2012 amounted to EUR472,396 (2011: EUR605,800).
Performance fees
The Manager is entitled to a performance fee payable at the end
of each financial year following the first listing of the Ordinary
Shares on AIM or any other stock exchange of an amount equal to 15%
of any excess of the net asset value per Ordinary Share (with any
dividends added back) over the Benchmark Net Asset Value per
Ordinary Share multiplied by the time weighted average number of
shares in issue during that financial year. For these purposes the
Benchmark Net Asset Value shall be equal to the higher of (i) the
subscription price per Ordinary Share on the first listing of the
Ordinary Shares; (ii) 0.80 Euros increased by 20% per annum
compound from the closing of the Placing until a Listing; and (iii)
the highest net asset value per Ordinary Share following a Listing
and giving rise to the payment of a performance fee.
The Manager's annual fees and any performance fees shall be
borne by a subsidiary of the Company.
Performance fees payable during the year ended 31 December 2012
amounted to EURnil (2011: EURnil).
7.4 Transactions and balances with Joint Venture companies and partners
The Group has made loans to Joint Venture Companies totalling
EUR44,731,000 (2011: EUR43,174,000) and to Joint Venture Partners
totalling EUR5,990,000 (2011: EUR5,553,000). Details of the terms
and applicable interest rates for these loans are more fully shown
in note 9 and note 11.
7.5 Intragroup balances
Intragroup balances are repayable on demand and bear interest at
commercial rates. Loans to subsidiaries outstanding at the year end
are held at fair value.
8 Charges and Fees
8.1 Nominated Adviser and Broker fees
As Nominated Adviser and Broker to the Company for the purposes
of the AIM Rules, the nominated advisor and broker is entitled to
receive an annual fee of GBP25,000, payable twice yearly in
advance.
Advisory fees payable to the Nominated Adviser and Broker for
the year ended 31 December 2012 amounted to EUR38,466 (31 December
2011: EUR35,786).
8.2 Administrator and Registrar fees
The Administrator is entitled to receive a fee of 8 basis points
of the net assets of the Company, subject to a minimum monthly fee
of EUR4,000, payable quarterly in arrears.
The Administrator shall assist in the preparation of the
financial statements of the Company for which it shall receive a
fee of EUR2,500 per set.
The Administrator shall provide general secretarial services to
the Company for which it shall receive a minimum annual fee of
EUR3,750. Additional fees based on time and charges, will apply
where the number of Board meetings exceeds four p.a. For attendance
at meetings not held in the Isle of Man, an attendance fee of
EUR750 per day or part thereof will be charged.
The Administrator may utilise the services of a CREST accredited
registrar for the purposes of settling share transactions through
CREST. The cost of this service will be borne by the Company. It is
anticipated that the cost will be in the region of GBP6,000 per
annum subject to the number of CREST settled transactions
undertaken.
The Administrator expects to review and, subject to written
agreement between the Company and the Administrator, may amend the
foregoing fees six months after closure of the initial offering
period and annually thereafter.
Administration fees payable for the year ended 31 December 2012
amounted to EUR56,769 (2011: EUR57,600).
8.3 Other operating expenses
The costs associated with maintaining the Company's
subsidiaries, including the costs of incorporation and third party
service providers, shall be chargeable to each subsidiary and
payable by the Company.
8.4 Audit fees
Audit fees payable for the year ended 31 December 2012 amounted
to EUR162,891 (2011: EUR75,559).
9 Investment in Equity Accounted Investments
Group 31 December 2012 31 December 2011
EUR'000 EUR'000
------------------------------------------------------------------ ----------------- -----------------
At beginning of year 22,083 26,370
Acquisition of equity accounted investment - 278
Recovery in loans to investments 630 34
Share of profit of equity accounted investment 448 289
Net uplift/(impairment) on value of equity accounted investments 24 (4,888)
Balance at end of year 23,185 22,083
------------------------------------------------------------------ ----------------- -----------------
The loans to equity accounted investees, before deduction of
provisions, are as follows:
Name Term Maturity date Interest Rate 31 December 2012
EUR'000
-------------------------------------------------------------- -------------- -----------------
Asmita Gardens SRL * 31 December 2012 6% 16,681
Galleria Plovdiv AD * * 0%** 10,000
Convergence Development Invest SRL 4,361
Cascade Park Plaza SRL * * *** 4,510
Turgovski Park Kraimorie AD * * 0%** 9,179
------------------------------------ ------ ------------------ -------------- -----------------
* Loans are due to be repaid after the project sale.
** Interest is nil until the loan is due for payment. In case of
default interest will be charged at a rate of 3M EURIBOR plus
10%.
*** Interest is nil, but in return for the provision of the
loan, the Group is entitled to be paid a penalty at an Internal
Rate of Return equating to 20% by the Group's partner in
Cascade.
At the previous year end, the loans to equity accounted
investees were as follows:
Name Term Maturity date Interest Rate 31 December 2011
EUR'000
-------------------------------------------------------------- -------------- -----------------
Asmita Gardens SRL * 31 December 2012 6% 15,909
Galleria Plovdiv AD * * 0%** 10,000
Convergence Development Invest SRL 4,129
Cascade Park Plaza SRL * * *** 4,000
Turgovski Park Kraimorie AD * * 0%** 9,136
------------------------------------ ------ ------------------ -------------- -----------------
* Loans are due to be repaid after the project sale.
** Interest is nil until the loan is due for payment. In case of
default interest will be charged at a rate of 3M EURIBOR plus
10%.
*** Interest is nil, but in return for the provision of the
loan, the Group is entitled to be paid a penalty at an Internal
Rate of Return equating to 20% by the Group's partner in
Cascade.
The carrying values of the Group's equity accounted investments
are as follows:-
Name Value at 31 December 2012 Value at 31 December 2011
EUR'000 EUR'000
----------------------------- -------------------------- --------------------------
Cascade Park Plaza SRL 15,783 14,015
Galleria Plovdiv AD 1,500 1,500
Mega Mall Rousse - -
Trade Centre Sliven EAD 1,876 1,876
Turgovski Park Kraimorie AD 1,863 2,135
NEF3 (IOM) 1 Limited* 1,158 983
NEF3 (IOM) 2 Limited* 409 357
NEF3 (IOM) 3 Limited* 1,438 1,217
Impairment provision (842) -
----------------------------- -------------------------- --------------------------
23,185 22,083
----------------------------- -------------------------- --------------------------
* held directly by the Company.
Valuation of Assets as at 31 December 2012
All the properties were subject to external and independent
valuations for the year ended 31 December 2011. This resulted in
the impairment of some properties since valuations were below
outstanding bank loans. The situation in respect of these
properties has been closely monitored during this financial year
and given the continuing difficult economic conditions it is felt
appropriate that the bases for these impairments still exist. In
the cases where carrying values are still relevant external and
independent valuations have been carried out as at 31 December
2012.
All the valuations were carried out by independent firms of
international valuers with a local presence in the region. They
were each asked to provide the current market value for each
property under latest International Valuation Standards published
in 2012. These state that three main approaches can be used in real
estate valuation: the cost approach, the income approach, and the
sales comparison approach. All three are based on the economic
principles of price equilibrium, anticipated benefits, and
substitution. The final choice related to the methodology to be
applied was determined by the valuer after the property inspection
was conducted.
Impairment provision is in respect of accrued interest due from
equity accounted investees.
BULGARIA
Galleria Plovdiv
The value of Galleria Plovdiv was impaired as at 31 December
2011 following the valuation carried out by Colliers International
S.R.L. which included an estimated current market value of
EUR49.7m. This valuation fell below the outstanding bank loan and
therefore indicated a nil value realisable from this investment
itself. Although there has been a recent improvement in occupancy
levels additional leasing is still proving difficult and is highly
dependent upon the successful implementation of the leasing
strategy developed by the international consultant. The
shareholders have provided very limited funding to support the
project in 2013, mainly for the temporary extension of the interim
asset manager until the end of April. However the project company
has yet to successfully restructure its bank debt which is in
default and there is an ongoing requirement for fresh cash
injections to cover operational needs. The impairment in value
therefore still applies.
EUR1.5m of the shareholder loans to Galleria are guaranteed by
land collateral from the Joint Venture partner. This land, of circa
35,000 sqm is also in Plovdiv; however it is not as central as
Galleria and is more fragmented. The land was valued at EUR1.53m in
December 2012. Therefore Management have kept the value of the
group's investment in Galleria Plovdiv at EUR1.5m.
Mega Mall Rousse
The Board decided to impair this asset down to nil as at 31
December 2011 following a valuation by SHM Smith Hodgkinson at
EUR17.9m which is below the bank loan.
The Mall is approximately 60% let; however the leasing process
continues to be difficult and is highly dependent on additional
investment in fit-out contributions.
Following the year end, the Bank has taken actions which have
added to the liquidity challenges already faced by the project
company. The shareholders are seeking to agree terms with the Bank,
and until such time as this situation can be resolved the full
impairment of this investment remains appropriate.
Bourgas (Trade Park Kramoire)
This development is on hold and the Manager is looking for a
suitable way of realising the underlying asset value and returning
the proceeds to the Group.
The Manager has had the property valued by an independent
surveyor who has valued the land at EUR3.9m. Other than the land
and shareholder loans there are no other major assets or
liabilities.
The Group nominally holds 60% of Bourgas, however, as part of
the original financing of this deal, the group provided loan
finance to the JV partner Sienit (who is also our partner on
Plovdiv) which was secured against Sienit's 40% holding in
Bourgas.
Therefore in terms of valuing our holding in Bourgas the Board
feel that it should adopt the lower value of;
-- If the loan is repaid: 60% of Bourgas, being EUR2.3m, plus
the loan repayment (currently standing at EUR2.3m inclusive of
interest), which is EUR4.6m or,
-- If the loan is not repaid, then the Group will secure 100% of
the shareholding by exercising its security, and therefore adopt
100% of the land value being EUR3.9 m.
The Group therefore values its holding in Bourgas at the lower
figure of EUR3.9 m.
At the time the JV purchased the land there was a covenant which
imposed a timescale on the beginning and end of the development
phase of the project. This timescale for completion elapsed in
2010, and as a result the JV is contractually bound to pay a
penalty of EUR2.0m.
Whilst it may be possible to re-negotiate the actual amount
paid, the Board has taken the conservative approach and assumed the
full amount of EUR2.0m will need to be paid and has therefore
provided for this amount against the EUR3.9m value of the land.
This therefore reduces the current carrying value of the investment
to EUR1.9m for 2012 (2011: EUR2.1m).
The loan to Sienit, of EUR2.3m including accrued interest, has
been 100% provided for.
Trade Centre Sliven
Due to the change in the global economic conditions the
development of the project in the city of Sliven, Trade Centre
Sliven ("Sliven") has not progressed. The Group has a 42.5% equity
holding in Sliven.
Sliven has two main assets; being cash of EUR3.3m and land which
was valued as at 31 December 2012 at EUR1.1m. There are no major
liabilities in the company, so the NAV for the JV is EUR4.4m,
valuing the Group's investment (of 42.5%) at EUR1.9m
(2011 EUR1.9m)
As part of the purchase the Group also made a loan to the JV
partner of EUR500k. During 2009 EUR160k of this loan was repaid,
with a further EUR23k being repaid during 2010. The loan is secured
against the wider assets of the partner. At the annual shareholders
meeting on 16(th) April 2013 it was agreed that the project company
will make a distribution of retained profits which enabled our
partner to pay an amount of EUR247k after the year end making the
balance outstanding as at May 2013 EUR83k.
ROMANIA
Cascade
Colliers International S.R.L valued Cascade at EUR50.1m, which
is slightly up from the 2011 valuation of EUR49.8m. The valuer has
used an exit yield of 7.0%
The property is now almost fully let. Following the repayment of
the external loan, and an additional contribution of EUR0.5m the
sale distribution waterfall would ensure that the Group would
receive proceeds of EUR15.8m, a gain of EUR1.3 m over the 2011
carrying value of EUR14m in the event of a sale of the property at
valuation.
NEF3
The underlying NEF 3 investments are in Iasi (EUR0.9m), Oradea
(EUR0.7m) and Cascade (EUR0.3m). These are all fixed term
investments in the form of preference shares in respect of Iasi and
Oradea and a loan in respect of Cascade with a guaranteed return.
The investments are reported at their net asset value which
includes the net return accruing to date on the investment.
The return for Iasi and Oradea are supported with a put and call
option over the assets of Argo Real Estate Opportunities Fund
("AREOF"), and the latest valuation of the Cascade property
provides the Board with comfort as to the carrying value of the
investment in Cascade. On 12th April 2013, the Company through its
investment vehicle issued Put notices to AREOF requiring AREOF to
purchase all of the respective shares and make payment of a
preferred return at the expiration of the notice period. The Put
option period expires 6 months from the date of the notice.
Argo, the fund manager, has merged the Iasi and Oradea assets
into one of its listed funds; Argo Real Estate Opportunities Fund
("AREOF"). It was felt that that the other assets held by the
listed fund are of a higher quality and should provide a greater
protection to the Group's returns.
AREOF's recent audited financial statements have disclosed that
they are in breach of loan covenants with two of its lending banks
and that they are having discussions with the banks with a view to
reaching agreement in respect of extending repayment terms. The
financial statements also disclose that AREOF will require
additional working capital for the foreseeable future and that this
continues to be provided by the Investment Manager, or by funds
advanced by a fellow subsidiary of the Investment Manager's parent
company. Options available to AREOF include asset sales,
restructuring bank borrowings and a further issue of capital. The
above matters indicate the existence of material uncertainties
which may cast significant doubt about the AREOF Group's ability to
continue as a going concern. The Board has taken the view that it
would be prudent to make a general provision of EUR842,000 against
the carrying value of the investments held.
The results, assets and liabilities of the equity accounted
companies are as follows:
Name Country Assets Liabilities Revenues Profit/ % interest
of (Loss)
Incorporation
EUR'000 EUR'000 EUR'000 EUR'000
---------------------------------------- -------- ------------ --------- -------- -----------
Cascade Park Plaza
SRL Romania 52,523 (41,117) 4,847 1,771 40
Trade Centre Sliven
EAD Bulgaria 4,459 12 68 31 42.5
Turgovski Park
Kraimorie AD Bulgaria 3,909 13,250 1 (271) 60
Isle
NEF3 (IOM) 1 Limited* of Man 3,079 190 583 438 55
Isle
NEF3 (IOM) 2 Limited of Man 2,982 292 539 349 55
Isle
NEF3 (IOM) 3 Limited of Man 3,831 247 723 550 55
----------------------- ---------------- -------- ------------ --------- -------- -----------
*The results and balances for NEF (IOM) 1 Ltd shown above only
include amounts in respect of those investments which the Company
has an interest in.
The Shareholders of Cascade Park Plaza SRL have pledged their
shareholding as security against the external loans to these
companies.
The figures in the tables above do not include adjustments made
for the purposes of these consolidated financial statements in
order to align the accounting policies of the equity accounted
investees with those of the Company's.
10 Loans to third parties
Loans to third parties of the Group includes loans to Joint
Venture Partners as follows:
2012 Term Maturity Date Interest Rate Amount
Name EUR'000
----------------------------------------------------------- ------------------------------------------- --------
Sienit Holding AD* Overdue Overdue EURIBOR plus 5%, plus 10% penalty interest 2,277
Property Capital Group** Overdue Overdue EURIBOR plus 5% 330
Dickau Investments Limited*** Overdue Overdue 10% 3,384
------------------------------- --------- --------------- ------------------------------------------- --------
* Sienit Holding AD is the Group's joint venture partner in
Galleria Plovdiv AD and Turgovski Park Kraimorie AD. The loan is
overdue for repayment and in 2008 the Group deemed it prudent to
provide for the loan in full.
**Property Capital Group is the Group's joint venture partner in
Trade Center Sliven EAD. Although the loan to Property Capital
Group is overdue for repayment, the partner has made a repayment of
EUR247k after year end. The Group considers this loan fully
recoverable.
***Dickau Investments Limited ("Dickau") is the Group's joint
venture partner in Convergence Development Invest Srl ('CDI'). The
above loan was provided to Dickau as part of the Group's package of
investment in CDI, and, as a result of the Group's decision to
fully provide against the Group's investment in CDI in 2008, the
Group also considered it prudent to retain full provision for the
loan to Dickau.
2011 Term Maturity Date Interest Rate Amount
Name EUR'000
----------------------------------------------------------- ------------------------------------------- --------
Sienit Holding AD* Overdue Overdue EURIBOR plus 5%, plus 10% penalty interest 2,069
Property Capital Group** Overdue Overdue EURIBOR plus 5% 313
Dickau Investments Limited*** Overdue Overdue 10% 3,171
------------------------------- --------- --------------- ------------------------------------------- --------
11 Capital and Reserves
Share Capital
2012 2012
Number EUR'000
-------------------------------------------- ----------- --------
Ordinary Shares of EUR0.80 each
In issue at 1 January and 31 December 2012 90,515,470 72,412
Shares cancelled during the year (960,000) (768)
In issue at 31 December 2012 89,555,470 71,644
-------------------------------------------- ----------- --------
2011 2011
Number EUR'000
-------------------------------------------- ----------- --------
Ordinary Shares of EUR0.80 each
In issue at 1 January and 31 December 2011 90,515,470 72,412
Shares cancelled during the year - -
In issue at 31 December 2011 90,515,470 72,412
-------------------------------------------- ----------- --------
At incorporation the authorised share capital of the Company was
EUR240 million divided into 300 million Ordinary Shares of EUR0.80
each.
During the year, the Company bought 960,000 shares for a total
consideration of EUR31,330 (2011: nil shares).
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 meetings of the Company. All shares rank equally with
regard to the Company's residual assets.
Capital Management
The Board's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the business. The Board manages the Group's
affairs to achieve shareholder returns through capital growth
rather than income, and monitors the achievement of this through
growth in net asset value per share.
Gearing may be employed by the Group with the aim of enhancing
shareholder returns. This would be in the form of bank borrowings,
secured on the investment portfolio.
Group capital comprises share capital, share premium and
reserves.
Neither the Company nor any of its subsidiaries are subject to
externally imposed capital requirements.
No changes were made in respect of the objectives, policies or
processes in respect of capital management during the years ended
31 December 2011 and 2012.
12 Basic and Diluted Earnings per Share
Basic and diluted earnings per share are calculated by dividing
the gain/(loss) attributable to equity holders of the Company by
the weighted average number of ordinary shares in issue during the
year.
2012 2011
----------------------------------------------------------------- ------- --------
Loss attributable to equity holders of the Company (EUR'000) (701) (5,618)
Weighted average number of ordinary shares in issue (thousands) 90,426 90,515
----------------------------------------------------------------- ------- --------
Basic and diluted loss per share (Euro cent per share) (0.78) (6.21)
----------------------------------------------------------------- ------- --------
13 Trade and Other Payables
Group 31 December 2012 31 December 2011
EUR'000 EUR'000
----------------- ----------------- -----------------
Withholding tax 5 4
Trade creditors 70 52
Accruals 223 183
----------------- ----------------- -----------------
Total 298 239
----------------- ----------------- -----------------
Company 31 December 2012 31 December 2011
EUR'000 EUR'000
---------- ----------------- -----------------
Accruals 92 73
---------- ----------------- -----------------
Total 92 73
---------- ----------------- -----------------
14 Exchange Rates
The following exchange rates were used to translate assets and
liabilities into the reporting currency at 31 December 2012:
ROL 4.3197
BGN 1.9558
15 Directors' Remuneration
The Company
The maximum amount of remuneration payable to the Directors
permitted under the Articles of Association is EUR300,000 p.a. Each
Director currently is paid a fee of EUR22,500 p.a. The Directors
are each entitled to receive reimbursement of any expenses incurred
in relation to their appointment. Total fees and expenses paid to
the Directors for the year ended 31 December 2012 amounted to
EUR72,000 (2011: EUR74,415).
The Subsidiaries
No fees are paid to the Directors of the subsidiaries except in
circumstances where a director is appointed in compliance with
local regulations and in such cases the fees payable are
nominal.
16 Taxation
Isle of Man
The Isle of Man has introduced a general zero per cent. tax rate
for companies with effect from 6 April 2006, with the exception of
certain banking income and income from Isle of Man land and
property, which is taxed at 10 per cent.
There are no capital gains or inheritance taxes payable in the
Isle of Man.
No Isle of Man stamp duty or stamp duty reserve tax will be
payable on the issue, transfer, conversion or redemption of
Ordinary Shares.
Shareholders resident outside the Isle of Man will not suffer
any income tax in the Isle of Man on any income distributions to
them.
Shareholders resident in the Isle of Man will, depending upon
their particular circumstances, be liable to Manx income tax on
dividends received from the Company.
United Kingdom
The affairs of the Company are conducted so that the central
management and control of the Company is not exercised in the UK
and so that the Company does not carry out any trade in the UK
(whether or not through a permanent establishment situated there).
On this basis, the Company should not be liable for UK taxation on
its income and gains, other than certain income deriving from a UK
source.
Other
The subsidiaries of the Company are taxed in accordance with the
applicable tax laws in the countries in which they are
incorporated.
17 Financial Instruments
The Group's activities expose it to a variety of financial
risks: market risk (including currency risk, cash flow risk,
interest rate risk and price risk), credit risk and liquidity
risk.
Market price risk
The Company's strategy for the management of market price risk
is driven by the Company's investment objective. The Company has
been established to invest primarily in early stage property
developments in South East Europe. The main objective of the
Company is to take advantage of the potential for capital
appreciation of these investments. The Company's market risk is
monitored by the Manager on a day to day basis and by the Directors
at Board Meetings.
The Group is exposed to market price risk through movements in
property prices and property rental rates. The Group's strategy is
to develop property assets and then sell them for gain: however as
a result of current global economic conditions (see note 4.1), the
property market in Romania and Bulgaria has declined. The Group
therefore expects that it may hold some assets for a substantial
period post completion. This further exposes the Group to movements
in property rental rates and property prices.
Foreign exchange risk
The Group's operations are conducted in jurisdictions which
generate revenue, expenses, assets and liabilities in currencies
other than the Euro (the functional currency). The currency the
Group is primarily exposed to is the Romanian Lei, as the Bulgarian
Lev is pegged to the Euro. As a result, the Group is subject to the
effects of exchange rate fluctuations with respect to these
currencies.
The Group may invest in financial instruments and enter into
transactions denominated in currencies other than the functional
currency. Consequently, the Group is exposed to risks that the
exchange rate of its currency relative to other foreign currencies
may change in a manner that has an adverse affect on the value of
that portion of the Group's assets or liabilities denominated in
currencies other than the functional currency.
The Group's policy is not to enter into any currency hedging
transactions as foreign currency exposure is not significant.
The following table sets out the Group's total exposure to
foreign currency risk and the net exposure to foreign currencies of
the assets and liabilities:
31 December 2012 Assets Liabilities Net assets
EUR'000 EUR'000 EUR'000
------------------ -------- ------------ -----------
Romanian Lei 49 (2) 47
Bulgarian Lev 2 (9) (7)
Euro 27,200 (287) 26,913
27,251 (298) 26,953
------------------ -------- ------------ -----------
31 December 2011 Assets Liabilities Net assets
EUR'000 EUR'000 EUR'000
------------------ -------- ------------ -----------
Romanian Lei 49 (1) 48
Bulgarian Lev 18 (1) 17
Euro 27,858 (237) 27,621
27,925 (239) 27,686
------------------ -------- ------------ -----------
At 31 December 2012, had the Euro strengthened/weakened by 5% in
relation to the Romanian Lei, with all other variables held
constant, net assets attributable to equity holders of the Group
and the profit for the year would have decreased/increased by
EUR2,400 (2011: 5% EUR2,400).
Interest rate risk
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates. Cash held by the Group is
invested at short-term market interest rates. The Group has
interest-bearing loans, with interest at fixed rates (note 10). As
a result, the Company is exposed to fair value interest rate risk
due to fluctuations in the prevailing levels of market interest
rates. It is also exposed to interest rate cash flow risk.
The table below summarises the Group's exposure to interest rate
risks. It includes the Group's financial assets and liabilities at
the earlier of contractual re-pricing or maturity date, measured by
the carrying values of assets and liabilities:
31 December Average interest Less 1-3 3 1-5 Over 5 Non-interest Total
2012 rates than 1 months months years years bearing
month to 1
year
------------- -------- -------- -------- -------- -------- ------------- --------
Fixed Variable
------------- --------- --------- -------- -------- -------- -------- -------- ------------- --------
% % EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Financial
assets
Loans to
third Euribor
parties - + 5% 330 - - - - - 330
Trade and
other
receivables n/a n/a - - - - - 58 58
Cash and
cash
equivalents - 0.1% 3,677 - - - - - 3,677
------------- --------- --------- -------- -------- -------- -------- -------- ------------- --------
Total financial assets 4,007 - - - - 58 4,065
------------------------ --------- -------- -------- -------- -------- -------- ------------- --------
Financial
liabilities
Trade and other
payables - - - - - (298) (298)
------------------------ --------- -------- -------- -------- -------- -------- ------------- --------
Total financial
liabilities - - - - - (298) (298)
------------------------ --------- -------- -------- -------- -------- -------- ------------- --------
Total interest rate 4,007 - - - - - -
sensitivity gap
------------------------ --------- -------- -------- -------- -------- -------- ------------- --------
31 December Average interest Less 1-3 3 months 1-5 years Over 5 Non-interest Total
2011 rates than 1 months to 1 years bearing
month year
------------- --------- --------- --------- ---------- --------- ------------- --------
Fixed Variable
------------- ----------- --------- --------- --------- --------- ---------- --------- ------------- --------
% % EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Financial
assets
Loans to
third Euribor
parties - + 5% 313 - - - - - 313
Trade and
other
receivables n/a n/a - - - - - 67 67
Cash and
cash
equivalents - 0.1% 5,461 - - - - - 5,461
------------- ----------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total financial assets 5,774 - - - - 67 5,841
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Financial
liabilities
Trade and other payables - - - - - (239) (239)
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total financial
liabilities - - - - - (239) (239)
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
Total interest rate 5,774 - - - - - -
sensitivity gap
-------------------------- --------- --------- --------- --------- ---------- --------- ------------- --------
At 31 December 2012, should the interest rates have
increased/decreased by 15 basis points with all other variables
remaining constant, the decrease/increase in net assets
attributable to shareholders for the year would amount to
approximately EUR6,010 (2011: 25 basis points EUR14,435).
Credit risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Group.
The carrying amounts of financial assets best represent the
maximum credit risk exposure at the balance sheet date, net of
provisions already made. This relates also to financial assets
carried at amortised cost.
At the reporting date, the Group's financial assets exposed to
credit risk, net of provisions and excluding loans which are
included within the balance of equity accounted investments,
amounted to the following:
31 December 2012 31 December 2011
EUR'000 EUR'000
---------------------------------- ----------------- -----------------
Loans to third parties (note 10) 330 313
Trade and other receivables 58 67
Cash at bank 3,677 5,461
---------------------------------- ----------------- -----------------
4,065 5,841
---------------------------------- ----------------- -----------------
The Group manages its credit risk by monitoring the
creditworthiness of counterparties regularly. It does not expect
any counterparty other than those debtors against which specific
provisions have been made to fail to meet its obligations (see
notes 9 and 10).
Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its obligations as they fall due. The Group manages its
liquidity risk by maintaining sufficient cash balances for working
capital and its joint venture associates obtain secured bank loans
to fund purchases of investment property. During the year and since
the year end, a number of the Group's JV's have been in technical
breach of their bank loan financing agreements. The Group completed
renegotiation of some of these financing arrangements during the
year and since the year end. The Group expects that further capital
injections may be required to support financing arrangements for
the joint venture companies. The Group has not guaranteed loan
financing for any of its subsidiaries. The Group's liquidity
position is monitored by the Manager and the Board of
Directors.
Residual undiscounted contractual maturities of financial
liabilities:
Trade and other payables at 31 December 2012 and 31 December
2011 represent trade creditors due within one month.
Fair values
The carrying amounts of all the Group's financial assets and
financial liabilities at the statement of financial position date
approximated to their fair values.
Fair value estimates are made at a specific point in time, based
on market conditions and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement (e.g., interest
rates, volatility, estimated cash flows, etc.) and therefore cannot
be determined with precision.
18 Investment Policy
European Convergence Development Company plc is an Isle of Man
company established to take advantage of opportunities that exist
in the property markets of South-East Europe. The principal target
countries are Bulgaria, Romania and Turkey, with the ability to
invest in Croatia and Slovakia.
The Company may invest in commercial, retail, residential and
industrial property, with a view to taking advantage of the
potential for capital appreciation. The Company primarily seeks to
invest in early stage developments; however it may also invest in
partially completed assets and may also continue to hold and
operate completed developments for a substantial period
post-completion at the sole discretion of the Board. The Board must
believe that it is in the long term benefit of the investors to
hold completed developments.
A proportion of the Group's portfolio may be held in cash or
cash-equivalent investments from time to time.
The Company established a subsidiary structure which primarily
invested equity and debt financing of development projects with the
use of local special purpose vehicles ("SPVs"). The Company intends
that its SPV investments will be in the form of partnerships with
local or international property developers.
Pending investment, cash held will be invested in bank deposits
or fixed income securities issued by governments or banks but not
corporate bonds.
It may be advantageous for the Company to borrow at the level of
its SPV subsidiaries. The Company may negotiate suitable borrowing
facilities with one or more lenders. The Directors do not intend
the Company or its SPVs to borrow in respect of any property more
than 75 per cent of its value on completion.
The Company expects to invest in early stage projects with a
construction period of 2 to 4 years. Whilst the Company intends to
exit from such assets post-completion, depending on prevailing
market conditions, it may be in the best interests of the Company
to hold the operating asset post completion until market conditions
are such that the Company can obtain a suitable price for the
asset.
The Company may reinvest the proceeds of sale of any properties
or return the capital or profits to Shareholders depending on
market conditions prevailing at the relevant time. Shareholders
will be given the opportunity to vote on the continued life of the
Company at the Company's annual general meeting to be held in 2016.
If the resolution to curtail the life of the Company is not passed,
a similar resolution will be proposed at every fifth annual general
meeting thereafter.
It is anticipated that the Group's investment portfolio will be
between 6 to 12 investments. Upon completion of the investment
programme, it is anticipated that, at that time, no single
investment will represent more than 50 per cent of the Company's
total capital. In exceptional circumstances the Company may make an
investment which represents in excess of 50 per cent of the
Company's total capital. In such circumstances the anticipated
investment portfolio may be correspondingly reduced below the
number of investments described above.
19 Commitments at the Balance Sheet Date
At the statement of financial position date the Group had no
outstanding commitments.
20 Post Balance Sheet Events
On 3 January 2013 the Company bought back a further 100,000 of
its own shares for a price of EUR0.0325.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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