24 Mar 2009 12:20
Engel East Europe N.V
Results for the year ended 31 December 2008
TUESDAY, 24 March 2009 - Engel East Europe N.V. ('Engel' or 'the Company') the AIM-listed Central and Eastern European property developer (EEE:L), announces results for the year ended 31 December 2008.
Financial summary
| Year ended (figures in €'000) | 31 Dec 2008 | 31 Dec 2007 |
|
| ||
| Net assets | 33,599 | 44,813 |
| NAV/share (€) | 0.38 | 0.51 |
| Revenues | 24,203 | 16,396 |
| Revaluation of investment property | 2,076 | 2,295 |
| Write-down of inventory | (1,153) | (3,858) |
| Gross Profit | 4,915 | 3,157 |
| Operating loss | (390) | (2,106) |
| Net financing costs | 8,703 | 2,037 |
| Loss before tax | (9,092) | (4,170) |
| Loss after tax | (9,579) | (4,763) |
| Loss per share (€) | (0.109) | (0.054) |
"Despite the challenging environment, by focusing on key countries and carefully managing our resources, we expect to be able to maintain development activity and sales in 2009."
Sam Salman, Chairman, Engel East Europe
Enquiries:
| Engel East Europe N.V. | |
| Sam Salman | Tel: +1 (646) 214 2000 |
| Samuel Hibel | Tel: +972 (9) 970 7004 |
| Libertas Capital Corporate Finance Limited | Tel: +44 (0) 20 7569 9650 |
| Sandy Jamieson | |
| Bankside Consultants | Tel: +44 (0) 20 7367 8888 |
| Simon Bloomfield or Andy Harris |
Chairman's Statement
The second half of the year ended 31 December 2008 witnessed the biggest financial crisis in living memory which was followed by a rescue, led by the world's leading economic powers, of the global banking system.
As indicated in the Company's trading update of 2 December 2008, this created major challenges for the economies and property markets of Central and Eastern Europe, where construction lending and availability of mortgage finance have been curtailed, with a negative impact on Engel's development activities and financial performance for the year.
This difficult market environment caused delays in construction by the Company with the reduced level of development activity reflected in a total of 958 units under construction at 31 December 2008 compared to 1,513 units at 31 December 2007.
The Company also reduced the number of new projects, starting construction of 226 units during 2008 compared to 677 units during 2007.
The decline in property markets in the second half resulted in lower average selling prices, a lack of land sales which, historically, have achieved high margins and, in 2007, accounted for 15 per cent of total turnover. As a result, gross margins in 2008 fell to 16.5 per cent compared to 28.8 per cent in 2007.
Nevertheless, as a result of increasing the number of units sold and handed over to 505 in 2008 from 354 in 2007, Engel achieved 47.6 per cent growth in revenues for 2008 to €24.2 million (2007: €16.4 million).
The 55.7 per cent increase in gross profit to €4.9 million for the year resulted from write-downs, mainly in respect of discontinued projects, being reduced to €1.2 million compared to €3.9 million in 2007.
The loss before tax of €9.1 million (2007: €4.2 million) reflects an increase in interest on debt and a foreign exchange loss of €3.1 million (2007: €0.4 million profit).
The delays in construction and slower sales experienced during 2008 led to an increase in net debt which, at 31 December 2008, was €41 million (31 December 2007: €20.7 million).
In the light of the challenging business environment, the Board has decided to focus activities and resources on projects in the Czech Republic, Hungary, Poland and Serbia. Activities in Bulgaria and Romania will be limited to existing projects. In Romania, construction of new projects may start when market conditions permit new developments.
At 31 December 2008, the Company had seven projects for 958 units under construction in Hungary, the Czech Republic, Poland and Bulgaria. During 2009, the Company expects to complete approximately 862 units and to start construction on a further 458 units, with all units being part of projects with joint venture partners. The Company is seeking to raise project loans for the financing of these units and construction will begin once funding has been secured.
In view of the challenging market environment and the need to focus the Company's financial resources on selected projects, the Board does not propose that a dividend be paid.
Despite the challenging environment, by focusing on key countries and carefully managing our resources, we expect to maintain development activity and sales in 2009.
Chief Financial Officer Review
General
A combination of the slow down in sales and the reduction in the availability of bank credit had a substantial impact on the level of development activity by Engel during 2008. Although the Company purchased a plot in Warsaw during the first half of the year, the shortage of finance severely curtailed investment in new projects in the second half.
At 31 December 2008, the Company had a total of €57.8 million in interest bearing bank loans of which €43.4 million mature within a year. €11.5 million is secured by the indirect parent company (Engel Resources and Development Ltd). The remaining €31.9 million consists of non-recourse loans to individual project companies with the financial exposure for the Company, in each case, being limited to the value of the specific security pledged. The Company has given no security in respect of the bank loans provided to its subsidiary companies and jointly controlled entities. The Board believes that most of the projects concerned will generate sufficient cash to meet their obligations. In the case of certain loans totalling €16.3 million (mostly relating to projects where construction has not yet started), it is unlikely that sufficient cash will be generated to repay all the amounts that fall due in 2009 and the Company is discussing various options, including extension of loans, with the banks concerned.
Poland
Estimated GDP growth in 2008 was 4.8 per cent and the rate of inflation was 4.1 per cent. Forecast GDP growth is 1.2 per cent for 2009.
At the end of 2008 the Company had two projects (Emilli Plater and Wilanow 1) under construction for a total of 178 units and an estimated value of €36 million. The Emilii Plater project is part of the Arces joint venture (50 per cent owned by the Company) and the Wilanow 1 project is part of the Enman joint venture (40 per cent owned by the Company), the joint venture partner being Heitman in both cases.
Phase 2 of the Zabky project (part of the Arces joint venture), for a total of 178 units, was completed during the last quarter of 2008. Most of the units were sold for a total of €5.6 million with the Company's share being recognised in 2008 revenues.
In February 2008, the Company acquired 41,387 square metres of land, close to the Wistula River and Wilanow Palace Gardens in Warsaw, for €4.5 million with a view to developing a commercial centre.
In addition the Company owns a plot of land in Krakow for about 300 residential units.
Serbia
GDP growth in Serbia in 2008 was 6.1 per cent and the rate of inflation was 10.8 per cent with GDP forecast to grow by 4 per cent in 2009.
The Marina Dorcol project in Belgrade, which will include five apartment buildings, a retail complex and hotel, is the Company's largest project with an estimated sales value of €204 million. In May 2008, the Company signed a revised 99-year lease, replacing two previous agreements, on approximately 4.07 hectares of land for this project. Having invested a total of €8.4 million in the project in 2007, the Company invested a further €2.8 million during 2008.
Czech Republic
Estimated GDP growth in 2008 was 3.5 per cent and the rate of inflation was 6 per cent. Forecast GDP growth of 0.5 per cent for 2009.
Despite the negative economic environment, the unemployment rate is low, at 4.4 per cent, and is expected to rise to just 5 per cent in 2010.
In Prague, the Company has two projects under construction for a total of 255 units with an estimated sales value of €42 million (50 per cent owned by the Company)
By the end of 2007, the Company acquired land in the Troja district in Prague, for a total of €4.5 million, with the purpose of developing a high end project for a total of 102 residential units.
The Company expects to start construction on 3 additional projects (Phase 4 of Safranka, Velaslavin and Troja) for a total of 409 units.
All projects in the Czech Republic are part of either the Arces or Enman joint ventures.
Romania
GDP growth in 2008 was 7.1 per cent and the rate of inflation was 6.3 per cent, with forecast GDP growth of 3 per cent for 2009.
Subject to a recovery in Romania's real estate market during 2009, the Company plans to start construction of 162 units, with an estimated sales value of €17 million, at the project in the Sisest area of Bucharest. Work on the remaining 261 units is expected to start in 2010 upon successful completion of Phase 1. This project is part of the Enman joint venture (40 per cent owned by the Company).
The Company has decided to sell its land holdings, with a total book value of €6.5 million, in the Pipera district of Bucharest and in Brigadiru (a southern suburb of Bucharest). The company's share in the land in Pipera is 40 per cent.
Following the decision during 2008 to discontinue the MOU negotiations announced in July 2006, there was a write down of inventory of approximately €0.3 million in 2008.
Bulgaria
GDP growth in 2008 was of 6.8 per cent and the rate of inflation was 7.4 per cent, with forecast GDP growth of 3 per cent for 2009.
In Bulgaria, the Company had one project under construction in Sofia for a total of 55 units with an estimated sales value of €3.5 million. During the year 2008 the Company also completed at the Zar Boris and Panorama projects for a total of 210 units with an estimated sales value of €15.4 million. The Panorama project forms part of the Enman joint venture.
On 23 July 2008, the Company decided not to proceed with the Gorna-Banya project, also part of the Enman joint venture, for 430 residential units in Sofia. The Company's share of costs incurred by the project, of approximately €0.2 million, were written off in 2008.
Hungary
GDP growth in 2008 was 0.6 per cent and the rate of inflation was 6.1 per cent, with GDP expected to contract by 3 per cent in 2009.
Heitman is a Joint Venture partner for all projects in Hungary. At the end of 2008, Engel had 470 units under construction worth approximately €35 million. During 2008, the Company finished the construction of 291 units (Phase 2 of the Sun Palace project), including a gym and swimming pool which were classified as investment property during the first half of the year.
Inventory write down
In Canada, as a result of a revaluation of the land for sale, there was an additional write-down of inventory in 2008 of approximately €0.2 million.
During 2008, as a result of discontinuing the Laromet project in Romania and Gorna Banya project in Bulgaria, the Company wrote down inventory with a total value of €0.5 million.
In addition, as a result of decrease in market value of the remaining units at the Gyor project in Hungary, the Company wrote down inventory by a further €0.5 million.
Financial Review
Total revenue for the year ended 31 December 2008 of was €24 million compared to €16 million in 2007, reflecting sales of housing units.
The gross margin on the sale of housing units and land, including management fees, was €4 million in 2008 compared to €4.7 million in 2007. The lower gross margin of 16.5 per cent for 2008 (2007: 28.8 per cent) followed a decline in property markets in the second half resulting in lower average selling prices and a lack of land sales which, historically, have achieved high margins. In 2007, 15 per cent of total turnover was derived from the sale of land.
Total gross profit for 2008 was €4.9 million (2007: €3.2 million) reflecting a lower total write-down of inventory of €1.2 million for 2008 compared to €3.9 million in 2007. The write-down for 2008 relates to land to be sold in Canada and to projects in Hungary, Romania, and Bulgaria, where the Board expects that sales proceeds will be lower than book value.
Selling, general and administrative expenses of €5.3 million (2007: €5.3 million) include a one-off provision of €1.2 million for 2008 in respect of legal charges (2007: €1.1 million).
Net financing costs increased to €8.7 million (2007: €2 million). This is reflects a total foreign exchange loss of €3.1 million (2007: €0.4 million profit) and an increase in bank debt during the year.
As a result of an increase in total finance expenses, the loss before tax for the year increased to €9.1 million (2007: €4.2 million).
Inventories of housing units at 31 December 2008 were up to €75.4 million from €71.1 million at 31 December 2007.
Net bank debt (liabilities to the bank offset by restricted bank deposits and cash in escrow and cash and cash equivalents) was €41 million at 31 December 2008 compared to net debt of €20.7 million at 31 December 2007.
Engel East Europe N.V.
Consolidated balance sheet
| 31 December | |||
|
| 2008 | 2007 | |
| Note | Thousands Euro | ||
| ASSETS | |||
| Current assets | |||
| Cash and cash equivalents | 2 | 6,628 | 11,030 |
| Restricted bank deposits and cash in escrow | 3 | 10,122 | 12,287 |
| Trade accounts receivable | 4 | 1,495 | 1,117 |
| Prepayments and other accounts | 5 | 2,306 | 2,939 |
| Loans to related parties | 6 | 6,537 | 8,064 |
| Income tax receivable | 143 | 354 | |
| Inventories of housing units | 7 | 75,389 | 71,120 |
| Total current assets | 102,620 | 106,911 | |
| Non-current assets | |||
| Investment property | 8 | 31,665 | 27,936 |
| Property and equipment | 9 | 208 | 414 |
| Deferred tax assets | 10 | 1,460 | 1,425 |
| Investment in associate | 12 | - | 24 |
| Total non-current assets | 33,333 | 29,799 | |
| Total assets | 135,953 | 136,710 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||
| Current liabilities | |||
| Interest-bearing loans from banks | 13 | 57,815 | 43,979 |
| Current portion of finance lease liability | 14 | 2,006 | 1,634 |
| Loans and amounts due to related parties and joint venture partners | 15 | 5,854 | 4,749 |
| Trade accounts payable | 5,005 | 5,684 | |
| Other liabilities | 16 | 14,710 | 18,123 |
| Provisions | 17 | 2,188 | 1,079 |
| Income tax payable | 590 | 630 | |
| Total current liabilities | 88,168 | 75,878 | |
| Non-current liabilities | |||
| Finance lease liability | 14 | 13,184 | 14,549 |
| Deferred tax liabilities | 10 | 1,002 | 1,470 |
| Total non-current liabilities | 14,186 | 16,019 | |
| Equity | |||
| Share capital | 18 | 878 | 878 |
| Share premium | 18 | 39,298 | 39,298 |
| Capital reserves | (334) | (328) | |
| Retained earnings | (4,829) | 4,579 | |
| Accumulated translation adjustment | (1,480) | 149 | |
| Equity attributable to equity holders of the parent | 33,533 | 44,576 | |
| Minority interest | 66 | 237 | |
| Total equity | 33,599 | 44,813 | |
| Total liabilities and equity | 135,953 | 136,710 | |
| 10 March 2009 | ||||||
| Sam Salman | Samuel Hibel | Terry Roydon | ||||
| Chairman | CFO | Chairman of the Audit Committee |
The notes are an integral part of these consolidated financial statements.
Engel East Europe N.V.
Consolidated income statement
| For the year ended 31 December | |||
| 2008 | 2007 | ||
|
| Note | Thousands Euro | |
| Revenues | 19 | 24,203 | 16,396 |
| Change in fair value of investment property | 8 | 2,076 | 2,295 |
| Write down of inventory | 20 | (1,153) | (3,858) |
| Cost of sales | 21 | (20,211) | (11,676) |
| Gross profit | 4,915 | 3,157 | |
| Selling, general and administrative expenses | 22 | (5,305) | (5,263) |
| Operating loss | (390) | (2,106) | |
|
| |||
| Foreign exchange gains (losses) | (3,058) | 350 | |
| Other financial income | 1,202 | 2,761 | |
| Other financial expenses | (6,847) | (5,148) | |
| Net finance expenses | 23 | (8,703) | (2,037) |
| Share in profit (loss) of associate | 12 | 1 | (27) |
| Loss before tax | (9,092) | (4,170) | |
| Income taxes | 24 | (487) | (593) |
|
| |||
| Loss for the year | (9,579) | (4,763) | |
| Attributable to: | |||
| Equity holders of the parent | (9,408) | (4,927) | |
| Minority interest | (171) | 164 | |
|
| (9,579) | (4,763) | |
| Loss per share: | |||
| Basic loss per share (Euro) | 25 | (0.109) | (0.054) |
| Diluted loss per share (Euro) | 25 | (0.109) | (0.054) |
The notes are an integral part of these consolidated financial statements.
Engel East Europe N.V.
Consolidated statement of changes in shareholders' equity
| Attributable to equity holders of the Company | ||||||||||
| Share capital | Share premium | Capital reserve | Translation reserve | Retained earnings | Total | Minority interest | Total equity | |||
| Note | Thousands Euro | |||||||||
| Balance at 1 January 2007 | 878 | 39,298 | (326) | (241) | 14,158 | 53,767 | 73 | 53,840 | ||
| Foreign currency translation adjustment | - | - | - | 390 | - | 390 | - | 390 | ||
| Loss for the year | - | - | - | - | (4,927) | (4,927) | 164 | (4,763) | ||
| Total recognised income and expense | (4,537) | 164 | (4,373) | |||||||
| Dividends payable to shareholders | 18 | - | - | - | - | (4,652) | (4,652) | - | (4,652) | |
| Share based payments | - | - | (2) | - | - | (2) | - | (2) | ||
| Balance at 31 December 2007 | 878 | 39,298 | (328) | 149 | 4,579 | 44,576 | 237 | 44,813 | ||
| Balance at 1 January 2008 | 878 | 39,298 | (328) | 149 | 4,579 | 44,576 | 237 | 44,813 | ||
| Foreign currency translation adjustment | - | - | - | (1,629) | - | (1,629) | - | (1,629) | ||
| Loss for the year | - | - | - | - | (9,408) | (9,408) | (171) | (9,579) | ||
| Total recognised income and expense | (11,037) | (171) | (11,208) | |||||||
| Share based payments | - | - | (6) | - | - | (6) | - | (6) | ||
| Balance at 31 December 2008 | 878 | 39,298 | (334) | (1,480) | (4,829) | 33,533 | 66 | 33,599 | ||
| *Dividends - The following dividend were declared and paid by the Group: | |||||||||||
| For the year ended 31 December | 2008 | 2007 | |||||||||
| €0.053 per qualifying ordinary share | 18 | - | 4,652 | ||||||||
| - | 4,652 | ||||||||||
The notes are an integral part of these consolidated financial statements.
Engel East Europe N.V.
Consolidated statement of cash flows
| For the year ended 31 December | |||
|
| 2008 | 2007 | |
| Note | Thousands Euro | ||
| Cash flows from operating activities: |
|
| |
| Loss for the year | (9,579) | (4,763) | |
| Adjustments for: | |||
| Depreciation | 102 | 108 | |
| Gain from sale of property and equipment | (10) | - | |
| Net finance expenses | 23 | 8,703 | 2,037 |
| Income taxes | 24 | 487 | 593 |
| Share in losses (profits) of associate | (1) | 27 | |
| Gain from sale of subsidiaries | - | (53) | |
| Dividend from associate | 27 | - | |
| Share based payment | (6) | (2) | |
| Change in fair value of investment property | 8 | (2,076) | (2,295) |
| Increase in inventory | (10,714) | (29,555) | |
| Write down of inventory | 20 | 1,153 | 3,858 |
| Decrease (increase) in trade accounts receivable | (526) | 69 | |
| Increase in provisions | 1,237 | 1,079 | |
| Increase in other accounts receivable | (58) | (1,169) | |
| Decrease in trade accounts payable | 73 | 3,044 | |
| Decrease (increase) in other liabilities | (1,015) | 10,598 | |
| Cash from (used in) operations: | |||
| Interest received | 701 | 609 | |
| Interest paid | (3,027) | (1,082) | |
| Income taxes paid | (825) | (185) | |
| Net cash used in operating activities | (15,354) | (17,082) | |
The notes are an integral part of these consolidated financial statements.
Engel East Europe N.V.
Consolidated statement of cash flows (continued)
| For the year ended 31 December | |||
| 2008 | 2007 | ||
| Note | Thousands Euro | ||
| Cash flows from investing activities: | |||
| Acquisition of property and equipment | (50) | (184) | |
| Disposal of subsidiaries | 30 | - | 4,485 |
| Acquisition of investment property | (4,495) | - | |
| Proceeds from sales of property and equipment | 164 | - | |
| Short term loans granted to related parties | (1,175) | (5,358) | |
| Short term loans repaid by related parties | 2,735 | 155 | |
| Restricted bank deposits and cash in escrow | 642 | (5,775) | |
| Net cash used in investing activities | (2,179) | (6,677) | |
|
| |||
| Cash flows from financing activities: | |||
| Interest-bearing loans received from banks | 29,432 | 39,340 | |
| Interest-bearing loans repaid to banks | (15,007) | (7,791) | |
| Loans received from related parties and other | 1,642 | 2,091 | |
| Loans repaid to related parties and other | (208) | (6,011) | |
| Payment of finance lease liability | (1,269) | (5,096) | |
| Dividend paid to shareholders | 18 | - | (4,652) |
| Net cash from financing activities | 14,590 | 17,881 | |
| Net decrease in cash and cash equivalents | (2,943) | (5,878) | |
| Effect of exchange rate fluctuations on cash held | (1,459) | 131 | |
| Cash and cash equivalents at 1 January | 11,030 | 16,777 | |
|
| |||
| Cash and cash equivalents at 31 December | 6,628 | 11,030 | |
The notes are an integral part of these consolidated financial statements.
Independent Auditors' Report
To the directors of Engel East Europe N.V.
We have audited the accompanying 2008 consolidated financial statements of Engel East Europe N.V. (hereinafter referred to as "the Group"), which comprise the consolidated balance sheet as at 31 December 2008 and the consolidated income statement, consolidated statement of changes in shareholders' equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the EU. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2008, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.
10 March 2009
KPMG Hungária Kft.
Istvan HenyePartner
Engel East Europe N.V.
Notes to the consolidated financial statements
For the year ended 31 December 2008
NOTE 1 - REPORTING ENTITY
Engel East Europe N.V. (the "Company") is a Company domiciled in The Netherlands. The Company owns subsidiary companies and has jointly controlled entities mainly in Central and Eastern Europe which purchase, develop, hold and sell real estate assets.
The Company has been listed on the Alternative Investment Market ("AIM") of the London Stock Exchange, United Kingdom since 15 December 2005.
The consolidated financial statements of the Company as at 31 December 2008 and for the year then ended comprise the Company and its subsidiaries and the Group's interests in associates and jointly controlled entities (collectively, the "Group").
The main shareholder of the Company is Engel General Developers Ltd. (incorporated in Israel), which owns, as of 31 December 2008, 68.35 % of the Company's shares.
On 1 March 2007 Azorim Investment, Development and Construction Ltd. (incorporated in Israel and listed in Tel-Aviv stock exchange), whose ultimate parent is Boymelgreen Capital Ltd. (incorporated in Israel) acquired a controlling interest in Engel General Developers Ltd.
The financial statements were authorised for issue by the directors on 10 March 2009.
Copies of these consolidated financial statements of the Group are available upon request from the Company's registered office at Rapenburgerstraat 204, 1011 MN Amsterdam, The Netherlands.
NOTE 2 - CASH AND CASH EQUIVALENTS
| 31 December | |||
| 2008 | 2007 | ||
| Thousands Euro | |||
| Bank balances | 5,676 | 9,091 | |
| Bank deposits | 939 | 1,897 | |
| Petty cash | 13 | 42 | |
| Total | 6,628 | 11,030 | |
NOTE 3 - RESTRICTED BANK DEPOSITS AND CASH IN ESCROW
| 31 December | |||
| 2008 | 2007 | ||
| Thousands Euro | |||
| Restricted bank deposits: | |||
| In Hungarian Forint | 6,424 | 7,117 | |
| In Bulgarian Lev | 760 | - | |
| In Canadian Dollar | 1 | 8 | |
| In Polish Zloty | 2,937 | 4,119 | |
| Total restricted bank deposits | 10,122 | 11,244 | |
| Cash in escrow | - | 1,043 | |
| Total | 10,122 | 12,287 | |
The Group pledged all restricted bank deposits to secure banking facilities granted to the Group.
Cash in escrow represents advances due to land owners for the purchase of land and held in an escrow account until the finalization of the land purchase (i.e. legal title passes to the Group).
NOTE 4 - TRADE ACCOUNTS RECEIVABLE
| 31 December | |||
| 2008 | 2007 | ||
| Thousands Euro | |||
| Denominated in: | |||
| In Hungarian Forint | 1,247 | 760 | |
| In Bulgarian Lev | - | 210 | |
| In Czech Korona | 233 | 143 | |
| In Polish Zloty | 15 | 4 | |
| Total | 1,495 | 1,117 | |
The balances represent receivables from customers for the sale of housing units. No amounts were overdue and no impairments losses were recorded with respect to trade receivables at 31 December 2008 or 2007.
NOTE 5 - PREPAYMENTS AND OTHER ACCOUNTS
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Advances to suppliers | 144 | 413 |
| VAT recoverable | 1,706 | 2,259 |
| Prepaid expenses | 302 | 111 |
| Other | 154 | 156 |
| Total | 2,306 | 2,939 |
NOTE 6 - LOANS TO RELATED PARTIES
| 31 December | |||
| Interest rate | 2008 | 2007 | |
| % | Thousands Euro | ||
| Loans provided to jointly controlled entities: | |||
| Fixed rate loan | 15% | 2,146 | 2,114 |
| Fixed rate loan | 8% | 1,555 | - |
| Non bearing interest loans | - | 2,273 | 2,592 |
| Floating rate loans | Mainly: 3m Euribor+1% | 563 | 3,358 |
| Total | 6,537 | 8,064 | |
The loans are denominated in Euro; no repayment date has been set. Repayment is expected from the proceeds of the sale of the related projects financed by the loans.
NOTE 7 - INVENTORIES OF HOUSING UNITS
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Housing units under construction | 55,526 | 49,232 |
| Land designated for residential project and for sale | 24,235 | 25,469 |
| Completed housing units for sale | 154 | 277 |
| 79,915 | 74,978 | |
| Write-down of inventory (see note 20) | (4,526) | (3,858) |
| Total | 75,389 | 71,120 |
| Including capitalization of borrowing costs in the amount of: | 260 | - |
The Group has pledged inventories having a carrying amount of EUR 61,436 thousands to secure banking facilities granted to the Group (on 31 December 2007: EUR 55,218 thousands).
The amount of inventory that is carried at net realisable value is EUR 9,147 thousands.
NOTE 8 - INVESTMENT PROPERTY
Movements of the investment property balances were as follows:
| 2008 | 2007 | |||||
| Land | Rented property | Total | Land | Rented property | Total | |
| Thousands Euro | ||||||
| Balance at 1 January | 27,936 | - | 27,936 | 24,227 | - | 24,227 |
| Acquisitions | 4,843 | - | 4,843 | 1,816 | - | 1,816 |
| Reclassified from inventory | - | 1,080 | 1,080 | (402) | - | (402) |
| Translations adjustments | (4,181) | (89) | (4,270) | - | - | - |
| Change in fair value | 1,839 | 237 | 2,076 | 2,295 | - | 2,295 |
| Balance at 31 December | 30,437 | 1,228 | 31,665 | 27,936 | - | 27,936 |
a. Investment property comprises a number of properties as follow:
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Property located in Hungary | 1,228 | - |
| Property located in Serbia | 24,100 | 27,936 |
| Property located in Poland | 6,337 | - |
| Total | 31,665 | 27,936 |
The property located in Hungary is rented for a period of 10 years (see note 27.m). The yield applied to the net annual rental to determine the fair value of this property for which current prices in an active market are unavailable is 8%, from the 10th and ahead the valuer applied yield of 10%.
The Group holds two additional plots which are held for purposes of commercial development (in Serbia and in Poland). The Group decided to treat these assets as investment property because the Group's intention is to hold the properties for long term period, for capital appreciation or rental.
In estimating the property value in Serbia using the residual method, the valuer estimated an expected selling price of the completed development based on external evidence such as current prices for similar developed properties in a similar location and condition adjusted for future price changes. The cost of development was also estimated based on construction projections by the Group and market estimates of construction costs taking into consideration a developer's profit of 30%. Under the residual method the fair value of the land is calculated as the difference between the estimated selling price of the development and the estimated cost of construction of the commercial structures less the developer's profit.
The fair value of the property in Poland was determined on the basis of transactions recently executed in the market involving similar properties and similar locations to the property owned by the Group.
b. Information regarding land ownership rights for investment property:
| 31 December | |||
| End of lease | 2008 | 2007 | |
| period (in years) | Thousands Euro | ||
| Owned property | - | 7,565 | - |
| Leased property | 97 | 24,100 | 27,936 |
| Total | 31,665 | 27,936 | |
c. Amounts recognised in the consolidated income statement due to the investment property:
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Rent income | 52 | - |
| Operating expenses | *30 | - |
| Change in fair value of investment property | 2,076 | 2,295 |
* Related to the property which generates rental income.
NOTE 9 - PROPERTY AND EQUIPMENT
| Vehicles | Furniture, office equipment and other assets | Total | |
| Thousands Euro | |||
| Cost |
|
| |
| Balance at 1 January 2007 | 191 | 288 | 479 |
| Additions | - | 184 | 184 |
| Balance at 31 December 2007 | 191 | 472 | 663 |
| Additions | - | 50 | 50 |
| Disposals | (191) | (89) | (280) |
| Balance at 31 December 2008 | - | 433 | 433 |
| Accumulated depreciation | |||
| Balance at 1 January 2007 | 26 | 115 | 141 |
| Depreciation for the year | 26 | 82 | 108 |
| Balance at 31 December 2007 | 52 | 197 | 249 |
| Depreciation for the year | 11 | 91 | 102 |
| Disposals | (63) | (63) | (126) |
| Balance at 31 December 2008 | - | 225 | 225 |
| Net book value at 31 December 2008 | - | 208 | 208 |
| Net book value at 31 December 2007 | 139 | 275 | 414 |
NOTE 10 - DEFERRED TAX ASSETS AND LIABILITIES
The following are the deferred tax assets and liabilities recognized by the Group before off sets, and the movements thereon, during the current and prior reporting periods.
| Balance 1 January 2007 | Recognized in profit or loss | Translation adjustments | Balance 31 December 2007 | Recognized in profit or loss | Translation adjustments | Balance 31 December 2008 | |
| Thousands Euro | |||||||
| Losses carry forward | 390 | (39) | 14 | 365 | 313 | (57) | 621 |
| Inventory | - | 552 | 143 | 695 | 377 | (125) | 947 |
| Loans and borrowings | 47 | 7 | 3 | 57 | 211 | (43) | 225 |
| Investment property | (2,380) | (416) | 2 | (2,794) | (558) | 477 | (2,875) |
| Accounts receivable | (161) | 206 | (1) | 44 | (37) | 1 | 8 |
| Advances from customers | (217) | 75 | (4) | (146) | (161) | 51 | (256) |
| Finance lease liability | 2,006 | (340) | (11) | 1,655 | 49 | (178) | 1,526 |
| Provisions | - | 80 | (1) | 79 | 206 | (23) | 262 |
| Total | (315) | 125 | 145 | (45) | 400 | 103 | 458 |
The following table sets out the Group's deferred tax assets and liabilities, net of off sets:
| 31 December | |||
| 2008 | 2007 | ||
| Thousands Euro | |||
| Deferred tax assets (non-current assets) | 1,460 | 1,425 | |
| Deferred tax liabilities (non-current liabilities) | (1,002) | (1,470) | |
| Net deferred taxes | 458 | (45) | |
Deferred tax assets and liabilities have been offset where a legal right of off set exists.
The total tax losses in the amount of EUR 621 thousands will expire in the following years: EUR 97 thousands will expire in 2011; EUR 80 thousands will expire in 2012; EUR 138 thousands will expire in 2013; EUR 95 thousands will expire in 2017; EUR 211 thousands will expire in 2018.
Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of tax losses amounting to EUR 8,085 thousands as at 31 December 2008 (2007: EUR 7,381 thousands).
Deferred tax assets have not been recognised in respect of losses where it is not probable that future taxable profit will be available against which the Group can utilise the benefits from the losses.
NOTE 11 - SUBSIDIARIES AND JOINT VENTURES
As at 31 December 2008, the Company holds interests in the following companies:
Jointly controlled entities:
a. Arces International B.V. ("Arces") - holding company, Amsterdam, The Netherlands. The Company and Heitman Financial UK LLC ("the Heitman Fund") each hold 50% of Arces' shares. Arces is considered a jointly controlled entity.
Arces holds the following subsidiaries, each of which is wholly owned by Arces:
1. Engel Park Kft. ("Park") - built residential project in Budapest, Hungary.
2. Engel Sun Palace Kft. ("Sun Palace") - is building a mix-use project with a majority of residential in Budapest, Hungary.
3. Engel Projekt Kft. ("Projekt") - is building a residential project in Gyor, Hungary.
4. Palace Engel Dejvice s.r.o. ("Dejvice") - through its wholly owned subsidiary Palace Engel Safranka s.r.o. ("Safranka") - is building a residential project in Prague, Czech Republic.
5. Palace Engel Estate s.r.o. ("Vokovice") - is building a residential project in Prague, Czech Republic.
6. Palace Engel I S.p. Z.o.o. ("Zabky") - is building a residential project in Warsaw, Poland.
7. Engel Apartmenty Emilii Plater S.p. Z.o.o. ("Emilii Plater") - is building a residential project in Warsaw, Poland.
8. Engel HÁZ Ingatlanfejlesztő Kft. ("Haz") - own and rent out the gym and pool in the project Sun Palace, Budapest, Hungary (see note 27.m)
The following amounts are included in the Group's financial statements as a result of the proportionate consolidation of Arces:
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Current assets | 51,409 | 48,763 |
| Non-current assets | 837 | 914 |
| Current liabilities | (45,792) | (41,764) |
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Income | 15,609 | 13,654 |
| Expenses | (17,523) | (13,823) |
The Group's proportionate share of non-current assets of Arces includes the relevant proportion of an investment in an associate, accounted for using the equity method (see note 12).
b. Enman B.V. ("Enman") - holding company, Amsterdam, The Netherlands. The Company and an investment fund HEPP III Luxembourg Master S.a.r.l. ("HEPP III") each hold 50% of Enman's shares and the Company is entitled to 40% of Enman's future distributions.
Enman is considered a jointly controlled entity:
Enman holds the following subsidiaries, , each of which is wholly owned by Enman:
1. E.G. Company EOOD. ("E.G Company") - (see note 27.j).
2. E.G. Project EOOD. ("E.G Project") - (see note 27.h).
3. E.G. Panorama EOOD. ("Panorama") - is building a residential project in Sofia, Bulgaria (see note 27.k).
4. E.G. Malinova Dolina EOOD. ("Malinova Dolina") - (see note 27.i).
5. E.G. Gorna Banya EOOD ("Gorna Banya") - (see note 27.l).
6. Palace Engel Wilanow 1 Sp.z o.o. ("Wilanow") - is building a residential project in Warsaw, Poland.
7. Engel Ingatlan Kft. ("Ingatlan") - is building a residential project in Budapest, Hungary.
8. Palace Engel Mokotow Sp.z o.o. ("Mokotow").
9. Palace Engel Veleslavin a.s. ("Veleslavin") and Palace Engel Villa s.r.o. - plan to build a residential project in Prague, Czech Republic.
10. Engel Lylia s.r.l ("Lylia") - plans to build a residential project in Bucharest, Romania.
11. Engel Crizantema s.r.l ("Crizantema") - through its wholly owned subsidiary, Engel Tulip s.r.l ("Tulip") plans to build a residential project in Bucharest, Romania.
12. Troja Gardens s.r.o ("Koncern") - plans to build a residential project in Prague, Czech Republic (see note 27.e).
The following amounts are included in the Group's financial statements as a result of the proportionate consolidation of Enman:
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Current assets | 20,724 | 19,434 |
| Non-current assets | 252 | 2 |
| Current liabilities | (12,136) | (9,871) |
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Income | 2,584 | 2,726 |
| Expenses | (4,231) | (3,453) |
c. ECG Trust Canada Holding Trust ("ECG") - 95% interest subsidiary - a holding trust (see note 27.o).
ECG holds 20% interest in future distributions of jointly controlled entity:
Montreal Residential Holdings Master Limited Partnership ("MLP").
The remaining 80% in future distributions is owned by Lehman Brothers Real Estate Partners II ("Lehman Brothers").
MLP holds the following subsidiaries:
1. Le Quartier Quebec LP - 99.99% in the partnership rights - owns land in Montreal, Canada.
2. Trianon Sur Le Golf Quebec LP - 99.99% in the partnership rights - owns land in Montreal, Canada.
3. Le Chagall Quebec LP - 99.99% in the partnership rights - owns land in Montreal, Canada.
4. Le Quartier-Parisien Inc. - 99.99% in the share capital - beneficial title holder company, Canada
5. Trianon Sur Le Golf Inc. - 99.99% in the share capital - beneficial title holder company, Canada.
6. Le Chagall Inc. - 99.99% in the share capital - beneficial title holder company, Canada.
Subsidiaries:
d. Palace Engel s.r.o. ("Prokopsky") - 64% interest subsidiary - built a residential project in Prague, Czech Republic.
e. Palace Engel Development s.r.o. ("Barandov") - 64% interest subsidiary- built a residential project in Prague, Czech Republic.
f. Engel Management s.r.o. ("Management") - a wholly owned subsidiary - management company, Czech Republic.
g. Burlington Hungary Kft. ("Burlington") - a wholly owned subsidiary - management company, Hungary.
h. Turlington Kft. ("Turlington") - a wholly owned subsidiary - management company, Hungary.
i. Engel Management S.p. Z.o.o - wholly owned by Burlington (see g. above) - management company, Poland.
j. Puribul EOOD. ("Puribul") - a wholly owned subsidiary - is building a residential project in Sofia, Bulgaria.
k. Nisim EOOD. ("Nissim") - a wholly owned subsidiary - is building a residential project in Sofia, Bulgaria.
l. Engel Marina Dorcol Ltd. ("Marina Dorcol") - 95% interest subsidiary - plans to build mix-use project with a majority of residential in Belgrade, Serbia (see notes 27.c and 27.d).
m. E.G. Management EOOD. ("E.G. Management") - a wholly owned subsidiary - management company, Bulgaria.
n. Engel Orchidea s.r.l ("Orchidea") - a wholly owned subsidiary, Romania (see note 27.g).
o. Engel Rose s.r.l ("Rose") - a wholly owned subsidiary - plans to build a residential project in Bucharest, Romania (see note 27.f).
p. Davero Invest s.r.l ("Davero") - a wholly owned subsidiary - management company, Romania.
q. Eurobul Ltd. ("Eurobul") - a wholly owned subsidiary - administration services company, Israel.
r. Engel Yzum Bnia Vebizua Shnaym (94) Ltd. - 77.3% interest subsidiary in the share capital - (see note 27.n).
s. Palace Engel Troja a. s. ("Troja") - a wholly owned subsidiary, Czech Republic.
t. 6212-964 Canada Inc. ("Canada Inc.") - a wholly owned subsidiary - management company, Canada (inactive) (see note 27.o).
u. 9152-8372 Quebec Inc. ("Quebec Inc.") - a wholly owned subsidiary - management company, Canada (see note 27.o).
v. Palace Engel III Sp z.o.o ("Krakow ") - a wholly owned subsidiary - plans to build a residential project in Krakow, Poland (see note 27.b).
w. Wilanow 1 Developments sp.zoo ("Wilanow 2") - a wholly owned subsidiary - plans to build a mix-use project in Warsaw, Poland (see note 27.a).
x. Engel Marina Dorcol B.V. - a wholly owned subsidiary, The Netherlands.
y. Engel Marina Dorcol C.V. - a wholly owned subsidiary, The Netherlands.
NOTE 12 - INVESTMENT IN ASSOCIATE
a. Arces, a jointly-controlled entity, owns a 40% associate interest in the share capital of Palace Engel Vrsovice s.r.o. ("Vrsovice"). The additional 45% and 15% are held by a former manager in the Group and a company owned by the Company's former CEO, respectively. Vrsovice, through its wholly owned subsidiary (Agentura Novy Domov 2000, spol s.r.o) built and sold units in a residential project in Prague, Czech Republic.
b. Composition of investment in associate:
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Cost of investment | 2 | 2 |
| Share of profits since date of acquisition | 162 | 161 |
| Dividend received since date of acquisition | (164) | (139) |
| Carrying value of interest in associate | - | 24 |
c. Summarised financial information in respect of the associate is set out below:
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Total assets | 48 | 128 |
| Total liabilities | (48) | (18) |
| Net assets | - | 110 |
| Group's proportionate share of the associate's net assets | - | 22 |
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Net profit (loss) for the year | 5 | (135) |
| Group's proportionate share of the associate's net profit (loss) for the year | 1 | (27) |
NOTE 13 - INTEREST-BEARING LOANS FROM BANKS
| 31 December | |||||
| Year of | 2008 | 2007 | |||
| Currency | Interest rate | maturity* | Thousands Euro | ||
| Secured bank loan | Euro | 3m Euribor +1.5% | - | - | 2,686 |
| Secured bank loan | HUF | 3m Bubor +2.97% - 60 % of AKK** | 2009 | 1,997 | 5,329 |
| Secured bank loan | HUF | 50 % of AKK** + 1.8 % | 2009 | 1,458 | 1,520 |
| Secured bank loan | HUF | 50 % of AKK** + 1.8 % | 2009 | 5,257 | 3,274 |
| Secured bank loan | HUF | 1m Bubor + 1.8% | 2009 | 798 | 356 |
| Secured bank loan | HUF | 3m Euribor + 1.5% | - | - | 489 |
| Secured bank loan | HUF | 110 % of AKK** + 1.65 % | 2010 | 5,468 | 3,193 |
| Secured bank loan | CZK | 3m PRIBOR + 2.25% | 2010 | 6,109 | 1,360 |
| Secured bank loan | CZK | 3m PRIBOR + 2.25% | 2010 | 7,160 | 1,995 |
| Secured bank loan | Euro | 3m Euribor + 3.25% | 2009 | 1,399 | 1,090 |
| Secured bank loan | Euro | 3m Euribor + 2.5% | 2009 | 2,912 | 1,786 |
| Secured bank loan | Euro | 3m Euribor + 2.75% | 2009 | 1,052 | 1,055 |
| Secured bank loan | Euro | 3m Euribor + 5% | 2009 | 1,096 | 1,101 |
| Secured bank loan | Euro | 3m Euribor + 10.5% | - | - | 1,500 |
| Secured bank loan *** | Euro | 3m Euribor + 1.5% | On demand | 6,897 | 6,840 |
| Secured bank loan *** | Euro | 3m Euribor + 3% | On demand | 4,611 | - |
| Secured bank loan | PLN | 1y Wibor + 1.6% | 2009 | 1,242 | 2,433 |
| Secured bank loan | PLN | 3m Wibor + 1.5% | 2009 | 5,166 | 7,086 |
| Secured bank loan | PLN | 3m Wibor + 1.5% | 2009 | 4,573 | 886 |
| Secured bank loan | Euro | 3m Euribor + 2.5% | 2009 | 428 | - |
| Secured bank loan | PLN | 3m Wibor + 1.35% | 2010 | 192 | - |
| Total interest-bearing loans from banks | 57,815 | 43,979 | |||
* Represents the latest possible year of maturity.
** AKK - the appropriate latest 3 month's average yield for the one year Hungarian Treasury bill.
*** These loans are secured by guarantees provided by an indirect parent company of the Company.
The Group finances its projects primarily with commercial bank lines of credit. The loans are expected to be settled in the Group's normal operating cycle and therefore are classified as current liabilities, in some cases the loans repayments date may need to be extended.
All of the secured bank loans have been provided to individual subsidiary and joint controlled entities and each loan has been granted in respect of a specific project. In each case, the security for the loan is a first ranking lien on the assets of the project company. The first ranking liens include liens on rights over land and the projects for which the loans were taken; liens on rights, including by way of assignment of rights, pursuant to the agreements to which the Company is a party (including establishment contracts and lease, operating and management agreements). Further, loans that these companies have received from their shareholders and/or every existing or future right of the holders of the rights in those companies are subordinated to the loans received from the banks. In addition, in most cases payments to the shareholders from subsidiaries and jointly controlled entities (including dividend payments but excluding amounts in respect of project management) are not allowed, until the bank loan has been repaid.
The Company has given no security in respect of the bank loans provided to its subsidiary companies and jointly controlled entities.
At the end of 2008, the Group was in breach of repayment in the amount of EUR 1,399 thousands in regard of one of the loans related to a project in Bulgaria. The Group is currently in discussions with the lending bank to renegotiate the terms (including repayment date) of the loan.
NOTE 14 - FINANCE LEASE LIABILITY
| 31 December | |||
| 2008 | 2007 | ||
| Thousands Euro | |||
| Non-current liabilities | |||
| Finance lease liability | 13,184 | 14,549 | |
| Current liabilities | |||
| Current portion of finance lease liability | 2,006 | 1,634 | |
Terms and conditions of outstanding financial lease liabilities were as follows:
| 31 December | |||||||
| 2008 | 2007 | ||||||
| Thousands Euro | |||||||
| Nominal | Year of | Face | Carrying | Face | Carrying | ||
| Currency | interest rate | maturity | value | amount | value | amount | |
| Finance lease liability | CSD | 7.25% | 2008-2105 | 45,998 | 15,190 | - | - |
| Finance lease liability | CSD | 8.0% | 2007-2105 | - | - | 50,933 | 16,183 |
The financial lease liability relates to a project in Serbia where the Group is obliged to pay monthly rent for land for 99 years. The Group has elected to classify this property interest held under an operating lease as an investment property and therefore has accounted for it as if it were held under a finance lease.
On 5 May 2008, the Group signed a new lease agreement, with a new payment schedule - see also note 27.c.
Repayments under the term of the finance lease as follows:
| Minimum lease Payments | Interest | Principal | Minimum lease Payments | Interest | Principal | |
| *2008 | 2007 | |||||
| Thousands Euro | ||||||
| Less than one year | 2,083 | 77 | 2,006 | 1,692 | 58 | 1,634 |
| Between one and five years | 11,390 | 1,745 | 9,645 | 13,870 | 2,598 | 11,272 |
| More than five years | 33,028 | 29,489 | 3,539 | 35,371 | 32,094 | 3,277 |
| Total | 46,501 | 31,311 | 15,190 | 50,933 | 34,750 | 16,183 |
* According to the new lease agreement which signed on 5 May 2008.
The value of the finance lease and its payments are adjusted on a monthly basis to the local index of retail prices in Belgrade, Serbia.
The increases of the local index of retail prices in Belgrade, Serbia in 2008 and 2007 were 5.6% and 9.3% respectively.
NOTE 15 - LOANS AND AMOUNTS DUE TO RELATED PARTIES AND JOINT VENTURE PARTNERS
| 31 December | |||
| 2008 | 2007 | ||
| Currency | Thousands Euro | ||
| Payable to related parties: |
| ||
| Engel General Developers Ltd. (1) | Euro | 677 | 74 |
| Jointly controlled entities (2) | Euro | 142 | 288 |
| Payable to joint venture partners and other: | |||
| Heitman Fund (3) | Euro | 2,972 | 1,957 |
| Minority shareholders of subsidiaries (4) | Euro | 8 | 47 |
| Lehman Brothers (5) | CAD | 2,055 | 2,383 |
| Total | 5,854 | 4,749 | |
No repayment dates have been set with regard to the above loans and advances. All are expected to be settled from proceeds generated from sales of the development projects to which they relate. As such, they are classified as current liabilities.
(1) The loans received from Engel General Developers Ltd. and bear interest of 6% per annum.
(2) Bears interest of 3 month Euribor + 1% per annum.
(3) The balance is comprises of two loans:
- EUR 1,936 thousands - bears interest of 15% per annum.
- EUR 1,036 thousands - bears interest of 8% per annum.
(4) Bears interest of 3 month Pribor+2.5% per annum.
(5) The loan bears no interest.
NOTE 16 - OTHER LIABILITIES
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Advances from customers | 10,820 | 15,563 |
| VAT payable | 658 | - |
| Provision for expected costs of completion of housing units | 1,448 | (*)616 |
| Retention from constructors | 1,265 | (*)1,170 |
| Accruals | 35 | 189 |
| Payroll and related expenses | 272 | 456 |
| Other | 212 | 129 |
| Total | 14,710 | 18,123 |
(*) Reclassified
NOTE 17 - PROVISIONS
| 2008 | 2007 | |
| Thousands Euro | ||
| Balance at 1 January | 1,079 | - |
| Provisions during the year | 1,237 | 1,079 |
| Translation adjustment | (128) | - |
| Balance at 31 December | 2,188 | 1,079 |
a. During 2007, two legal claims were filed against Engel Sun Palace Kft. , a 100% owned subsidiary of Arces:
1. On 3 April 2007 the subsidiary was sued by a former constructor. The constructor sued for return of the entire bank guarantee which was forfeited to the subsidiary, in amount of HUF 1,475 million (approximately EUR 5.6 million).
2. On 27 July 2007 the subsidiary received a notice claiming an amount of HUF 145 million (approximately EUR 549 thousands). Due to the bank the claim relates to an alleged breach of the original bank loan agreement.
Provision for these claims was recognised by the Group in its 2007 financial statements.
b. The Jointly controlled entities in Canada and the Company's parent company are in the legal proceeding with a minority shareholder (5%) who was employed as technical manager in the Canadian projects and was dismissed by the Company. The amount of the claim CAD 13 million (approximately EUR 7.6 million).
According to the court decision, disposal of assets in Canada (see note 13.c) will require the approval of the court.
Provision for this claim was recognised by the Group in its 2007 financial statements.
c. During 2008 the former constructor of Engel Palace Engel I Sp z.o.o ("Zabky") a 100% owned subsidiary of Arces, has filed a claim against the subsidiary for an amount of PLN 3.3 million (approximately EUR 789 thousands).
d. During 2008 the one of the constructors of Engel Projekt Kft. ("Gyor") a 100% owned subsidiary of Arces, has filed a claim against the subsidiary, for an amount of HUF 170 million (approximately EUR 642 thousands).
e. By the end of 2008, the Company and the Company's parent company were sued for brokerage fee and legal services in the amount of NIS 10 million (approximately EUR 1.9 million) for the plot in Gyor, Hungary.
f. The Company has estimated provisions in respect of these legal claims, based on the management estimations after consulting legal advice received.
During 2008 an amount of EUR 1,237 thousands was added to provisions and is included in the 2008 financial statements as an expense at the statement of profit and loss under "Selling, general and administrative expenses".
NOTE 18 - EQUITY
| 31 December | |
| 2007 and 2008 | |
| Thousands Euro | |
| Authorised: | |
| 120,000,000 ordinary shares of par value EUR 0.01 each | 1,200 |
| Issued and fully paid: | |
| At the beginning of the year (87,777,777 ordinary shares) | 878 |
| At the end of the year (87,777,777 ordinary shares) | 878 |
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.
On 15 December 2005 the Company initially offered its shares in the AIM stock exchange market in London ("the IPO"). The proceeds from the IPO were 30,000,000 British Pounds and 27,777,778 shares were issued, accordingly EUR 39,298 thousands were recorded as share premium.
Dividends
Dividends are declared based on the retained earnings presented in the Company's consolidated financial statements prepared in accordance with The Netherlands Civil Code and not from the retained earnings presented in these consolidated financial statements.
On 29 March 2007, a gross dividend of EUR 0.053 per share (total amount of EUR 4.6 million) was paid.
NOTE 19 - REVENUES
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Sale of housing units | 22,949 | 13,035 |
| Sale of land | - | 2,542 |
| Project management fees | 1,125 | 704 |
| Rent | 90 | 48 |
| Other | 39 | 67 |
| Total | 24,203 | 16,396 |
NOTE 20 - INVENTORY WRITE-DOWN
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Gorna-Banya - Bulgaria (see note 27.l) | 182 | - |
| Orchidea - Romania (see note 27.g) | 259 | - |
| Gyor - Hungary | 466 | - |
| Rasnitz - Germany (see note 27.n) | - | 2,728 |
| Canada (see note 27.o) | 246 | 1,049 |
| Other | - | 81 |
| Total | 1,153 | 3,858 |
NOTE 21 - COST OF SALES
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Cost of housing units | 18,178 | (*)8,980 |
| Cost of sold land | - | (*)1,350 |
| Payroll and related expenses | 753 | 482 |
| Depreciation and amortization | 185 | 173 |
| Professional services | 245 | 101 |
| Maintenance | 493 | 445 |
| Other | 357 | 145 |
| Total | 20,211 | 11,676 |
(*) Reclassified
NOTE 22 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Selling | 444 | 858 |
| Payroll and related expenses | 1,156 | 1,185 |
| Professional services | 1,662 | 1,473 |
| Depreciation | 36 | 48 |
| Travel and accommodation | 330 | 287 |
| Provisions for legal claims (see note 17) | 1,237 | 1,079 |
| Maintenance | 434 | 256 |
| Other | 6 | 77 |
| Total | 5,305 | 5,263 |
NOTE 23 - NET FINANCE EXPENSES
| For the year ended 31 December | |||
| 2008 | 2007 | ||
| Thousands Euro | |||
| Finance income: | |||
| Interest earned from bank deposits | 804 | 660 | |
| Interest on loans from related parties | 398 | 171 | |
| Interest due to new finance lease | - | 1,930 | |
| Total | 1,202 | 2,761 | |
| Finance expenses: | |||
| Interest on bank loans | 4,397 | 1,989 | |
| Interest on loans from related parties | 651 | 172 | |
| Interest on loans from others | 14 | 34 | |
| Adjustment of finance lease for inflation | 929 | (*)1,839 | |
| Interest on finance lease | 1,116 | 1,114 | |
| Finance expenses | 7,107 | 5,148 | |
| Less capitalized borrowing costs during the year | (260) | - | |
| Total | 6,847 | 5,148 | |
| Foreign exchange (gains) losses | 3,058 | (*)(350) | |
| Net financing expense recognized in profit or loss | 8,703 | 2,037 | |
(*) Reclassified
NOTE 24 - INCOME TAXES
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Current tax | 685 | 598 |
| Net deferred tax | (400) | (125) |
| Prior year taxes | 202 | 120 |
| Total income tax expense recognised in the income statement | 487 | 593 |
Reconciliation of statutory to effective tax rate:
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Loss before tax | (9,092) | (4,170) |
| Statutory income tax rate in the Netherlands | 25.5% | 25.5% |
| Theoretical tax expense (benefits) | (2,318) | (1,063) |
| Changes in tax burden as a result of: | ||
| Differences in tax rates | 966 | (186) |
| Current year losses for which no deferred asset was recognised | 1,072 | 1,675 |
| Changes in unrecognised temporary differences | 480 | - |
| Prior year's taxes | 202 | 120 |
| Other differences, net | 85 | 47 |
| Income taxes | 487 | 593 |
The main tax laws to which the Group companies are subject in their countries of residence are as follows:
a. The Netherlands
1. The maximum corporation tax rate that may be imposed on the Dutch Group's income is 25.5% in 2008 (2007: maximum rate of 25.5 %).
2. Profits for tax purposes do not include dividends and capital gains that fall within the scope of the participation exemption (Article 13 of the 1969 Corporate Income Tax Act). In order to be eligible for the participation exemption, generally speaking, the following conditions should be met:
a. The Dutch resident taxpayer must own a shareholding of 5 per cent or more of the nominal paid-in share capital of the subsidiary;
b. The subsidiary must have a capital divided into shares; and
c. The subsidiary does not qualify as a 'passive and low taxed' subsidiary, which condition will be met if one of the following sub-conditions is met:
i. the assets of the subsidiary, directly or indirectly, consist for less than 50 per cent of 'free passive investments' (asset test), generally speaking only excess portfolio assets that are not committed to or maintained for the company's business;
ii. the subsidiary is subject to a profit tax that results in a levy that equals at least 10 per cent of the taxable profits determined according to Dutch tax law (tax burden test); or
iii. the subsidiary can be qualified as a 'real estate participation' (real estate test). Generally speaking, the balance sheet of the subsidiary should, on a consolidated basis, comprise of more than 90% of real estate in order to qualify for the real estate test.
Capital losses are, under certain conditions, only deductible upon liquidation of the subsidiary.
b. Hungary
The corporation tax rate of the subsidiaries incorporated in Hungary is 16% in 2008 (2007: 16%). From 2007 capital gains can be considered exempted income provided that certain criteria are fulfilled. A special solidarity tax is levied on companies starting 1 September, 2006, which is 4% of the accounting profit modified by certain items such as dividends received and donations. Dividends, interest and royalty paid out are not subject to withholding tax. Losses in the first three years of operation can be carried forward without limitation. Losses arising afterwards can be carried forward indefinitely, subject to certain limitations. Losses incurred before 2005 can be carried forward for five years, subject to certain limitations.
c. Czech Republic
The corporation tax rate of the subsidiaries incorporated in the Czech Republic is 21% in 2008 (2007: 21%). Capital gain could be taxed at 10% under certain circumstances Tax losses can be carried forward up to five years to offset future taxable income (previously seven years). Dividends paid out of net income are subject to a withholding tax of 15%, subject to the relevant double taxation treaty or EU regulations.
d. Poland
The corporation tax of the subsidiaries incorporated in Poland (including capital gains) is 19% in 2008 (2007: 19%).Tax losses can be carried forward for the period of five years and only 50% of a loss can be offset in any one year. Dividends paid out of net income are subject to a withholding tax of 19%, subject to the relevant double taxation treaty or EU regulations.
e. Canada
The federal corporate tax rate of the subsidiaries incorporated in Canada (including capital gains) is 19.5% in 2008 (2007: 22.12%). The combined corporate and provincial tax rate is 30.9%. Non-capital tax losses can be carried back three years and carried forward up to 20 years for losses arising in 2006 and later, 10 years for losses arising in taxation years ending after 22 March, 2004 and before 2006, 7 years for losses arising in taxation years ending before 23 March, 2004. Capital tax losses can be carried back three years and carried forward indefinitely against other capital gains. Dividends paid out of net income are subject to a withholding tax of 15% (2007: 15%), subject to the relevant double taxation treaty.
f. Bulgaria
The corporation tax rate of the subsidiaries incorporated in the Bulgaria (including capital gains) is 10% in 2008 (2007: 10%). Tax losses can be carried forward up to five years to offset future taxable income. Dividends paid out of net income are subject to a withholding tax of 5 %, subject to the relevant double taxation treaty and EU regulations.
g. Romania
The corporation tax of the subsidiaries incorporated in Romania (including capital gains) is 16% in 2008 (2007: 16%). Tax losses can be carried forward and offset against taxable income of the five years following the accounting year in which they were incurred. Dividends paid out of net income are subject to a withholding tax of 16%, subject to the relevant double taxation treaty or EU regulations.
h. Serbia
Corporate income tax is levied at a rate of 10% in 2008 (2007: 10%). The same rate also applies to capital gains. Capital gains are taxable together with other income, but only if derived from the sale of immovable property, intellectual property rights, participations in companies and securities. Losses may be carried forward for 10 years. No carry-back of losses is permitted. Dividends paid outside the country are subject to a withholding tax of 20 % subject to the relevant double taxation treaty.
NOTE 25 - LOSS PER SHARE
The calculation of basic loss per share attributable to the ordinary equity holders of the Company is based on the following data:
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Loss attributable to ordinary shareholders | ||
| Loss for the purposes of basic and diluted losses per share profit for the year attributable to equity holders of the Company | (9,579) | (4,763) |
| 31 December | |
| 2007 and 2008 | |
| Weighted average number of ordinary shares (In thousands of shares) | |
| Issued ordinary shares at 1 January | 87,778 |
| Changes during the year | - |
| Weighted average number of ordinary and diluted shares at 31 December | 87,778 |
* There are no dilutive factors.
NOTE 26 - FINANCIAL INSTRUMENTS
Liquidity risk
The table below summarizes the maturity profile of the Group's financial liabilities at 31 December 2008 and 2007 based on contractual undiscounted payments.
| Year ended 31 December 2008 | ||||||
| 1 | 1-2 | 2-5 | Above 5 | Total | Carrying | |
| year | years | years | years | amount | amount | |
| Thousands Euro | ||||||
| Interest-bearing loans from banks | 43,445 | 16,262 | - | - | 59,707 | 57,815 |
| Loans and amounts due to related parties and others | 5,854 | - | - | - | 5,854 | 5,854 |
| Trade accounts payable | 5,005 | - | - | - | 5,005 | 5,005 |
| Other liabilities | 2,442 | - | - | - | 2,442 | 2,442 |
| Finance lease liability | 2,083 | 10,669 | 1,089 | 32,660 | 46,501 | 15,190 |
| Total | 58,829 | 26,931 | 1,089 | 32,660 | 119,509 | 86,306 |
| Year ended 31 December 2007 | ||||||
| 1 | 1-2 | 2-5 | Above 5 | Total | Carrying | |
| year | years | years | years | amount | amount | |
| Thousands Euro | ||||||
| Interest-bearing loans from banks | 17,049 | 31,486 | - | - | 48,535 | 43,979 |
| Loans and amounts due to related parties and others | 4,749 | - | - | - | 4,749 | 4,749 |
| Trade accounts payable | 5,684 | - | - | - | 5,684 | 5,684 |
| Other liabilities | 1,944 | - | - | - | 1,944 | 1,944 |
| Finance lease liability | 1,692 | 5,999 | 7,871 | 35,371 | 50,933 | 16,183 |
| Total | 31,118 | 37,485 | 7,871 | 35,371 | 111.845 | 72,539 |
b. Currency and inflation risk
The tables below summarise the foreign exchange exposure on the net monetary position of each currency that is denominated in a currency other than the functional currency, expressed in the Group's presentation currency:
| Functional currency | ||||||
| Serbian Dinar | Hungarian Forint | Polish Zloty | Czech Crown | Romanian Lei | Other | |
| Year ended 31 December 2008 | ||||||
| Thousands Euro | ||||||
| Euro - net exposure | (14,322) | (4,624) | (4,787) | (5,312) | (8,342) | 476 |
| Year ended 31 December 2007 | ||||||
| Thousands Euro | ||||||
| Euro - net exposure | (11,249) | (4,879) | (4,635) | (4,217) | (7,278) | (97) |
Additionally the Company has exposure to the changes in the local index of retail in Belgrade, Serbia due to finance lease liability amounted to EUR 15,190 thousands as at 31 December 2008 (EUR 16,183 thousands as at 31 December 2007).
Sensitivity analysis:
The following table demonstrates the post-tax impact of:
15% strengthening of the Euro with Serbian Dinar, Hungarian Forint and Polish Zloty,
10% strengthening of the Euro with Czech Crown, Romanian Lei, other and
5% strengthening of the Serbian index.
With all other variables held constant (the impact on the Group's equity is the same).
| Increase in currency rate/ | Effect on post-tax profit | |||
| For the year ended 31 December | ||||
| Serbian index | 2008 | 2007 | ||
| Euro vs. DIN, HUF and PLN | 15% | (3,070) | (2,667) | |
| Euro vs. CZK, RON and other | 10% | (1,086) | (951) | |
| Serbian index | 5% | (684) | (728) | |
A 10%-15% weakening of the Euro and/or 5% weakening of Serbian index at 31 December would have had the equal but opposite effect on the post-tax profit to the amount shown above on the basis that all other variables remain constant
c. Interest rate risk
The following table sets out the carrying amount of the Group's financial instruments that are exposed to interest rate risk:
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Fixed rate | ||
| Financial assets | ||
| Cash and cash equivalents | 6,628 | 11,030 |
| Loans to related parties and other | 5,974 | 4,706 |
| Total financial assets | 12,602 | 15,736 |
| Financial liabilities | ||
| Loans and amounts due to related parties and other | 5,027 | 4,340 |
| Finance lease liability | 15,190 | 16,183 |
| Total financial liabilities | 20,217 | 20,523 |
| Floating rate | ||
| Financial assets | ||
| Restricted bank deposits and cash in escrow | 10,122 | 12,287 |
| Loans to related parties and other | 563 | 3,358 |
| Total financial assets | 10,685 | 15,645 |
| Financial liabilities | ||
| Interest-bearing loans from banks | 57,815 | 43,979 |
| Loans and amounts due to related parties and other | 827 | 409 |
| Total financial liabilities | 58,642 | 44,388 |
Interest on financial instruments classified as floating rate is reprised at intervals of less than six months. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument.
The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group's profit before tax (through the impact on floating rate borrowings). There is no impact on the Group's equity, except of the profit and loss.
| Effect on profit before tax | |||
| For the year ended 31 December | |||
| Increase in | 2008 | 2007 | |
| basis points | Thousands Euro | ||
| Variable rate interest of other currencies denominated financial instruments | 50 | (197) | (108) |
| Variable rate interest of HUF denominated financial instruments | 350 | (299) | (247) |
A decrease in 50 and 350 basis points at 31 December would have had the equal but opposite effect to the amount shown above on the basis that all other variables remain constant.
Fair values versus carrying amounts
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:
| 31 December | ||||
| 2008 | 2007 | |||
| Carrying | Fair | Carrying | Fair | |
| amount | value | amount | value | |
| Thousands Euro | ||||
| Financial assets | ||||
| Cash and cash equivalents | 6,628 | 6,628 | 11,030 | 11,030 |
| Restricted bank deposits and cash in escrow | 10,122 | 10,122 | 12,287 | 12,287 |
| Trade accounts receivable | 1,495 | 1,495 | 1,117 | 1,117 |
| Fixed rate loans to related parties and other | 5,974 | 5,974 | 5,416 | 5,416 |
| Floating rate loans to related parties and other | 563 | 563 | 2,648 | 2,648 |
| Total financial assets | 24,782 | 24,782 | 32,498 | 32,498 |
| Financial liabilities | ||||
| Floating rate interest-bearing loans from banks | 57,815 | 55,040 | 43,979 | 43,979 |
| Trade accounts payable | 5,005 | 5,005 | 5,684 | 5,684 |
| Fixed rate loans due to related parties and other | 5,027 | 5,027 | 4,340 | 4,340 |
| Floating rate loans due to related parties and other | 827 | 827 | 409 | 409 |
| Finance lease liability | 15,190 | 14,224 | 16,183 | 16,183 |
| Total financial liabilities | 83,864 | 80,123 | 70,595 | 70,595 |
NOTE 27 - SIGNIFICANT ACQUISITIONS, SALES AND JOINT VENTURES
Poland
a. In 2007, the Group purchased land for a new development project of approximately 300 residential units in a central district of Krakow, Poland.
The total purchase price of approximately EUR 6.9 million was paid in 2007.
The Group intends to develop a residential project of approximately 12,500 sqm on the acquired plots which have a total land area of 9,763 sqm.
b. On 18 February 2008 the Company, through a subsidiary, purchased 41,387 sqm of land in the Wilanow district of Warsaw, Poland.
The Group intends to develop the site, which is located close to the Wistula River and Wilanow Palace gardens, into a commercial centre. The total purchase price of the site was approximately EUR 4.5 million.
The Company classified the asset as investment property. As a result the Company recorded the difference between carrying amount of the investment property and its fair value as of 31 December 2008, amounting to approximately EUR 2,650 thousands, as a gain at the statement of profit and loss.
Serbia
c. The Group entered into a revised lease contract with the municipality of Belgrade on 11 December 2007 with respect to its property interest in Belgrade, Serbia. Under the revised agreement, the present value of the new lease payments is 16.7% lower than the previous present value; the decrease arises mainly from a deferral of payments. These changes caused income recognition of EUR 1.9 million due to re-measurement of the finance lease liability.
As a result of a win of a tender of an additional 1.5 hectares plot within the Marina Dorcol project area, the Group signed a new lease agreement under which it will be required to pay a total amount of approximately EUR 3.5 million; an amount of EUR 0.4 million of this was paid in February 2008 with the balance due over the next four years.
d. On 5 May 2008 the Group signed a revised lease agreement with the municipality of Belgrade for a 99-year lease on approximately 4.07 hectares of land in Marina Dorcol. The new agreement replaces two previously signed agreements.
Czech Republic
e. On 29 August 2006 the Group signed an agreement for the purchase of additional land in Prague, Czech Republic, for the development of approximately 100 residential units (see note 11.s and note 11.b.12).
In December 2007, the Group purchased the land for approximately EUR 4.8 million.
The Group intends to develop a residential project with a total area of approximately 9,000 sqm on the acquired land.
Romania
f. On 16 February 2007 the Group signed a final contract for the purchase of land for a new development project of approximately 1,160 residential units in a south suburb of Bucharest, Romania. The total purchase price of the land was EUR 1.937 million. The land was registered on the name Engel Rose on 19 February 2007.
The Group entitled to develop a residential project of approximately 116,000 sqm on the acquired plots with a total land area of 77,500 sqm
g. During 2008, following its decision to discontinue negotiations in respect of the MOU announced on 24 July 2006 for a project in Romania, the Group wrote down inventory in the amount of approximately EUR 259 thousands.
Bulgaria
h. In 2007, Enman sold the land owned E.G. Project EOOD in Sofia, Bulgaria.
The total sale price for the land was EUR 1.6 million.
i. In 2007 Enman sold the land owned E.G. Malinova Dolina EOOD in Sofia, Bulgaria.
The total sale price for the land was EUR 3.2 million.
j. In 2007 Enman sold the land owned of E.G. Company EOOD in Sofia, Bulgaria.
The total sale price for the land was EUR 1.65 million.
k. On 29 November 2007 the Group signed a preliminary agreement for the sale of the project of E.G. Panorama EOOD in Sofia, Bulgaria. During March 2008 the agreement was cancelled.
l. On 23 July 2008 the Group decided not to proceed with the Gorna-Banya project to develop 430 residential units in Sofia, Bulgaria (the "Project").
The Company's share of the costs incurred by the Project to date is approximately EUR 182 thousands which was written down in 2008 (see note 20).
Hungary
m. On 30 October 2007 the Group signed a long lease agreement with "World Class Klub Kft." to operate the gym nd pool complex which is being built by Engel Sun Palace Kft, a 100% owned subsidiary of Arces, in udapest, Hungary.
The agreement comes into force in 2008 when the company completed the construction of the gym.
The Company has reclassified the Gym and Pool complex, from inventory to investment property due to commencement of long term operating lease to third party. As a result the Company recorded the difference between carrying amount of the investment property and its fair value as of 31 December 2008, amounting to approximately EUR 237 thousands as a gain in the statement of profit and loss.
Germany
n. On 6 December 2005, the Company acquired a 77.3% beneficial interest in Engel Yzum Bnia Vebitzua Shnaym (94) Ltd. which owns land in the city of Raznitz, Germany.
During 2007, the Company reviewed the project and decided not to continue developing it. Accordingly the value of the project was written down by EUR 2.7 million.
Canada
o. On 29 November 2005, the Company acquired a 95% beneficial interest in ECG Trust. The Trust owns 3 residential development plots in Montreal, Canada.
The Group has decided not to continue to develop the projects in Montreal - Canada which it manages through a joint venture with Lehman Brothers. The Group's share in the joint venture's future distributions is 20%.
As a result of this decision, the book value of the 3 plots located in Montreal was decreased to its net realizable value. The total effect on the Group was a write-down of inventory in the amount of EUR 1,049 thousands in 2007.
In addition, provisions for future expenses, related to this discontinued activity, were recognised by the Group in its 2007 financial statements (see also note 20).
During 2008 the Group received an updated valuation of the plots, which resulted in the additional write-down of inventory in the amount of EUR 248 thousands.
NOTE 28 - OPERATING LEASE
The operating lease rentals are payable as follows:
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Less than one year | 4,002 | 968 |
| Between one and five years | 3,541 | 7,643 |
| More than five years | 8,511 | 9,204 |
| Total | 16,054 | 17,816 |
The Company leases a plot in Serbia (see note 27.d) which will be used for commercial and residential developing. The lease runs for a period of 99 years, with an option to renew the lease after that date. The lease payments are adjusted for changes in the retail price index in Belgrade, Serbia.
During 2008 an amount of EUR 932 thousands has been capitalised to housing units under construction in respect of operating lease payments (at 31 December 2007 an amount of EUR 2,184 thousands).
The lease of the portion which will be used for commercial development is treated as a finance lease.
The lease of the portion which will be used for development and sale of residential units is an operating lease
NOTE 29 - RELATED PARTIES
The main shareholder of the Company is Engel General Developers Ltd. (incorporated in Israel), which owns, as of 31 December 2008, 68.35 % of the Company's shares.
On 1 March 2007 Azorim investment, Development and Construction Ltd. (incorporated in Israel), whose ultimate partner is Boymelgreen Capital Ltd. (incorporated in Israel) acquired a controlling interest in the Group.
During 2008, Azorim investment, Development and Construction Ltd. acquired additional 1.4% of the Company shares.
Related party transactions
Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.
As of 31 December 2008, the Company has 5 directors (31 December 2007: 6 directors)
The annual salary cost of the directors in 2008 amounted to EUR 571 thousands (in 2007: EUR 821 thousands).
Bank loans in the amount of EUR 11,508 thousands (31 December 2007: EUR 6,840 thousands) are secured by guarantees provided by Engel Recourses and Developments Ltd. an indirect parent company of the Company (see also note 15)
Transactions with directors and senior employees
During 2008, the Company sold 2 vehicles to its former Chairman and former CEO for a total consideration of EUR 116 thousands.These transactions caused to the Company a gain of EUR 10 thousands.
On 16 May 2008 the Company established a share option programme for its Chief Executive Officer (CEO) to purchase shares of the Company. In accordance with the programme, during the years 2008-2011 options are exercisable at the market price of the shares at the date of grant plus 10%.
On 12 August 2008 the CEO of the Company resigned his position as director and CEO. The resignation was approved by the board of directors on 13 August 2008. As part of the resignation agreement, the CEO waived his rights to receive share options under the programme.
Trading transactions
The following trading transactions and balances with related parties are included in the financial statements:
| For the year ended 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Income statements | ||
| Gain from sale of property and equipment | (10) | - |
| Interest to parent (Engel General Developers Ltd.) | 109 | - |
| Interest on loans to jointly controlled entities | (398) | (171) |
| Total | (299) | (171) |
| 31 December | ||
| 2008 | 2007 | |
| Thousands Euro | ||
| Balance sheet | ||
| Loans to jointly controlled entities (see note 6) | 6,537 | 8,064 |
| Amounts due to parent (Engel General Developers Ltd.) (see note 15) | (677) | (74) |
| Other related parties (see note 15) | (142) | (288) |
| Total | 5,718 | 7,702 |
NOTE 30 - DISPOSAL OF SUBSIDIARY
On 19 April 2007 Enman acquired all of the shares in Engel Lylia s.r.l and Engel Crizantema s.r.l from the Company (see notes 27.i and 27.j) for an amount less than EUR 2 thousands in cash and also repaid all loans made by the Company to these entities.
The disposal had the following effect on the Company's assets and liabilities:
| Engel Lylia s.r.l | Engel Crizantema s.r.l | Total | |
| Thousands Euro | |||
| Inventories of housing units | (3,201) | (2,880) | (6,081) |
| Trade accounts receivable | (38) | (29) | (67) |
| Cash and cash equivalents | (18) | (27) | (45) |
| Interest-bearing loans from banks | - | 1,584 | 1,584 |
| Trade and other payables | 132 | - | 132 |
| Net identifiable assets and liabilities | (3,125) | (1,352) | (4,477) |
| Gain on disposal | (53) | - | (53) |
| Received consideration satisfied in cash | (3,178) | (1,352) | (4,530) |
| Cash disposal | 18 | 27 | 45 |
| Net cash inflow | (3,160) | (1,325) | (4,485) |
NOTE 31 - SEGMENT REPORTING
The Group comprises the following main business segments:
1. Residential- the residential segment includes purchasing, developing and selling real estate assets mainly in Central and Eastern Europe.
2. Commercial - The commercial segment includes the activity related to investment property in Serbia (see note 11.l), Poland (see note 11.w) and Hungary (see note 11.a.8).
The Group considers the Central and Eastern Europe to be one geographic region therefore no geographical segment information has been prepared.
The Company also has assets in Germany and in Canada. Due to the fact that the management of the Company decided not to develop in these countries, no information on these geographical regions has been provided under this note.
| Residential | Commercial | Consolidated | ||||
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |
| Thousands Euro | ||||||
| Revenues from external customers | ||||||
| Sale of housing units and lands | 22,949 | 15,577 | - | - | 22,949 | 15,577 |
| Management fees | 1,125 | 704 | - | - | 1,125 | 704 |
| Rent | 38 | 48 | 52 | - | 90 | 48 |
| Other | 39 | 67 | - | - | 39 | 67 |
| Change in fair value of investment property | - | - | 2,076 | 2,295 | 2,076 | 2,295 |
| Total revenues from external customers | 24,151 | 16,396 | 2,128 | 2,295 | 26,279 | 18,691 |
| Inter-segment revenue | - | - | - | - | - | - |
| Total revenues | 24,151 | 16,396 | 2,128 | 2,295 | 26,279 | 18,691 |
| Segment result | (2,488) | (4,401) | 2,098 | 2,295 | (390) | (2,106) |
| Net financing costs | - | - | - | - | (8,703) | (2,037) |
| Share in profit (loss) of associate | 1 | (27) | - | - | 1 | (27) |
| Income taxes | (487) | (593) | ||||
| Loss for the year | (9,579) | (4,763) | ||||
| Segment assets | 94,599 | 94,894 | 31,665 | 27,936 | 126,264 | 122,830 |
| Investment in associates | - | 51 | - | - | - | 51 |
| Unallocated assets | 9,689 | 13,829 | ||||
| Total assets | 135,953 | 136,710 | ||||
| Segment liabilities | 37,683 | 41,699 | - | - | 37,683 | 41,699 |
| Unallocated liabilities | 65,671 | 50,198 | ||||
| Total liabilities | 102,354 | 91,897 | ||||
| Capital expenditure | 50 | 184 | 4,495 | - | 4,545 | 184 |
| Depreciation | 102 | 117 | - | - | 102 | 117 |