Kimberly Enterprises Regulatory News (KBE)

Kimberly Enterprises N.V.

Results for the year ended 31 December 2012

Kimberly Enterprises N.V.  ("Kimberly" or "the Company"), the AIM listed Eastern European property developer (KBE.L), announces its results for the year ended 31 December 2012.

Financial summary:

Total revenue for the year ended 31 December 2012 was €2.6 million compared to €4.1 million in 2011, reflecting sales of housing units.

The negative gross margin on the sale of housing units, including management fees, was €0.3 million in 2012 compared to a negative gross margin of €1.0 million in 2011. The negative gross margin of 10 per cent for 2012 (2011: negative gross margin of 24 per cent) followed the decrease in the activity compared to 2011.

Total gross profit for 2012 was €0.8 million (2011: €4.3 million gross loss) which reflects a positive investment property revaluation of €1.6 million for 2012 compared to a negative investment property revaluation of €1.4 million in 2011 and a decrease in write down of inventory in 2012 (write down of €0.5 million in 2012 compared to €2.0 million in 2011).

Most of the write-down for 2012 relates to the projects in Romania. The positive revaluation of the investment property for 2012 reflects the change in the Serbian market.

Selling, general and administrative expenses of €1.8 million (2011: €2.2 million) include a profit from reserve in provision of €0.2 million for 2012 in respect of legal charges (2011: €0.2 million cost). The change is mainly caused by decreasing the staff and cutting current expenses in each country.

Net financing costs increased to €7.8 million (2011: €6.6 million). This reflects a loss due to a increase in the finance costs related to the finance lease in Serbia (predominantly finance costs in relation to the inflation in Serbia) of €4.9 million (2011: €3.5 million) and an increase in the foreign exchange losses to €0.9 million (2011: €0.5 million).

As a result of the above, the loss before tax for the year decreased to €6.7 million (2011: €13.3 million).

Inventories of housing units at 31 December 2012 went down to €23.5 million from €31.0 million at 31 December 2011.

Assets held for sale at 31 December 2012 and 31 December 2011 represents the plot in Poland for which during 2011 Engel Resources and Development Ltd ("ERD") signed a preliminary agreement to sell it for a total consideration of €4.14 million. 

After the reporting period, the final sale agreement has been signed and a total amount of €2.2 million was transferred to ERD.

Net bank debt (liabilities to the bank offset by restricted bank deposits, cash in escrow, cash and cash equivalents) of Kimberly and its subsidiary companies ("Group") was €5.4 million at 31 December 2012 compared to net debt of €11.6 million at 31 December 2011. 

General

As of 31 December 2012, the financial condition of the Company remains weak and it is not able to meet its obligations to its employees and service providers as they fall due. Companies within the Group are in breach of:

·; Interest bearing loans from banks - totaling €6 million.

·; The requirement to pay lease payments totaling €6.4 million (relating to the lease of the Marina Dorcol project in Belgrade, Serbia). After the reporting date the Company breached is requirements to pay an additional amount of €1.4 million.

At 31 December 2012 the Group has current liabilities totaling €52.4 million, which exceeds its current assets amounting to €33.9 million and a negative equity which amounts to €13.1 million.

In order to manage its financial situation the Company has requested ERD, the parent company of the Company's immediate parent company, Engel General Developers Ltd., to provide additional financial assistance to fund the Company's immediate liabilities.

During the reporting period ERD provided several bridge loans in the total amount of approximately €1.1 million. After the reporting period the Company received additional loans from ERD in the total amount of €0.3 million regarding the related guarantees granted to ERD.

During the reporting period the Company received several bridge loans from GBES in the total amount of €80,000.

The management is also examining other solutions to fund the Company's immediate liabilities and to resolve its financial situation.

Poland

GDP growth in 2012 was 2.4 per cent and the rate of inflation was 3.6 per cent. Forecast GDP growth for 2013 is 2.14 per cent.

During 2011 ERD signed a preliminary agreement to sell the plot of Wilanow 2 in Poland for a total consideration of €4.14 million. The Group has recognized a loss of approximately €0.8 million in respect of this disposal in the financial statements for the year ended at 31 December 2011.

After reporting period, the final sale agreement was signed, and the net proceeds of the sale were deducted from the total debt of the Group towards ERD.

During the reporting period, a receiver was appointed by a court in Poland due to the overdue bank loan in relation to Palace Engel III sp zoo ("Krakow"), a wholly owned subsidiary of the Company, which owns the Krakow project in Poland.

The bank loan is non-recourse to the rest of the Group.

As a consequence the Company has ceased to consolidate the entity in its consolidated financial report. The Group recognized a profit on the book value of its investment in Krakow as a result of this appointment, in the amount of €1.8 million in the statement of profit and loss under "other incomes (losses)".

Serbia

GDP in 2012 was -0.5 per cent and the rate of inflation was 6.2 per cent. Forecast GDP growth for 2013 is 1.1 per cent.

Since January 2011, the Group has been in breach of the requirement to pay the monthly lease payments. As of 31 December 2012 the total breach was €6.4 million. The Group is in the process of negotiation to restructure the liability.

Czech Republic

GDP in 2012 was -1.0 per cent and the rate of inflation was 3.3 per cent. Forecast GDP growth for 2013 is 1.0 per cent.

There are 4 additional projects in Prague in pre-development stage with a total of 469 potential units (Phase 4 of Safranka, Phase 2 of Vokovice, Veleslavin and Troja).

During 2012 the Company signed loan agreement with a lender bank in order to finance the construction of Phase 1 of Veleslavin producing a total of 77 units with an estimated sales value of €17 million (17 per cent owned by the Company). The Company expects contract work to commence on the site during 2013.

All projects in the Czech Republic are part of either Arces or ENMAN joint ventures.

Romania

GDP in 2012 was 0.9 per cent and the rate of inflation was 3 per cent. Forecast GDP growth for 2013 is 2.5 per cent.

Due to unstable economic conditions in the country, the Company did not start the development of the existing plots in Romania.

Hungary

GDP in 2012 was -1.0 per cent and the rate of inflation 5.6 per cent. Forecast GDP growth in 2013 is 0.8 per cent.

After the reporting period, a receiver was appointed by court in Hungary due to an appeal of one of the entity's creditors in the jointly controlled entity, Engel Ingatlan Ingatlanfejlesztő Kft. ("Ingatlan"), which owns the Punko project in Hungary.

As a consequence the Company will cease to consolidate the jointly controlled entity in the consolidated financial statement of 2013. The Group will recognise a profit on the book value of its investment in Ingatlan as a result of this appointment, in the estimated amount of €2.4 million (the Company's share is €0.6 million).

Enquiries:

Board statement

"Despite the difficulties the Group is facing, we are sure that together with GBES Limited, the Company's ultimate shareholder, we will be able to look forward and continue to develop additional projects of the Company's portfolio. In order to strengthen the Company's cash position, the management expects that several plots included in the Company's portfolio will be sold during the course of 2013.

The Management wants to thank and deeply appreciates Group staff for their charitable contributions of time, energy, and talent in such challenging period".

Kimberly Enterprises N.V.

Consolidated statement of financial position

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Consolidated income statement

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Consolidated statement of comprehensive income

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Consolidated statement of changes in equity

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Consolidated statement of cash flows

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Notes to the consolidated financial statements

For the year ended 31 December 2012

NOTE 1 - REPORTING ENTITY

Kimberly Enterprises N.V. (the "Company") is a Company domiciled in The Netherlands. The Company owns subsidiary companies and has jointly controlled entities mainly in 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 and for the year ended 31 December 2012 comprise the Company and its subsidiaries and the Group's interests in associates and jointly controlled entities (collectively, the "Group").

At the Annual General Meeting of the Company held on 7 March 2012 it was approved to change the name of the Company from Engel East Europe N.V. to Kimberly Enterprises N.V.

Copies of these consolidated financial statements of the Group are available on the Company's website (www.kimberly-enterprises.com) and upon request from the Company's registered office at Keizersgracht 616, 1017 ER Amsterdam, The Netherlands.

NOTE 2 - BASIS OF PREPARATION

a. Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ("EU IFRS").

The consolidated financial statements were authorized for issue by the Board of Directors on 18 March 2013.

These consolidated financial statements have been prepared by the Company. These consolidated financial statements are not intended for statutory filing purposes. The Company is required to file consolidated financial statements prepared in accordance with The Netherlands Civil Code.

At the date of preparing these financial statements the Company had not yet filed consolidated financial statements for the years ended 31 December 2011 and 31 December 2012 in accordance with The Netherlands Civil Code.

b. Going concern

The consolidated financial statements have been prepared on a going concern basis, which assumes that the Group will be able to rise funding to meet its obligations to the banks, its employees and service providers as disclosed in Note 4.b.

The financial position of the Group continued to be weak during the reporting period, the Group is in breach of:

·; Interest bearing loans from banks totaling EUR 6,000 thousands - see Note 16.

·; The requirement to pay lease payments totaling EUR 6.4 million (relating to the lease of the Marina Dorcol project in Belgrade, Serbia). After the reporting date the Company breached is requirements to pay an additional amount of EUR 1.4 million - see Note 17.

Management considers it is unlikely that some of the projects will generate sufficient cash inflows to repay their obligations when they fall due. Management believes that the above financial position of the Group indicates the existence of material uncertainties which cast significant doubt on the Company's ability to continue as a going concern.

The notes to the consolidated financial statements (in particular see Notes 4.b, 16 and 17) disclose all the key risk factors, assumptions made and uncertainties of which the management of the Company aware that are relevant to the Company's ability to continue as a going concern, including significant conditions and events.

Should the going concern assumption not be appropriate, adjustments would have to be made to reflect a situation where the assets may need to be realized other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the consolidated financial statements.

c. Basis of measurements

The consolidated financial statements have been prepared on the historical cost basis except for the following material item in the statements of financial position:

·; Investment property which is measured at fair value.

d. Functional and presentation currency

These consolidated financial statements are presented in Euro (EUR), which is the Company's functional currency. All financial information presented in Euro has been rounded to the nearest thousands, except where otherwise indicated.

The functional currency of each subsidiary and jointly controlled entity is the local currency in the specific country in which it is located.

e. Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRSs as adopted by the EU requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Information about accounting estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in Note 37.

f. Operating cycle

The Group is involved in projects some of which may take 5-6 years to complete. The cost of inventory and loans which finance residential development projects are presented as current assets and liabilities (see Note 3.f).

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently during the periods presented in these consolidated financial statements and have been applied consistently by all Group entities.

a. Basis of consolidation

1. Business combinations

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.

The Group measures goodwill at the acquisition date as:

·; the fair value of the consideration transferred; plus

·; the recognized amount of any non-controlling interests in the acquire; plus

·; if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquire; less

·; the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.

2. Subsidiaries

Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The accounting policies of the subsidiaries have been changed when necessary to align them with the policies adopted by the Group.

3. Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of another entity.

Other investments in associates are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The Group's investment includes goodwill identified on acquisition, net of any accumulated impairment losses.

The consolidated financial statements include the Group's share of the profit and loss and other comprehensive income, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence 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 investments, 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.

4. Jointly controlled entities

Entities which are jointly controlled with another party or parties through the establishment of a contractual agreement ("joint ventures") are accounted for using the proportional consolidation method of accounting. In any period where there is a change of economic interest or a change in estimate of economic interest, then the corresponding adjustment is recognized in the income statement.

The financial statements of joint ventures are included in the consolidated financial statements from the date that joint control commences until the date that joint control ceases.

Where necessary, adjustments are made to the financial statements of subsidiaries, associates and joint ventures to bring the accounting policies used into line with those used by the Group in the consolidated financial statements.

5. Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

6. Loss of control

On the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary.

Any surplus or deficit arising on the loss of control is recognized in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level of influence retained.

a. Foreign currency

1. Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity investments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income.

2. Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euro at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to euro at exchange rates at the dates of the transactions.

Foreign currency differences are recognized in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. However, if the operation is a non-wholly-owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only a part of its investment in an associate that includes a foreign operation while retaining significant influence, the relevant proportion of the cumulative amount is reclassified to profit or loss.

When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognized in other comprehensive income, and presented in the translation reserve in equity.

The functional currencies of the Group entities are: Hungarian Forint ("HUF"), Czech Crown ("CZK"), Polish Zloty ("PLN"), Canadian Dollar ("CAD"), Romanian Lei ("RON"), New Israeli Shekel (NIS) and Serbian Dinar ("CSD").

b. Financial instruments

1. Non-derivative financial assets

The Group initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The Group classifies non-derivative financial assets into the following categories: cash and cash equivalents, restricted bank deposits, cash in escrow and loans and receivables.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.

Restricted bank deposits and cash in escrow

Restricted bank deposits comprise of deposits in banks that are pledged to secure banking facilities for the Group and to which the Group does not have access.

Cash in escrow represents cash paid into an escrow account for security of future interest bank payments.

Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.

Loans and receivables comprise cash and cash equivalents and trade and other receivables.

2. Non-derivative financial liabilities

The Group initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The Group classifies non-derivative financial liabilities into the following categories: loans and borrowing, bank overdrafts, and trade and other payables. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method.

Trade payables

Trade payables are not interest bearing and are recognized initially at fair value, subsequent to which they are stated at amortized cost.

Interest-bearing loans from banks

Interest-bearing loans from banks are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the income statement over the period of the borrowings on an effective interest basis.

3. Share capital

Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effects.

c. Property and equipment

1. Recognition and measurement

Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the following:

·; the cost of materials and direct labor;

·; any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located;

·; capitalized borrowing costs.

Cost also may include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.

Any gain or loss on disposal of an item of property and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognized in profit or loss.

2. Depreciation

Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.

The estimated useful lives for the current and comparative periods are as follows:

·; Furniture, office equipment and other assets 3-15 years

Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

d. Investment property

Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at cost on initial recognition and subsequently at fair value with any change therein recognized in profit or loss.

Cost includes expenditure that is directly attributable to the acquisition of the investment property. The cost of self-constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for their intended use and capitalized borrowing costs.

Any gain or loss on disposal of an investment property (calculated as the difference between the net proceeds from disposal and the carrying amount if the item) is recognized in profit and loss. When an investment property that was previously classified as property, plants and equipment is sold, any related amount included in the revaluation reserve is transferred to retain earnings.

An external, independent valuation companies, having appropriate recognized professional qualifications and recent experience in the location and category of property being valued, value the Group's investment properties. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably.

In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. A market yield is applied to the estimated rental value to arrive the gross property valuation. When actual rents differ materiality from the estimated rental value, adjustments are being made to reflect actual rents.

Any gain or loss arising from a change in fair value is recognized in the profit or loss in the period in which it arises. Rental income from investment property is accounted for as described in Note 3.l.

e. Inventories of housing units

Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-in first-out principle, and includes direct materials, direct labor costs, subcontracting costs and those direct overheads which have been incurred in bringing the inventories to their present condition.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset (see Note 3.m).

The Group is involved in projects some of which may take several years to complete. The cost of inventory and loans which finance residential development projects are presented as current assets and liabilities, unless they are not expected to be realized within the operating cycle of 5-6 years and then they are classified as non-current.

f. Impairment

The carrying amounts of the Group's assets, other than inventories (see Note 3.f), investment property (see Note 3.e) and deferred tax assets (see Note 3.n) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated.

For goodwill, that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date.

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognized in the income statement.

Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

Calculation of recoverable amount

The recoverable amount of the Group's receivables carried at amortized cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted.

The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specified to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Reversal of impairment

An impairment loss in respect of a receivable carried at amortized cost is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. Such reversal is recognized in the income statement.

An impairment loss in respect of goodwill is not reversed.

In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

g. Assets held for sale or distribution

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale or distribution rather than through continuing use, are classified as held for sale or distribution. Immediately before classification as held for sale or distribution, the assets, or components of a disposal group, are remeasured in accordance with the Group's accounting policies. Thereafter generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets and investment property, which continue to be measured in accordance with the Group's accounting policies. Impairment losses on initial classification as held for sale or distribution and subsequent gains and losses on remeasurement are recognized in profit or loss. Gains are not recognized in excess of any cumulative impairment loss.

Once classified as held for sale or distribution, intangible assets and property and equipment are no longer amortized or depreciated, and any equity-accounted investee is no longer equity accounted.

h. Employee benefits

Short-term employee benefit

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

i. Provisions and warranties

A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.

Provision for warranty costs are recognized at the date of sale of housing units, at the Company's best estimate of the expenditure required to settle the Group's liability. Such estimates take into consideration warranties given to the Group by subcontractors.

j. Leased assets

1. Operating leases

The Group's leases of assets in which substantially all the risks and rewards of ownership are retained by the other party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are added to inventory where these costs will be recovered in future sales.

2. Finance leases

The Group's leases of assets in which the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in current and non-current borrowings. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Investment properties held under finance leases are carried at their fair value.

k. Revenue

Revenue from the sale of housing units is recognized when the risks and rewards of ownership have been transferred to the buyer provided that the Group has no further substantial acts to complete under the contract.

Rental income from investment property is recognized in the income statement on a straight- line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income.

Other revenues, including project management fees, are recognized in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided, and are measured at the fair value of the consideration received or receivable for goods and services provided in the normal course of business, net of VAT and other sales related taxes.

No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or continuing management involvement with the assets.

l. Finance income and finance costs

Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss, using the effective interest method.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions and impairment losses recognized on financial assets.

Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing costs may continue until the assets are substantially ready for their intended use. If the resulting carrying amount exceeds its recoverable amount, an impairment loss is recognized. The capitalization rate is arrived at by reference to the actual rate payable on borrowings for development purposes or, with regard to that part of the development cost financed out of general funds, to the average rate.

Borrowing costs that are not directly attributable to the acquisition or construction of a qualifying asset are recognized in profit or loss using the effective interest method.

m. Tax

Tax expense comprises current and deferred tax. Current tax and deferred tax is recognized in profit or loss except to the extent that these relate to a business combination, or items recognized directly in equity or in other comprehensive income.

1. Current tax

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends.

2. Deferred tax

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:

·; temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

·; temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and

·; Taxable temporary differences arising on the initial recognition of goodwill.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. For investment property that is measured at fair value, the presumption that the carrying amount of the investment property will be recovered through sale has not been rebutted.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

2. Tax exposures

In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment in estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.

n. Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

o. Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. All operating segments' operating results are reviewed regularly by the Group's CEO to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available.

Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Company's headquarters), head office expenses, and tax assets and liabilities.

Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment, and intangible assets other than goodwill.

NOTE 4 - FINANCIAL RISK MANAGEMENT

Overview

The Group has exposure to the following risks from its use of financial instruments:

·; Credit risk

·; Liquidity risk

·; Market risk

This note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies and processes for measuring and managing risk, and the Group's management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

The Group's risk management policies are established to identify and analyses the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

The Group Audit Committee oversees how management monitors compliance with the Group's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group.

a. Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers.

There are no significant concentrations of credit risk. The Group exposure to credit risk in most of the countries of activity is minimized by the requirement for customers to pay most of the amount due on purchased housing units prior to handover.

The Group limits its exposure to credit risk arising from bank deposits by transacting only with reputable bank counterparties that have a credit rating higher than that of the Group. Additionally, the Group reduces its exposure to credit risk by depositing its financial funds in different and independent bank institutions.

The carrying amount of financial assets represents the maximum credit exposure of the Group at the reporting date.

b. Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

The Group relies on external funding to finance its current and future development projects. Future acquisitions of investment properties and land designated for residential projects and the ability of the Group to expand its operations is partly dependant on its ability to obtain future bank financing. The Group intends to repay its existing bank loans from its operating activity (mainly sales of housing units and undeveloped plots). Despite the tightening of the availability of credit, the Group has so far been able to secure additional project funding when needed largely because the Group's bank financing is project-specific and generally secured by the physical assets of the relevant project company. However, there is no assurance that banks will provide funding for new projects or prolong overdue loans.

At 31 December 2012 the Group has current liabilities totaling EUR 52,412 thousands, which exceeds its current assets amounting to EUR 33,946 thousands and a negative equity which amounts to EUR 13,115 thousands.

As of 31 December 2012, the financial condition of the Company remains weak and it is not able to meet its obligations to its employees and service providers as they fall due. The Group is in breach of:

·; Interest bearing loans from banks - totaling EUR 6,000 thousands - see Note 16.

·; The requirement to pay lease payments totaling EUR 6.4 million (relating to the lease of the Marina Dorcol project in Belgrade, Serbia). After the reporting date the Company breached is requirements to pay an additional amount of EUR 1.4 million - see Note 17.

1. Interest bearing loans from banks

In respect of breached projects loans totaling EUR 5,879 thousands (see Note 16) the management considers it is unlikely that the projects will generate sufficient cash inflows to repay all obligations which fall due within one year. The Group is discussing possible solutions with the financing banks, including extension of the loans, as well as potential sales of the projects.

Whilst in the past financing banks have agreed to prolong existing loan facilities, there is no assurance that these banks will be prepared to extend existing loan facilities beyond currently committed maturity dates. In the event that a bank is not willing to extend a project loan, it has the option to call in its security. In most cases these loans are secured by the underlying project company's assets only. Loans granted by the financing banks to the projects are non-recourse loans, except for:

·; ENMAN B.V., a jointly controlled entity, has provided guarantees for interest payments and costs overruns, to the bank which finances the project Ingatlan in Budapest, Hungary, the amount of the loans as of the reporting period is EUR 6,099 thousands (the Company's share is EUR 1,525 thousands). After the reporting period following the appeal of one of the jointly controlled entity's creditors, a bankruptcy procedure started, see also Note 39.a.

In all other cases, the exposure is limited to the value of the specific securities pledged in each project.

Arces International B.V., a jointly controlled entity, has an exposure as per the bank loans which financed the project in Gyor Hungary in the amount of EUR 12,648 thousands (the Company's share is EUR 6,324 thousands). The bank claims that the loans were additionally guaranteed by Arces International B.V. The company has disputed the validity of this guarantee with the bank. As well there is legal dispute between the Company and Heitman regarding the responsibility of this guarantee, however, no official legal claim has been filed by any of the parties. A relative provision was booked in the financial statements according to the management best estimation.

Management considers it is unlikely that some of the projects will generate sufficient cash inflows to repay all obligations when they fall due. Management believes that the above mentioned conditions indicate the existence of material uncertainties which cast significant doubt on the Company's ability to continue as a going concern.

1. Lease agreement

Since January 2011, the Group has been in breach of the requirement to pay the monthly lease payments. As of 31 December 2012 the total breach was EUR 6.4 million.

The consolidated subsidiary, Marina Dorcol d.o.o. is exposed to the following sanctions:

·; Termination of the lease contracts which will cause the loss of the right to use of land;

·; In the case of termination the final result of termination would be restitution of the amounts paid by Marina Dorcol d.o.o (95% interest subsidiary) based on the agreements with the municipality, decreased for the amount of compensation for usage of such land for the period of duration of lease and for compensation of damages which occurred for the municipality, if any.

Should any party commence bankruptcy procedure against Marina Dorcol, the Company would lose control of Marina Dorcol and would be exposed to uncertainty with respect to compensation from the bankruptcy estate, since the Company will be in the "last row of creditors".

In case that the Serbian municipality will wish to terminate the lease contract, it has to give to the Company a written notice. The Company will have 90 days to remedy the breach in order to avoid the agreement termination. However, the management of the Company estimates, inter alia, based on its legal advisor that it is not likely the Serbian municipality will act to terminate the agreement between the parties and that bankruptcy procedure against Marina Dorcol will commence.

In order to manage its financial situation the Company has requested Engel Resources and Development Ltd., the parent company of the Company's immediate parent company, Engel General Developers Ltd., ("ERD") to provide additional financial assistance to fund the Company's immediate liabilities.

During the reporting period ERD provided several bridge loans in the total amount of approximately EUR 1.1 million. After the reporting period the Company received additional loans from ERD in the total amount of EUR 0.3 million (see Note 33(3) regarding the related guarantees granted to ERD).

During the reporting period the Company received several bridge loans from GBES in the total amount of EUR 80 thousands.

The management is also examining other solutions to fund the Company's immediate liabilities and to resolve its financial situation.

Should the going concern assumption not be appropriate, adjustments would have to be made to reflect a situation where the assets may need to be realized other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the consolidated financial statements.

c. Market risk

Market risk is the risk that changes in market prices, (such as foreign exchange rates and interest rates) will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable local economic parameters, while optimizing the return.

Currency and inflation risk

The Group presents its financial statements in Euro. However, the Group's operations are based locally in a number of different countries including Hungary, Romania, the Czech Republic, Serbia and Poland, and therefore the Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of Group entities, primarily the Euro. The Group's financial results could, therefore, be adversely affected by fluctuations in the exchange rates between Euro and local currencies. The Group mitigates its foreign exchange risk by financing development projects through financial liabilities that are denominated in the currency of the country the project is located in and in which revenues from the projects will be generated.

Following the loans granted by Engel Resources and Development Ltd. (see Note 33) the Group is exposed to the changes in arising from changes in the retail prices index in Israel and the change in the exchange rates of the New Israeli Shekel.

The Group is exposed also to the changes in future lease payments arising from changes in the retail prices index in Belgrade, Serbia, related to its finance lease of investment property in Belgrade, Serbia.

The Group does not currently engage in hedging or use any other financial arrangement to minimize currency exchange and the inflation risks or the translation risk related to foreign operations.

Interest rate risk

The Group's interest rate risk arises mainly from short-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group does not currently engage in hedging or use any other financial arrangement to minimize the exposure to these risks.

c. Capital management

The Group's objectives when managing capital are to safeguard the group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stockholders and to maintain an optimal capital structure to reduce the cost of capital.

Due to current financial position of the Group, the aim of the management is to enable the Group to continue and to operate as a going concern. Currently no specific target of return on capital was determined.

There are no externally imposed capital requirements on the Company.

There were no changes in the Group's approach to capital management during the year.

NOTE 5 - CASH AND CASH EQUIVALENTS

The balance as of 31 December 2012 includes an amount of EUR 134 thousands (2011: EUR 166 thousands) which is related to the project Safranka in the Czech Republic. The balance is available only for use in this project and cannot be used for any other purpose prior to the repayment of the bank loan which finances this project, after the reporting period the above balance was released and free for any use following the full repayment of the bank loan, see also Note 16(5).

NOTE 6 - RESTRICTED BANK DEPOSITS AND CASH IN ESCROW

Restricted bank deposits - the Group pledged all restricted bank deposits to secure credit facilities granted to the Group by the banks.

Cash in escrow in Euro - the balance as of 31 December 2012 includes an amount of EUR 223 thousands represents cash which has a lien issued against by one of the project's previous contractors, see also Note 32.e.

NOTE 7 - TRADE RECEIVABLES

The balances as of 31 December 2011 represent mainly receivables from customers for the sale of housing units.

NOTE 8 - PREPAYMENTS AND OTHER ASSETS

NOTE 9 - LOANS TO RELATED PARTIES

No repayment date has been set. Repayment is expected from the proceeds of the sale of the related projects financed by the loans.

(a) Impairment - represents loans granted by the Company to jointly controlled entities and the Management of the Company estimates that these loans are not recoverable.

NOTE 10 - INVENTORIES OF HOUSING UNITS AND LAND

(a) Write-down of inventory - mainly represents the adjustment of the inventories to its net realizable value when estimated lower than cost. For determining the net realizable value, the Company used the services of an external independent valuator or its estimations for the project future results (see also Notes 23 and 37).

(b) Non-current asset - the management does not predict that the asset located in Romania will be sold at the normal operating cycle, thus the asset was classified as non-current inventory during the reporting period.

The group intention is to develop or sell the plots and continually examining the possibilities to do so.

The Group has pledged inventories having a carrying amount of EUR 13,045 thousands to secure credit facilities granted to the Group by the banks (2011: EUR 19,730 thousands).

As of 31 December 2012 the amount of inventory that is carried at net realizable value is EUR 8,836 thousands (2011: EUR 13,659 thousands).

The net realizable value of the inventory is based on the Company's best estimation of the expected selling price and costs of completion less selling expenses. In determining the expected selling price of housing units the Company based its estimations on actual selling prices during the period. For determining the net realizable value of empty plots, in most cases, the Company uses the services of an external, independent valuation companies, having appropriate, recognized professional qualifications and recent experience in the location and category of the inventory being valued (see Note 37(3)).

Inventories includes an amount of EUR 8,993 thousands which relates to the part of the plot in Serbia and planned for developing of residential units, this part of plot, was valued by an independent valuer ("CBRE d.o.o") which estimated its fair value at the amount of EUR 24,500 thousands as of 31 December 2012.

NOTE 11 - INVESTMENT PROPERTY

The movements of the investment property balances were as follows:

As of 31 December 2012 the Group holds one plot in Serbia for purposes of commercial development.

The Group decided to treat this asset as investment property because the Group's intention was to hold the property for long term, for capital appreciation or rental.

In estimating the property value in Serbia using the residual method, the appraiser 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 17.42%. 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.

Information regarding ownership rights for investment property:

Amounts recognised in the profit or loss: (a)

(a) Includes also the results of the investment property which is classified under "held for sale", see Note 35.

NOTE 12 - PROPERTY AND EQUIPMENT

(a) See Note 34.a

NOTE 13 - 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:

The following table sets out the Group's deferred tax assets and liabilities, net of off-sets:

(a) See Note 34.a

The Group recognized deferred tax assets in the amount of EUR 2,049 thousands over losses totalling to EUR 20,375 thousands, which will expire in the following years:

Unrecognised deferred tax assets

Deferred tax assets have not been recognised in respect of tax losses amounting to EUR 13,883 thousands as of 31 December 2012 (2011: EUR 13,026 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 14 - SUBSIDIARIES AND JOINT VENTURES

As at 31 December 2012 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 HCEPP II Luxembourg Master S.à r.l ("Heitman") each hold 50% of Arces' shares.

Arces is considered a jointly controlled entity.

During the reporting period Heitman has signed with related party agreement of selling it rights in Arces, see Note 33(3).

Arces holds the following subsidiaries, each of which is wholly owned by Arces:

1. Engel Sun Palace Kft. ("Sun Palace") - built a mix-use project with a majority of residential in Budapest, Hungary

2. Palace Engel Dejvice s.r.o. ("Dejvice") - through its wholly owned subsidiary Palac Engel Safranka s.r.o. ("Safranka") - built a residential project in Prague, Czech Republic.

3. Palace Engel Estate s.r.o. ("Vokovice") - built a residential project in Prague, Czech Republic.

4. Palace Engel Vokovice s.r.o. - is planning to build the third building in the project Vokovice in Prague, Czech Republic.

5. Palace Engel I S.p. Z.o.o. ("Zabky") - built a residential project in Warsaw, Poland.

6. Engel Apartmenty Emilii Plater S.p. Z.o.o. ("Emilii Plater") - built a residential project in Warsaw, Poland.

7. Engel HÁZ Ingatlanfejlesztő Kft. ("Haz") - inactive.

The following amounts are net amounts included in the Group's financial statements as a result of the proportionate consolidation of Arces:

The Group's proportionate share of non-current assets of Arces includes the relevant proportion of an investment in equity accounted investees (see Note 15).

b. ENMAN B.V. ("ENMAN") - holding company, Amsterdam, The Netherlands. The Company and HEPP III Luxembourg Master S.à r.l. ("Heitman") each hold 50% of ENMAN's shares.

On July 2010 the Company signed an amendment to its joint venture agreement with Heitman according to which the Company's share in profit distributions from ENMAN are 25% and the Company's share in profit distributions from "Koncern" project in Czech Republic are 50%.

ENMAN is considered a jointly controlled entity:

During the reporting period Heitman has signed with related party agreement of selling it rights in Arces, see Note 33(3).

ENMAN holds the following subsidiaries, each of which is wholly owned by ENMAN:

1. Palace Engel Wilanow 1 Sp.z o.o. ("Wilanow") - plans to build a residential project in Warsaw, Poland.

2. Engel Ingatlan Ingatlanfejlesztő Kft. ("Ingatlan") - built a residential project in Budapest, Hungary, after the reporting period the company entered into a bankruptcy procedure, see also Note 39.a.

3. Palace Engel Veleslavin a.s. ("Veleslavin") and Palace Engel Villa s.r.o. ("Villa") - plan to build a residential project in Prague, Czech Republic.

4. Engel Lylia s.r.l ("Lylia") - plans to build a residential project in Bucharest, Romania.

5. 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.

6. Troja Gardens s.r.o ("Koncern") - plans to build a residential project in Prague, Czech Republic.

The following amounts are net amounts included in the Group's financial statements as a result of the proportionate consolidation of ENMAN:

a. ECG Trust Canada Holding Trust ("ECG") - 95% interest subsidiary - a holding trust.

ECG holds 20% interest in future distributions of a 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") represented by Silverpeak Real Estate Partners ("Silverpeak").

The above mentioned shares of each investor are relevant till the initial investment returned and after that the future distributions will be 50% to each party.

MLP holds (directly and indirectly) 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 Condominiums Inc. - 99.99% in the share capital - beneficial title holder company, Canada.

The following amounts are net amounts included in the Group's financial statements as a result of the proportionate consolidation of MLP:

Subsidiaries:

c. Palace Engel s.r.o. ("Prokopsky") - 64% interest subsidiary - built a residential project in Prague, Czech Republic (see also Note 32.d).

d. Palace Engel Development s.r.o. ("Barandov") - 64% interest subsidiary- built a residential project in Prague, Czech Republic (see also Note 32.d).

e. Engel Management s.r.o. ("DA") - a wholly owned subsidiary - management company, Czech Republic.

f. Burlington Hungary Kft. ("Burlington") - a wholly owned subsidiary - management company, Hungary.

g. Turlington Ingatlanfejlesztő Kft. ("Turlington") - a wholly owned subsidiary - management company, Hungary.

h. Engel Management S.p. Z.o.o - a wholly owned subsidiary - management company, Poland.

i. Marina Management doo. ("Marina Management") - a wholly owned subsidiary - management company, Serbia.

j. Marina Dorcol doo. ("Marina Dorcol") - 95% interest subsidiary - plans to build mix-use project with a majority of residential in Belgrade, Serbia.

k. Engel Orchidea s.r.l ("Orchidea") - a wholly owned subsidiary - inactive (voluntary liquidation in progress, which started during the reporting period).

l. Engel Rose s.r.l ("Rose") - a wholly owned subsidiary - plans to build a residential project in Bucharest, Romania, see also Note 32.c.

m. Davero Invest s.r.l ("Davero") - a wholly owned subsidiary - management company, Romania.

n. Euro-bul Ltd. ("Eurobul") - a wholly owned subsidiary - administration services company, Israel.

o. Palace Engel Troja a. s. ("Troja") - a wholly owned subsidiary, Czech Republic - inactive.

p. 6212-964 Canada Inc. ("Canada Inc.") - a wholly owned subsidiary - management company, Canada - inactive.

q. 9152-8372 Quebec Inc. ("Quebec Inc.") - a wholly owned subsidiary - management company, Canada - inactive.

r. Wilanow 1 Developments sp.zoo - through its wholly owned subsidiary Wilanow 2 sp.zoo ("Wilanow 2"), Warsaw, Poland.

During 2009 the shares were transferred to ERD (see Note 32.a), during a sale process, the companies are classified as held for sale, see also Note 35.

NOTE 15 - INVESTMENT IN EQUITY ACCOUNTED INVESTEES

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 equity accounted investee:

c. Summarised financial information in respect of the associate is set out below:

NOTE 16 - INTEREST-BEARING LOANS FROM BANKS

(a) AKK - the appropriate latest 3 months' average yield for the one year Hungarian Treasury bill.

(b) The loan is secured by guarantees provided by the indirect parent company of the Company (see also Note 33(3)).

All of the secured bank loans have been provided to individual 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 for the land and the projects for which the loans were received and 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 the 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 not provided any securities in respect of the bank loans granted to its subsidiaries and jointly controlled entities, except the following case:

·; ENMAN B.V., a jointly controlled entity, has provided guarantees for interest payments and costs overruns, to the bank which finances the project Ingatlan in Budapest, Hungary, the amount of the loans as of the reporting period EUR 6,099 thousands (the Company's share is EUR 1,525 thousands). After the reporting period following the appeal of one of the entity's creditors, a bankruptcy procedure started, see Note 39.a.

Arces International B.V., a jointly controlled entity, has an exposure in relation with the bank loans which financed the project in Gyor, Hungary in the amount of EUR 12,648 thousands (the Company's share is EUR 6,324 thousands). The bank claims that the loans were additionally guaranteed by Arces International B.V. The company has disputed the validity of this guarantee with the bank. As well there is legal dispute between the Company and Heitman regarding the responsibility of this guarantee, however, no official legal claim has been filed by any of the parties. A relative provision was booked in the financial statements according to the management best estimation.

Comments in respect of several interest-bearing loans from banks:

1. During the fourth quarter of 2009, the subsidiary, Palace Engel III Sp. z.o.o, breached its requirement to repay the bank loan, which finances the project "Krakow" in Poland,

During the reporting period, a receiver was appointed by court in Poland due to the overdue bank loan in relation to Palace Engel III sp zoo ("Krakow"), a wholly owned subsidiary of the Company, which owns the Krakow project in Poland, see Note 34.c.

2. During 2010 the jointly controlled entity, Engel Ingatlan Ingatlanfejlesztő Kft. ("Ingatlan") breached its requirement to repay a bank loan totaling EUR 6,099 thousands (the Company's share is EUR 1,525 thousands).

After the reporting period following the appeal of one of the Ingatlan's creditors, a bankruptcy procedure started, see Note 39.a.

3. During 2011, the jointly controlled entity, Engel Lylia s.r.l. ("Pipera") breached its requirement to repay a bank loan totaling EUR 3,224 thousands (the Company's share is EUR 806 thousands).

The Group is in negotiation with the financing bank in order to restructure this loan.

4. During the first quarter of 2012, the jointly controlled entity, Engel Crizantema s.r.l. ("Sisest") breached its requirement to repay a bank loan totaling EUR 3,084 thousands (the Company's share is EUR 771 thousands).

During November 2012, following the requirement to repay the loan, the lender bank started legal procedures to enforce the securities granted by the jointly controlled entity. As of 31 December 2012 the jointly controlled entity still owns the asset.

The bank loan is non-recourse to the rest of the Group.

5. During the first quarter of 2011, the jointly controlled entity, Palace Engel Dejvice s.r.o. ("Dejvice") breached its requirement to repay a bank loan totaling EUR 242 thousands (the Company's share is EUR 121 thousands).

After the reporting period the bank loan was fully repaid by the jointly controlled entity.

NOTE 17 - FINANCE LEASE LIABILITY

(a) As of 31 December 2012 the amount represents overdue installments to the municipality in Serbia according to the lease agreement. The balance consists mainly of: overdue monthly installments, an amount which is under disagreement with the municipality, overdue installments according to the lease agreements and penalty interest.

The amounts carry an average penalty interest of 1.5% per month.

Terms and conditions of outstanding financial lease liabilities were as follows:

The financial lease liability relates to the project in Serbia where the Group is obliged to pay monthly rent for land for 99 years.

Following the adoption of the changes in IAS 17, the Group classified the lease agreement as finance lease.

Finance lease liability is payable as follows:

The value of the finance lease and its payments are adjusted on a monthly basis by the local index of retail prices in Belgrade, Serbia.

The increases of the local index of retail prices in Belgrade, Serbia in 2012 and 2011 were 13% and 7.5% respectively.

As of 31 December 2012, the Group breached its requirements to pay total amount of EUR 6.4 million which were determine by the new lease agreement. After the reporting date the Company breached is requirements to pay an additional amount of EUR 1.4 million.

The Group is in the process of negotiation to restructure the liability.

NOTE 18 - LOANS AND AMOUNTS DUE TO RELATED PARTIES AND JOINT VENTURE PARTNERS

No repayment dates have been set with regard to the above loans and advances, except for the loans from Engel Resources and Development Ltd. which are due till 31 March 2013 and the loans due to GBES Ltd. which is due till 30 April 2013.

All the loans are expected to be restructured or to be settled by proceeds generated from sales of the development projects to which these related to. As such, these are classified as current liabilities.

For more details about the related parties transactions, see also Note 33.

(a) The loans were received from Engel Resources and Development Ltd ("ERD").

The amount of EUR 19,996 thousands bears interest of 6% per annum and linked to an annual change in Israeli CPI and the amount of EUR 1,579 thousands bears interest of 6.5% per annum.

The loans are secured by the following guarantees (see also Note 33(3)):

·; The shares of Wilanow 1 Development sp.zoo. (which controls Willanow 2 - a project in Poland.

·; Pledge over the shares of Marina Dorcol D.o.o in the total value of EUR 20.3 million.

·; The future proceeds generated from its Canadian project. The total amount will be twice the loans granted by ERD since the beginning of 2012.

(b) The loan bears interest of 6% per annum.

(c) The loans bear mainly interest of 3 month Euribor + 1% per annum.

(d) The balance is comprised of two loans:

·; EUR 485 thousands - bears interest of 15% per annum.

·; EUR 1,686 thousands - bears interest of 8% per annum.

(e) The loans bear no interest.

NOTE 19 - OTHER PAYABLES

NOTE 20 - PROVISIONS

(a) See Note 34.d.

a. During 2007, two legal claims were filed against Engel Sun Palace Kft. , a wholly 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 by the subsidiary, in amount of HUF 1,475 million (approximately EUR 5.6 million).

2. On 27 July 2007 the subsidiary received a notice from the bank claiming an amount of HUF 145 million (approximately EUR 549 thousands). The claim relates to an alleged breach of the original bank loan agreement.

As a result of series of financial transactions initiated by the management, the Company succeeded to reduce the total amount of the above two claims to EUR 1.2 million to be paid in several instalments, during the reporting period the claims were fully settled.

b. The jointly controlled entities in Canada and its parent company are in the legal proceeding with a minority shareholder who was employed as technical manager for the Canadian projects and was dismissed by the Company. The amount of the claim is CAD 13 million (approximately EUR 7.6 million).

According to the court decision, disposal of assets in Canada will require the approval of the court. Provision for this claim was initially recognised by the Group in its 2007 financial statements.

c. By the end of 2008, the Company and the parent company were sued for brokerage fee and legal services in the amount of NIS 10 million (approximately EUR 1.9 million) in relation with the plot in Gyor, Hungary.

Provision for this claim was initially recognised by the Group in its 2008 and 2009 financial statements.

During the reporting period the Company reached a compensation agreement with the plaintiff.

After the reporting period the compensation agreement was fully settled.

d. During 2010 the Company recognized provisions for future expected defects in the project Zabki in Poland, as of 31 December 2012; in the amount of EUR 458 thousands (the Company part EUR 229 thousands).

During 2010 and 2011, part of the residents in the project appealed to the local court.

During 2011 part of the claims were settled by the subsidiary.

e. During 2011 a former main constructor of Zabki project ("Zabki"), a wholly owned subsidiary of Arces, has filed a claim for amount of EUR 0.2 million for returning bank guarantees.

The Company has reached a settlement with the plaintiff and as a result a provision for this claim was recognised by the Group in its financial statements.

During the reporting period, the Company breached the agreed settlement; as a result the plaintiff put a lien on Zabki's bank accounts.

The Company estimated provisions in respect of these legal claims, based on the management's estimations following consulting its legal advisors.

NOTE 21 - EQUITY

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 declarable 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.

NOTE 22 - REVENUES

NOTE 23 - WRITE-DOWN OF INVENTORY