Kimberly Enterprises Regulatory News (KBE)

Engel East Europe N.V.

Results for the six months period ended 30 June 2010

7 December 2010 - Engel East Europe N.V. ('Engel' or 'the Company') the AIM-listed Central and Eastern European property developer (EEE: L), announces results for the six months period ended 30 June 2010.

Financial Summary

 During the last 12 months we have seen a slow but steady positive change in the East European real estate market.

There is an ever growing demand for small sized apartments which are affordable to a greater proportion of the population.

This demand creates a requirement for a different kind of development of smaller custom apartments which can be built and sold in a shorter time frame.

Whilst this change results in a lower overall level of revenue and profits, these results are compensated by the shorter time that is required from inception to delivery and payment.

In these circumstances, we are tailoring our product to suit the current demand and have moved much of our focus in the light of these market trends, resulting in a lower financial resources requirement and a greater ability to increase our production capacity."

Gad Raveh, CEO of Engel East Europe N.V.

Enquiries:

Management Statement

Construction lending in the last year has been difficult, though the lending institutions have started to begin to provide finance again.

We see signs of the financial institutions returning to their core business of providing finance, but in a very cautious way and not in "lending money to companies but to the people who run these companies".

This cautious lending environment has resulted in severe cuts and savings in our operations which we try to balance by utilizing our existing finance and minimizing borrowings.

The decision to focus on Poland and the Czech Republic appears to be bearing fruit and we look forward to seeing some of its results over the next 12 to 15 months.

Financial Position

Given the current conditions in the real estate market in the countries where the Group operates, management has considered on a project by project basis whether the Group will be able to generate sufficient cash flow from sales of housing units and other assets, including investment properties, in order to repay its financial obligations as these falls due. 

Regarding project loans totaling EUR 12,364 thousands (out of which EUR 10,212 thousands are in breach of repayment as of 30 June 2010) management considers that 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.

At 30 June 2010, the Group has current liabilities totaling EUR 58,874 thousands.

Whilst in the past financing banks have agreed to prolong existing loan facilities, there is no assurance that the banks will be prepared to extend existing loan facilities beyond currently committed maturity dates. In the event a bank is not willing to extend a project loan, it has the option to call 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:

·; The bank loans which finance the project in Gyor, Hungary in the amount of EUR 11,709 thousands (the Company's share is EUR 5,855 thousands), are additionally guaranteed by Arces International B.V., a jointly controlled entity (there is a legal dispute with the bank regarding the validity of this guarantee).

·; ENMAN B.V, a jointly controlled entity, has provided guarantees for interest payments and costs overruns to the bank which finances the Ingatlan project in Budapest, Hungary.

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

As of 30 June 2010, the Group is in breach of certain bank loan agreements totaling EUR 10,212 thousands. Subsequent to the reporting date the Group is also in breach of additional bank loan agreement totaling EUR 1,100 thousands.

During 2009 and during the reporting period, the Group breached the requirement to pay lease payments totaling EUR 10.2 million relating to the lease of Marina Dorcol in Belgrade, Serbia and consequently was exposed to possible sanctions.

After the reporting period, the Group signed a revised lease agreement with the municipality of Belgrade regarding the land in Marina Dorcol. The new agreement replaces the previously signed agreement.

As of 30 June 2010, 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 full 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.

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 EUR 418 thousands. After the reporting period the Company received additional loans from ERD in the total amount of EUR 2.6 million.

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

Trading Performance

During the period, the total number of units sold and handed over was 122 (6 months ended 30 June 2009: 272).

The revenues decreased by 20 per cent to €10.2 million (6 months ended 30 June 2009: €12.7 million). Nevertheless, the gross margin was higher reflecting sales in 2 profitable projects during 2010. After writing down of inventory by €1 million and other losses in amount of €1.6 million, following foreign exchange losses of €3.2 million, there is a loss before tax of €9 million for the period (6 months ended 30 June 2009: €8.8 million). 

Approximately 35% of the loss before tax for the period is attributable to the financial costs of the Marina Dorcol project in Serbia.

The Company's continuous policy to reduce costs is reflected in a slightly lower level of selling, general and administrative expenses of €1.2 million (6 months to 30 June 2009: €1.3 million).

Outlook

We have started to see gradual signs of improvement in the real estate sector and reasons to be optimistic about the future, but markets still remain tough.

The Czech Republic and Poland markets continue to grow and Hungary is beginning to show potential. Whilst more risky, it carries very good opportunities which we hope to exploit but will proceed with caution.

 Engel East Europe N.V.

Condensed consolidated statement of financial position

The notes are an integral part of these condensed consolidated interim financial statements.

Engel East Europe N.V.

Condensed consolidated income statement

The notes are an integral part of these condensed consolidated interim financial statements.

Engel East Europe N.V.

Condensed consolidated statement of comprehensive income

The notes are an integral part of these condensed consolidated interim financial statements.

Engel East Europe N.V.

Condensed consolidated statement of changes in equity

The notes are an integral part of these condensed consolidated interim financial statements.

Engel East Europe N.V.

Condensed consolidated statement of cash flows

The notes are an integral part of these condensed consolidated interim financial statements.

Engel East Europe N.V.

Condensed consolidated statement of cash flows (continued)

The notes are an integral part of these condensed consolidated interim financial statements.

Engel East Europe N.V.

Notes to the condensed consolidated interim financial statements

1. Reporting entity

Engel East Europe N.V. (the "Company") is a company domiciled in The Netherlands. The condensed consolidated interim financial statements of the Company as at and for the six months period ended 30 June 2010 comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interests in associates and jointly controlled entities. The Group owns subsidiary companies and has jointly controlled entities mainly in Central and Eastern Europe which purchase, develop, hold and sell real estate assets.

The consolidated financial statements of the Group as at and for the year ended 31 December 2009 are available upon request from the Company's registered office at Rapenburgerstraat 204, 1011MN Amsterdam, The Netherlands or at www.engel-ee.com.

2. Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2009.

These condensed consolidated interim financial statements were approved by the Board of Directors on 6 December 2010.

3. Significant accounting policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2009, as described in those annual financial statements.

Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2009.

Engel East Europe N.V.

Notes to the condensed consolidated interim financial statements

4. Segment reporting

The chief operating decision-maker has been identified as the CEO of the Group who reviews the group's internal reporting in order to assess performance and allocate resources. Management has determined the operating segments based on these reports.

The chief operating decision-maker assesses the performance of the operating segments based on a measure of adjusted earnings before tax.

The Group considers that the business has the following 2 operating segments:

·; Development and sale of residential real estate projects

·; Commercial properties which include income producing properties and lands designated for commercial projects.

5. Financial risk management

There has been no change in the Group's financial risk management objectives and policies as compared with those disclosed in the consolidated financial statements as at and for the year ended 31 December 2009.

Liquidity risk

Given the current conditions in the real estate market in the countries where the Group operates, management has considered project by project whether the Group will be able to generate sufficient cash flow from sales of housing units and other assets, including investment properties, in order to repay its financial obligations as these falls due. 

Regarding project loans totaling EUR 12,364 thousands (out of which EUR 10,212 thousands are in breach of repayment as of 30 June 2010 - see also note 8) 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.

At 30 June 2010 the Group has current liabilities totaling EUR 58,874 thousands.

Engel East Europe N.V.

Notes to the condensed consolidated interim financial statements

6. Financial risk management (continued)

Liquidity risk (continued)

Whilst in the past financing banks have agreed to prolong existing loan facilities, there is no assurance that the banks will be prepared to extend existing loan facilities beyond currently committed maturity dates. In the event a bank is not willing to extend a project loan, it has the option to call 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:

·; The bank loans which finance the project in Gyor (see note 13.b), Hungary in the amount of EUR 11,709 thousands (the Company's share is EUR 5,855 thousands), are additionally guaranteed by Arces International B.V., a jointly controlled entity (there is a legal dispute with the bank regarding the validity of this guarantee).

·; ENMAN B.V, a jointly controlled entity, has provided guarantees for interest payments and costs overruns, to the bank which finances the Ingatlan project in Budapest, Hungary.

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

As of 30 June 2010 the Group is in breach of certain bank loan agreements totaling EUR 10,212 thousands (see note 8 for loans which are due in 2010). Subsequent to the reporting date the Group is also in breach of additional one bank loan agreement totaling EUR 1,100 thousands.

During 2009 and during the reporting period, the Group breached the requirement to pay lease payments totaling EUR 10.2 million relating to the lease of Marina Dorcol in Belgrade, Serbia and consequently is exposed to possible sanctions.

After the reporting period, the Group signed a revised lease agreement with the municipality of Belgrade regarding the land in Marina Dorcol. The new agreement replaces the previously signed agreement, see also note 12.b.

As of 30 June 2010, 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 full 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.

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 EUR 418 thousands. After the reporting period the Company received additional loans from ERD in the total amount of EUR 2.6 million.

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.

Engel East Europe N.V.

Notes to the condensed consolidated interim financial statements

7. Income tax expense

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full financial year applied to the pre-tax income of the interim period. The Group's consolidated effective tax rate in respect of continuing operations for the six months period ended 30 June 2010 was 0% (for the period ended 30 June 2009: -5%).

The change in effective tax rate was caused mainly by the following factors:

·; Taxes adjustments in the current period relating to taxes from previous years.

·; Current year losses for which no deferred tax asset was recognized.

·; Write off of deferred tax assets which are not expected to be utilized in the future.

8. Loans and borrowings

The following interest-bearing loans from banks were received and repaid during the six months period ended 30 June 2010:

* Represents the latest possible year of maturity.

** AKK - the appropriate latest 3 month's average yield for the one year Hungarian Treasury bill.

Engel East Europe N.V.

Notes to the condensed consolidated interim financial statements

8. Loans and borrowings (continued)

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, see also note 6.

After the reporting date, the Group breached its requirement to re pay the bank loan granted to a project in Romania in the amount of EUR 2,750 thousands (the Company's share is EUR 1,100 thousands). The Group is in the process of negotiation to restructure this liability and to prolong the bank loan for a period of additional 12 months.

9. Write-down of inventory

During the six months period ended 30 June 2010 the Group recognized a write-down of inventory in amount of approximately EUR 1 million related to the project Sun Palace, Hungary, see also note 11.c.

10. Related parties transactions

During the six months period ended 30 June 2010 the Group received from ERD several loans in the amount of approximately EUR 418 thousands. These loans were mainly granted in order to support the cash flow position of the Company and its subsidiaries. The loans are fixed in the New Israeli Shekel, linked to the changes in the Israeli CPI and carry a 6% yearly interest. In order to secure these loans the Company pledged its shares in the subsidiary Engel Marina Dorcol d.o.o.

After the reporting date the Group received an additional loan in the amount of EUR 2.6 million for the same purpose on the same terms.

11. Significant events during the period

a. During the reporting period, Engel Haz Kft, a 100% owned subsidiary of Arces,sold its gym and pool asset for EUR 750 thousands. The Company recognized a loss on the sale totaling EUR 1.3 million (the Company's share is EUR 0.63 million).

b. During the reporting period, the lending bank of E.G. Panorama EOOD ("E.G. Panorama"), a 100% owned subsidiary of ENMAN, appointed a liquidator to take possession of the Panorama project in Bulgaria.

The bank's loan to E.G. Panorama is non- recourse to the Company.

c. During the reporting period, Engel Sun Palace Kft, a 100% owned subsidiary of Arces, signed several agreements to sell most of the remaining units in the project, for the total amount of EUR 1.28 million. Engel Sun Palace Kft recognized a loss on the sales in the amount of EUR 2 million (the Company's share is EUR 1 million).

Engel East Europe N.V.

Notes to the condensed consolidated interim financial statements

12. Subsequent events

a. After the reporting period the Company signed an amendment to its joint venture agreement with HEPP III in respect of the investment in ENMAN B.V., the entity that holds interests in several of the Group's projects in Eastern Europe.

The main terms of the amendment to the agreement include, inter alia, a reduction of the Company's share in profit distributions from ENMAN from 40% to 25% and an increase in the Company's share in profit distributions from Troya, a subsidiary of ENMAN, which holds the 100% of the project in Czech Republic, from 40% to 50%.

Following completion of the agreement above, the Company will recognize an estimated loss of EUR 2 million on the book value of its investment in ENMAN as a result of this amendment.

b. After the reporting period, the Group signed a revised lease agreement for the land in Marina Dorcol with the municipality of Belgrade. The new agreement replaces the previously signed agreement.

According to the new agreement, a new payment schedule was determined, according to which the subsidiary will be obliged to pay an amount of approximately MEUR 1.1 by the mid of November 2010 and the monthly fee debts in the amount of MEUR 0.65 by September 2010.

As of today the company paid the above two instalments.

The remaining overdue debt in amount of MEUR 9.8 will be paid in several instalments commencing September 2011.

The payment of the remaining debt to the municipality in the amount of MEUR 9.9 will be postponed from years 2010-2011 until years 2014-2016.

The inventories of housing units and land and the other liabilities includes an amount of approximately MEUR 6.7 which will be offset at the next period due to the new lease agreement.

c. After the reporting period the Company's board of directors appointed new Chief Executive Officer.

13. Disposal of subsidiaries

a. During the reporting period the Company started the process of liquidation of four Bulgarian companies (EG Company EOOD, EG Project EOOD, EG Malinova Dolina EOOD and EG Gorna Banya EOOD).

The Group recognized a loss on the in the amount of EUR 10 thousands.

The disposal had the following effect on the Group's assets and liabilities:

Engel East Europe N.V.

Notes to the condensed consolidated interim financial statements

13. Disposal of subsidiaries (continued)

b. During the reporting period, the liquidator that was appointed following the court decision in regard to the legal procedure, described in note 20.d of the 2009 financial statements started the liquidation of Engel Project Kft. (The Gyor project, Hungary).

As a consequence the Company has seized to consolidate the subsidiary in its consolidated financial statements.

The disposal due to loss of control in the subsidiary had the following effect on the Group's assets and liabilities:

14. New IFRS pronouncements

Certain new standards, amendments and interpretations to existing standards have been published that are not yet effective for the Group's accounting period ended 30 June 2010, and have not been early adopted in preparing these consolidated financial statements:

1. Revised IAS 24 Related Party Disclosure (effective for annual periods beginning on or after 1 January 2011)

The amendment exempts government-related entity from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with (a) a government that has control, joint control or significant influence over the reporting entity; and (b) another entity that is a related party because the same government has control, joint control or significant influence over both the reporting entity and the other entity. The revised Standard requires specific disclosures to be provided if a reporting entity takes advantage of this exemption.

The revised Standard also amends the definition of a related party which resulted in new relationships being included in the definition, such as, associates of the controlling shareholder and entities controlled, or jointly controlled, by key management personnel.

Revised IAS 24 is not relevant to the Group's financial statements as the Group is not a government-related entity and the revised definition of a related party is not expected to result in additional new relationships requiring disclosure in the financial statements.

Engel East Europe N.V.

Notes to the condensed consolidated interim financial statements

14. New IFRS pronouncements (continued)

2. Revised Amendment to IAS 32 Financial Instruments: Presentation - Classification of Rights Issues (effective for annual periods beginning on or after 1 February 2010)

The amendment requires that rights, options or warrants to acquire a fixed number of the entity's own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments.

The amendments to IAS 32 are not relevant to the Group's financial statements as the Group has not issued such instruments at any time in the past.

3. Amendment to IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2011)

The amendment of IFRIC 14 addresses the accounting treatment for prepayments made when there is also a minimum funding requirements (MFR). Under the amendment, an entity is required to recognize certain prepayments as an asset on the basis that the entity has a future economic benefit from the prepayment in the form of reduced cash outflows in future years in which MFR payments would otherwise be required.

The amendment to IFRIC 14 is not relevant to the Group's financial statements as the Group does not have any defined benefit plans with minimum funding requirements

4. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010)

The Interpretation clarifies that equity instruments issued to a creditor to extinguish all or part of a financial liability in a 'debt for equity swap' are consideration paid in accordance with IAS 39.41.

The initial measurement of equity instruments issued to extinguish a financial liability is at the fair value of those equity instruments, unless that fair value cannot be reliably measured, in which case the equity instrument should be measured to reflect the fair value of the financial liability extinguished. The difference between the carrying amount of the financial liability (or part of the financial liability) extinguished and the initial measurement amount of equity instruments issued should be recognized in profit or loss.

The Interpretation can relate only to transactions that will occur in the future, if any.

***