Annual Report 31.12.10

Engel East Europe N.V.

Results for the year ended 31 December 2010

08 April 2011 - Engel East Europe N.V. ("Engel" or "the Company"), the AIM listed Central and Eastern European property developer (EEE.L), announces its results for the year ended 31 December 2010.

Financial summary:

(*) Restated, implementation of new IFRS standard.

Total revenue for the year ended 31 December 2010 was €15 million compared to €25 million in 2009, reflecting sales of housing units.

The gross margin on the sale of housing units, including management fees, was €2.4 million in 2010 compared to €3 million in 2009. The higher gross margin of 16 per cent for 2010 (2009: 13 per cent) followed the increase of sales in one project with marketing resulting in higher average selling prices compared to 2009.

Total gross profit for 2010 was €4.9 million (2009: €5.7 million gross loss) which reflect a positive investment property revaluation of €3.5 million for 2010 compare to a negative investment property revaluation of €3.7 million in 2009 and a decrease in write down of inventory in 2010 (write down of €1 million in 2010 compared to €5 million in 2009).

Most of the write-down for 2010 relates to a project in Hungary. It was agreed to sell most of the remaining units in this project at a loss. During the reporting period this transaction was canceled but the company didn't cancel the related provision for losses.

The positive revaluation of the investment property for 2010 mainly reflects the changes in the Serbian market.

Selling, general and administrative expenses of €2.5 million (2009: €3.3 million) include a one-off provision of €0.3 million for 2010 in respect of legal charges (2009: €0.3 million). The change is mainly caused by decreasing the staff and cutting current expenses in each country.

Net financing costs decreased to €7.4 million (2009: €11.7 million after the restatement). This reflects a profit due to a change of terms in a lease agreement of 3 million, a lower rate of interest on the finance lease of €2.4 million (2009: €4.5 million) and an increase in the foreign exchange losses to €3 million (2009: €1.7 million).

As a result of all the developments mentioned above, the loss before tax for the year decrease to €8.2 million (2009: €20.9 million).

Inventories of housing units at 31 December 2010 went down to €37.7 million from €59.4 million at 31 December 2009.

Net bank debt (liabilities to the bank offset by restricted bank deposits, cash in escrow, cash and cash equivalents) was €12.8 million at 31 December 2010 compared to net debt of €26.0 million at 31 December 2009. 

General

The financial position of the Group continued to be weak during the reporting period. The management considers it is unlikely that the projects will generate sufficient cash inflows to repay all obligations when they fall due.

At 31 December 2010 the Group has current liabilities totaling €46,993 thousands, which exceeds its current assets of €46,603 thousands.

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 3 million. After the reporting period the Company received additional loans from ERD in the total amount of €0.5 million (see also note 18 regarding the related guarantees to ERD).

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

Regarding project loans totaling €14,973 thousands (out of which €10,614 thousands are in breach of repayment as of 31 December 2010 - see also note 16) 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.

As announced on 12 August 2010, 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 100% of the project in Czech Republic, from 40% to 50%.

The Company recognized a loss of €1.7 million on the book value of its investment in ENMAN as a result of this amendment.

New investor

On 7 July 2010, GBES Ltd. (a company incorporated in Cyprus) has signed an agreement with Engel Resources and Development Limited ("ERD"), the parent company of Engel General Developers Ltd., and with EGD, to invest capital of approximately EUR 9.2 million for 53% of the enlarged share capital of ERD (part of which will be given as loan until the receipt of court approval) and to provide an additional credit line of approximately EUR 10.2 million to ERD.

The agreement was approved by the bond holders of ERD and it is subject to the approval of bond holders in Engel Europe Limited ("EEL"), which is the parent company of ERD and to the approval of the district Court of Tel Aviv. In case the Company will not complete the above mentioned procedures and get the necessary approvals by 15 April 2011, the Company admission to AIM likely to be canceled.

Implementation of change in IFRS standard

Commencing 2010 the Group adopted the amendment to IAS 17 and changed its accounting policy with respect to the classification of the lease of land in Belgrade, Serbia which will be used for residential housing units' development from operating lease to finance lease.

This change in accounting policy was applied retrospectively, as required by the standard, and had negative impact of €0.011 on losses per share (2009: negative impact of €0.024).

The effect on the statement of comprehensive income was as follows:

Poland

GDP growth in 2010 was 3.8 per cent and the rate of inflation was 2.6 per cent. Forecast GDP growth for 2011 is 4.1 per cent.

Serbia

GDP in 2010 was 1.7 per cent and the rate of inflation was 10.3 per cent.

During 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 €1.1 million by the mid of November 2010 and the monthly fee debts in the amount of €0.65 million by September 2010.

As of today the Company paid the above two instalments (except of approximately €0.2 million which is under disagreements with the municipality).

The remaining overdue debt in the amount of €9.8 million will be paid in several instalments commencing September 2011, while the payment of the remaining debt to the municipality of approximately €9.9 million will be postponed from the years 2010-2011 to the years 2014-2016.

Czech Republic

GDP in 2010 was 2.3 per cent and the rate of inflation was 1.5 per cent. Forecast GDP growth for 2011 is 2.2 per cent.

There are 4 additional projects in Prague in pre-development stage with a total of 484 potential units (Phase 4 of Safranka, Phase 2 of Vokovice, Veleslavin and Troja) and during 2011 the Company expects to start Phase 1 of Veleslavin producing a total of 77 units with an estimated sales value of €17 million (25 per cent owned by the Company).

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

Romania

GDP in 2010 was -1.9 per cent and the rate of inflation was 8 per cent, with forecast GDP growth of 0.9 per cent for 2011.

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

Bulgaria

GDP in 2010 was 0.3 per cent and the rate of inflation was 4.4 per cent.

During 2010 the lending bank to E.G. Panorama EOOD ("E.G. Panorama"), a 100% owned subsidiary of ENMAN, has appointed a liquidator to take possession of the Panorama project in Bulgaria.

The loan to E.G. Panorama is non- recourse to the rest of the Company.

Hungary

GDP in 2010 was 0.8 per cent and the rate of inflation 4.9 per cent. Forecast GDP growth in 2011 is 3 per cent.

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

During the reporting period, Engel Sun Palace Kft, a 100% owned subsidiary of Arces, agreed to sign several agreements to sell most of the remaining units in the project, for the total amount of €1.28 million. Engel Sun Palace Kft recognized a loss on the sales in the amount of €1.9 million (the Company's share is €0.93 million). During the reporting period the Company cancelled those agreements. The Company did not cancel the related provision for loss.

Enquiries:

Board statement

"Despite the challenging environment, by focusing on key countries and carefully managing our resources, we expect to be able to maintain development activity and sales in 2011."

Engel East Europe N.V.

Consolidated statement of financial position

Engel East Europe N.V.

Consolidated income statement

(*) Restated, see note 34.

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

Engel East Europe N.V.

Consolidated statement of comprehensive income

(*) Restated, see note 34.

Engel East Europe N.V.

Consolidated statement of changes in equity

(*) Restated, see note 34.

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

Engel East Europe N.V.

Consolidated statement of cash flows

(*) Restated, see note 34.

NOTE 2 - BASIS OF PREPARATION

a. Statement of compliance

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

The consolidated financial statements were authorized for issue by the Board of Directors on 6 April 2011.

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 2008, 2009 and 2010 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 has interest bearing loans from banks totaling EUR 14,973 thousands (out of which EUR 10,614 thousands are in breach of repayment as of 31 December 2010 - see note 16). Management considers it is unlikely that the projects will generate sufficient cash inflows to repay all 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 notes 4.b. and 16) 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:

·; Inventories of housing units which are measured at net realizable value in the statement 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 thousand.

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 critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in note 38.

f. Operating cycle

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 (see note 3.f).

g. Changes in accounting policies

1. Overview

Commencing 2010, the Group has changed its accounting policies in the following areas:

·; Accounting for non controlling interests.

·; Accounting for lease of land (this change in accounting policy was applied retrospectively, as required by the standard).

2. Accounting for non controlling interests

The Group applies revised IAS 27. In the revised Standard the term minority interest has been replaced by non-controlling interest, and is defined as "the equity in a subsidiary not attributable, directly or indirectly, to a parent". The revised Standard also amends the accounting for non-controlling interest, the loss of control of a subsidiary, and the allocation of profit or loss and other comprehensive income between the controlling and non-controlling interest.

As a result the Company allocated total comprehensive loss for the year to non-controlling interest. Future gains should not be first allocated to the parent until a deficit recognized in previous periods in the parent's equity is eliminated

3. Accounting for lease of land

The Group applies the amendment for IAS 17. The amendment to IAS 17 deletes previous requirements stating that a lease of land with an indefinite economic life normally is classified as an operating lease, unless title is expected to pass to the lessee at the end of the lease term. Under the amendment, a lease of land is subject to the general lease classification criteria of IAS 17. That is, if a lease of land transfers substantially all the risks and rewards of the land to the lessee, then the lease is a finance lease. If as a result of the amendment a lease is newly classified as finance lease, then that classification is effected retrospectively.

NOTE 23 - REVENUES

NOTE 29 - INCOME TAX (BENEFIT) EXPENSE

(*) Restated, see note 34.

Reconciliation of statutory to effective tax rate:

(*) Restated, see note 34.

The main tax laws to which the Group companies are subject in their countries of residence are as follows:

a. The Netherlands

The participation exemption is, summarised, applicable to an (equity) investment when all of the following three conditions are satisfied:

1. The company in which the investment is held (the subsidiary) has a capital divided in shares (article 13, paragraph 2, sub a, CITA); and

2. The taxpayer owns at least 5% of the nominal paid-up share capital of the subsidiary (article 13, paragraph 2, sub a, CITA); and;

3. The asset test or tax test is met, or the subsidiary qualifies as real property participation.

The asset test is met if the assets of the subsidiary continuously (directly and indirectly) consist for less than 50% of free passive investments.

The tax test is met if the subsidiary is subject to tax on its profits against an effective rate of at least 10%, calculated in accordance with Dutch tax standards, whereby the royalty box is not taken into account.

The qualification as a real property participation can be made if the assets of the company in which the taxpayer has a participation, consist for at least 90% of real property that, directly or indirectly, is not in the possession of a company that is regarded as an investment institution (article 13, paragraph 13 CITA). The question whether a participation qualifies as a real property participation has to be determined (continuously) according to a consolidated balance sheet.

If none of the abovementioned tests are met, the subsidiary qualifies as a low-taxed passive subsidiary. For a low taxed passive subsidiary, the participation exemption is replaced by a credit system. A participation of at least 25% in a low taxed passive investment participation of which the assets directly or indirectly consist for at least 90% of free passive investments, has to be revalue annually to the fair market value (article 13a CITA). This rule applies to both domestic and foreign subsidiaries.

Starting 1 January 2010, changes have been implemented in Dutch tax law regarding the participation exemption. In short, the new participation exemption regulations start from the main rule that the participation exemption applies to, in short, participations of at least 5%, unless the participation concerned is held as a passive investment. However, even if participation qualifies as a passive investment, the participation exemption still applies, if either the subject-to-tax test or the asset test is met.

b. Hungary

The corporation tax rate in Hungary is 10/19% in 2010 taxable profit is taxed at 10 % with a certain cap. (2009: 16%). Since 2007 capital gains can be considered exempted income provided that certain criteria are fulfilled. For 2010 a withholding tax could be levied on certain payments such as interest, royalty and management fees. Losses can be carried forward indefinitely.

c. Czech Republic

The corporation tax rate in the Czech Republic is 19 % in 2010 (2009: 20%). Capital gain could be taxed at 10% under certain circumstances. Tax losses can be carried forward up to five years to offset future taxable income (previously seven years). Dividends paid out of net income are subject to a withholding tax of 15%, subject to the relevant double taxation treaty or EU regulations.

d. Poland

The corporation tax in Poland (including capital gains) is 19% in 2010 (2009: 19%).Tax losses can be carried forward for five years and only 50% of a loss can be offset in any one year. Dividends paid out of net income are subject to a withholding tax of 19%, subject to the relevant double taxation treaty or EU regulations.

e. Canada

The federal corporate tax rate of the subsidiaries incorporated in Canada (including capital gains) is 18% in 2010 (2009: 19%). The combined corporate and provincial tax rate is 29.9%. Non-capital tax losses can be carried back three years and carried forward up to 20 years for losses arising in 2006 and later, 10 years for losses arising in taxation years ending after 22 March, 2004 and before 2006, 7 years for losses arising in taxation years ending before 23 March, 2004. Capital tax losses can be carried back three years and carried forward indefinitely against other capital gains. Dividends paid out of net income are subject to a withholding tax of 25%, subject to the relevant double taxation treaty.

f. Bulgaria

The corporation tax rate in Bulgaria (including capital gains) is 10% in 2010 (2009: 10%). Tax losses can be carried forward up to five years to offset future taxable income. Dividends paid out of net income are subject to a withholding tax of 5 %, subject to the relevant double taxation treaty and EU regulations.

g. Romania

The corporation tax in Romania (including capital gains) is 16% in 2010 (2009: 16%). Dividends paid out of net income are subject to a withholding tax of 10/16%, subject to the relevant double taxation treaty or EU regulations. Tax losses can be carried forward and deducted from taxable profits in the following 7-year period (the carry forward period for losses recorded up to 31 December 2008 is 5 years), on a first-in-first-out basis.

h. Serbia

Corporate income tax is levied at a rate of 10% in 2010 (2009: 10%). The same rate also applies to capital gains. Capital gains are taxable at the rate of 10 %. Losses may be carried forward for 5 years (excluding capital loss). Losses generated in the period 2003-2009 may be carried forward for 10 years. No carry-back of losses is permitted. Dividends paid outside the country are subject to a withholding tax of 20 % subject to the relevant double taxation treaty.

The complete financial report including the notes can be found on the website of the Company at www.engel-ee.com.