Final Results

Engel East Europe N.V.

Results for the year ended 31 December 2009

22 October 2010 - 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 2009.

Financial summary:

Total revenue for the year ended 31 December 2009 was €25 million compared to €24 million in 2008, reflecting sales of housing units.

The gross margin on the sale of housing units, including management fees, was €3 million in 2009 compared to €4 million in 2008. The lower gross margin of 13 per cent for 2009 (2008: 16.5 per cent) followed a decline in property markets resulting in lower average selling prices.

Total gross loss for 2009 was €5.1 million (2008: €4.9 million gross profit) reflecting a higher total inventory write-down of €5.7 million for 2009 (2008: €1.2 million) and a negative investment property revaluation of €3.7 million for 2009 compared to a positive revaluation of €2 million for 2008.

The write-down for 2009 relates to land to be sold in Canada and Poland, and to the projects in Bulgaria and Hungary, where the Board expects that sales proceeds will be lower than book value. The negative revaluation of the investment property for 2009 reflects changes in Serbian, Polish and Hungarian markets.

Selling, general and administrative expenses of €3.2 million (2008: €5.3 million) include a one-off provision of €0.3 million for 2009 in respect of legal charges (2008: €1.2 million). The change is mainly caused by decreasing the staff and cutting current expenses in each country.

Net financing costs increased slightly to €8.8 million (2008: €8.7 million). This reflects a lower total foreign exchange loss of €1.7 million (2008: €3.1 million), a higher rate of interest on the finance lease of €2.4 million (2008: €1.1 million) and a decrease in bank debt during the year.

As a result of all the developments mentioned above, the loss before tax for the year increased to €18.2 million (2008: €9.1 million).

Inventories of housing units at 31 December 2009 were down to €59.6 million from €75.4 million at 31 December 2008.

Net bank debt (liabilities to the bank offset by restricted bank deposits, cash in escrow, cash and cash equivalents) was €26 million at 31 December 2009 compared to net debt of €41 million at 31 December 2008. 

General

As of 31 December 2009, the financial condition of the Company remains weak and it is currently unable to meet its obligations to its employees and service providers as they fall due.

In order to manage its financial situation, the Company has requested additional financial assistance from Engel Research and Development LTD. ("ERD"), part of Engel's parent company group, to fund the Company's immediate liabilities.

During the reporting period, ERD provided two bridge loans totaling €380,000. After the reporting period the Company received additional loans from ERD totaling €808,000.

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

As announced on 12 August 2010, the Company signed an amendment to its joint venture agreement with a HEPP III in respect of the investment in ENMAN B.V., the entity that holds some of the Group's interests in its projects in Eastern Europe. The main terms of the amendment to the agreement include, inter alia, a reduction of the Company share of profit distributions from ENMAN from 40% to 25% and an increase in the Company share of profit distributions from Troya, a subsidiary of ENMAN, which holds 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 €2 million on the book value of its investment in ENMAN. 

At 31 December 2009, current liabilities include €29.6 million of interest bearing loans from banks,

€3.7 million of finance lease liabilities and other liabilities which mature within one year. 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 they fall due. 

Regarding project loans totaling €21.1 million (out of which €14.4 million are in breach of repayment as of 31 December 2009), 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 project disposals.

Poland

GDP growth in 2009 was 1.7 per cent and the rate of inflation was 3.6 per cent. Forecast GDP growth for 2010 is 2.6 per cent.

Construction of the Emilii Plater project (part of the Arces joint venture) was completed during 2009 for a total of 82 units, out of which 35 units were sold till 31 December 2010.

Serbia

GDP in 2009 was -3 per cent and the rate of inflation was 7.8 per cent. Forecast GDP growth for 2010 is 1.5 per cent.

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. Under the terms of the new agreement, a new payment schedule was determined, according to which the subsidiary will be obliged to pay approximately MEUR €1.1 million by the end of October 2010 and overdue monthly lease costs of €0.65 million by September 2010. The remaining overdue debt of €9.8 million will be repaid in several instalments commencing September 2011.The repayment of the remaining debt to the municipality of €9.9 million will be postponed from years 2010-2011 to years 2014-2016.

During 2009, the inventories of housing units and land and the other liabilities were increased in amount of approximately MEUR 5 due to unpaid debts to the municipality. As a result of the new agreement, one of the consequences is that this amount will be decreased from inventories of housing units and land and from the other liabilities in the financial statements of 2010.

Czech Republic

GDP in 2009 was -4.1 per cent and the rate of inflation was 1 per cent. Forecast GDP growth for 2010 is 1.6 per cent and forecasted inflation for 2010 is 1.6 per cent.

The unemployment rate in 2009 was 6.7 per cent, and is expected to rise to 7.6 per cent in 2010. 

In Prague, the Company finished building 3 phases of the Safranka project producing a total of 346 units with an estimated sales value of €41 million (50 per cent owned by the Company) and Phase 1 of the Vokovice project producing a total amount of 125 units with an estimated sales value of €24 million (50 per cent owned by the Company).

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 2010 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 2009 was -7.1 per cent and the rate of inflation was 3.5 per cent, with forecast GDP growth of 0.8 per cent for 2010.

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

Bulgaria

GDP in 2009 was -5.1 per cent and the rate of inflation was 0.6 per cent, with forecast GDP growth of 0.3 per cent for 2010.

During 2009 the Group sold all of its shares in the following subsidiaries in Bulgaria:

a. Puribul EOOD

b. Nissim EOOD

c. EG Management EOOD

The Company recognized a loss of €421,000. Total cash consideration amounted to €25,000.

After the reporting period, 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 2009 was -1.7 per cent and the rate of inflation was 4.2 per cent, expected GDP growth in 2010 is 2.3 per cent.

Heitman Fund is a joint venture partner in all the projects in Hungary. During 2009, the Company finished the construction of the Ingatlan project producing a total of 257 units.

During 2010, Engel Haz Kft, a 100% owned subsidiary of Arces, sold the gym and pool asset for €750,000. The Company will recognize a loss on the sales totaling €1.3 million (the Company's share is €0.65 million).

During 2010, 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. The Company will recognize a loss on the sales in the amount of EUR 1.2 million (the Company's share is €0.6 million).

During 2008, one of the constructors of Engel Projekt Kft. ("Gyor"), a 100% owned subsidiary of Arces, filed a claim against the subsidiary for HUF 170 million (approximately €642,000).

During December 2009, due to a court decision in favour of the constructor, an execution process of the claim has been commenced against Gyor. In December 2009, Gyor initiated a procedure of revision before the Supreme Court against the court decision rendered by the court of second instance and requested the suspension of the execution of the legally binding court decision. Full provision was recorded in the profit or loss.After the reporting period, the liquidator that was appointed following the court decision in regards to the legal procedure, started a liquidation process of the subsidiary Engel Project Kft.

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

Engel East Europe N.V.

Consolidated statement of comprehensive income

Engel East Europe N.V.

Consolidated statement of changes in equity

Engel East Europe N.V.

Consolidated statement of cash flows

Engel East Europe N.V.

Consolidated statement of cash flows (continued)

NOTE 2 - BASIS OF PREPARATION

a. Statement of compliance

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

The consolidated financial statements were authorized for issue by the Board of Directors on 18 October 2010.

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 and 2009 in accordance with The Netherlands Civil Code.

BASIS OF PREPARATION (continued)

b. Going concern

During 2009 the financial position of the Group has deteriorated. The Group has interest borrowing from banks totaling EUR 21,110 thousands (out of which EUR 14,526 thousands are in breach of repayment as of 31 December 2009 - see note 16) management considers it is unlikely that the projects will generate sufficient cash inflows to repay all obligations when 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 note 4.b. and note 16) disclose all of 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 investment property which is measured at fair value and Inventory which is measured at net realizable value in the statement of financial position.

d. Functional and presentation currency

These consolidated financial statements are presented in Euro (EUR), which is the Company's functional currency. All financial information is presented in thousands of Euro ("TEUR" or "thousands Euro"), and 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 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 note 37.

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

Starting as of 1 January 2009, the Group has changed its accounting policies in the following areas:

·; Determination and presentation of operating segments

·; Presentation of financial statements.

2. Determination and presentation of operating segments

As of 1 January 2009 the Group determines and presents operating segments based on the information that internally is provided to the Chairman and the Acting CEO of the Group, who together act as the Group's chief operating decision maker. This change in accounting policy is due to the adoption of IFRS 8 Operating Segments. Previously operating segments were determined and presented in accordance with IAS 14 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows.

Comparative segment information has been re-presented in conformity with the transitional requirements of IFRS 8. Since the change in accounting policy only impacts presentation and disclosure aspects there is no impact on earnings per share.

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. An operating segment's operating results are reviewed regularly by the Chairman and the Acting CEO of the Group to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the Chairman and the Acting CEO of the Group 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 income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property and equipment, and intangible assets other than goodwill.

3. Presentation of financial statements

The Group applies revised IAS 1 Presentation of Financial Statements (2007), which became effective as of 1 January 2009. As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income.

Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share.

- REVENUES

 INCOME TAX

Reconciliation of statutory to effective tax rate:

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

a. The Netherlands

1. The maximum corporation tax rate that may be imposed on the Dutch Group's income is 25.5% in 2009 (2008: maximum rate of 25.5 %).

2. Profits for tax purposes do not include dividends and capital gains that fall within the scope of the participation exemption (Article 13 of the 1969 Corporate Income Tax Act). In order to be eligible for the participation exemption, generally speaking, the following conditions should be met:

a. The Dutch resident taxpayer must own a shareholding of 5 per cent or more of the nominal paid-in share capital of the subsidiary;

b. The subsidiary must have a capital divided into shares; and

c. The subsidiary does not qualify as a 'passive and low taxed' subsidiary, which condition will be met if one of the following sub-conditions is met:

i. the assets of the subsidiary, directly or indirectly, consist for less than 50 per cent of 'free passive investments' (asset test), generally speaking only excess portfolio assets that are not committed to or maintained for the company's business;

ii. the subsidiary is subject to a profit tax that results in a levy that equals at least 10 per cent of the taxable profits determined according to Dutch tax law (tax burden test); or

iii. the subsidiary can be qualified as a 'real estate participation'(real estate test). Generally speaking, the balance sheet of the subsidiary should, on a consolidated basis, comprise of more than 90% of real estate in order to qualify for the real estate test.

Capital losses are, under certain conditions, only deductible upon liquidation of the subsidiary. 

b. Hungary

The corporation tax rate in Hungary is 16% in 2009 (2008: 16%). Since 2007 capital gains can be considered exempted income provided that certain criteria are fulfilled. A special solidarity tax is levied on companies, which is 4% of the accounting profit modified by certain items such as dividends received and donations. Dividends, interest and royalty paid out are not subject to withholding tax in 2009, however, starting from 2010 withholding tax could be levied on certain payments. Losses in the first three years of operation can be carried forward without limitation. Losses arising afterwards can be carried forward indefinitely, subject to certain limitations. Losses incurred before 2005 can be carried forward for five years, subject to certain limitations.

c. Czech Republic

The corporation tax rate in the Czech Republic is 20 % in 2009 (2008: 21%). Capital gain could be taxed at 10% under certain circumstances. Tax losses can be carried forward up to five years to offset future taxable income (previously seven years). Dividends paid out of net income are subject to a withholding tax of 15%, subject to the relevant double taxation treaty or EU regulations.

 d. Poland

The corporation tax in Poland (including capital gains) is 19% in 2009 (2008: 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 19% in 2009 (2008: 19.5%). The combined corporate and provincial tax rate is 30.9%. Non-capital tax losses can be carried back three years and carried forward up to 20 years for losses arising in 2006 and later, 10 years for losses arising in taxation years ending after 22 March, 2004 and before 2006, 7 years for losses arising in taxation years ending before 23 March, 2004. Capital tax losses can be carried back three years and carried forward indefinitely against other capital gains. Dividends paid out of net income are subject to a withholding tax of 25%, subject to the relevant double taxation treaty.

f. Bulgaria

The corporation tax rate in Bulgaria (including capital gains) is 10% in 2009 (2008: 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 2009 (2008: 16%). Dividends paid out of net income are subject to a withholding tax of 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 2009 (2008: 10%). The same rate also applies to capital gains. Capital gains are taxable at the rate of 10 %. Losses may be carried forward for 10 years. No carry-back of losses is permitted. Dividends paid outside the country are subject to a withholding tax of 20 % subject to the relevant double taxation treaty.