20th Mar 2006 07:01
Black Sea Property Fund Limited20 March 2006 For Immediate Release 20 March 2006 The Black Sea Property Fund Limited Preliminary announcement of results for the period 27 January to 31 December 2005 The Black Sea Property Fund Limited, which specialises in the financing and sale"off-plan" of luxury holiday apartments in Bulgaria, is pleased to announce itspreliminary results for the period 27 January to 31 December 2005. The Fund is managed by Development Capital Management (Jersey) Limited. List of ContactsDevelopment Capital ManagementRoger HornettTom Pridmore020 7399 4270 Buchanan CommunicationsCharles Ryland020 7466 5000 Numis SecuritiesCharles Farquhar020 7776 1500 The Black Sea Property Fund Limited Annual Report and Financial Statements For The Period 27 January to 31 December 2005 Chairman's Statement I am pleased to welcome shareholders to the first full set of financialstatements for The Black Sea Property Fund Limited (the Fund) for the periodended 31 December 2005. Good progress has been made and investment is ahead ofour initial expectations. The initial period has been very busy and DevelopmentCapital Management (Jersey) Limited (the Manager), has been very active in notonly seeking out and securing investment opportunities but also setting thestrategy for the future realisation of the Fund's investments. Valuation The Fund's investments are valued every six months by Colliers International.Using the methodology set out by the Royal Institute of Chartered Surveyors, thedevelopments are valued on an 'as if built' open market comparative basis. Theestimated valuation of the properties financed and under option within theportfolio as at year end was £158m. The Net Present Value (NPV) for theseprojects, discounted back using a risk premium of 11% pa, over their anticipatedlife, together with the current cash reserves amounted to £73.1m (29.2p pershare). This compares with an NPV for the Fund as at 30 June 2005 of £69m (27.5pper share). This valuation should not be seen as a profit forecast, but itprovides a measure of the progress of your Fund. Investment strategy Launched on 14 March 2005, the Fund was well received by both institutional andprivate investors, to the extent that the subscriptions under the placing werecapped at £50m. Designed for the investor seeking capital gain, the Fund's investment objectiveis to seek to share in the substantial profit margins enjoyed by developers ofholiday properties in Bulgaria. The Fund finances the construction of developments by acquiring rights overproperties, at a price below the 'as if built' current market value. The financeis released in instalments providing the Fund with a significantly gearedinvestment, offset by the discounted purchase price. The Fund aims to sell theproperties 'off-plan' during the construction period, receiving the buyer'sdeposits, which are based on the full market price, before the full developmentfinancing is drawn down. In its dealings within the Bulgarian property development market, the Managerhas found that a more advantageous method of investing, has been to use loanfinancing. Accordingly, it is proposed that the wording of the strategy beamended to more accurately reflect techniques used by the Fund. The Board doesnot believe this increases the risk profile of the Fund or that it isdetrimental to the interests of shareholders. An ordinary resolution to approvethis amendment is to be put to shareholders at the annual general meeting. At its launch, the investment policy of the Fund limited to 20% the percentageof the Fund's assets (at the time of investment) which could be used to investin land. With investments concluded and under consideration, the Fund is closeto this limit. The Manager continues to see potentially attractive investmentopportunities involving investment in land and the Board is of the view that itwould be in the interests of shareholders for the Fund to be able to continue toconsider and, if appropriate, invest in these types of opportunities.Accordingly, a resolution is being put to shareholders at the annual generalmeeting which would, if passed (and subject to approval of the Jersey FinancialServices Commission), increase the limit to 35%. Investment progress Prior to the admission to AIM, the Manager had acquired three options over some1,300 luxury holiday apartments to be built along the Black Sea coast. The sitesat Kavarna, Obzor and Shabla are each within an hour's drive of either Bourgasor Varna, the main airport towns in the region. These options committed theFund, if exercised, to an investment of €9.3m. In April 2005 the Fund entered into a fourth option agreement with Byala BeachTour for the construction of a further 1,200 luxury apartments as part of aholiday complex on the coast. Upon exercise this would commit the Fund to aninvestment of €15m. This was followed by an investment in the ski resort ofPamporovo in October 2005, of a further €4.6m, taking the proportion of the Fundpotentially committed to a little over 40%. Before the year end, talks were at an advanced stage to acquire development landin Bulgaria's fast growing ski resort of Borovetz, which the government plans touse as its principal resort area in its bid for the 2014 Winter Olympics. The deal was announced mid January 2006 and thefull cost of the project at €15.7m brought the total amount of the Fundallocated to investment, to more than 60%. The Fund now has a wide spread of geographically diversified investments, withvarying completion schedules. This has laid the foundation for a managedprogramme of realisations. Property prices and demand The average price of property in Bulgaria in the twelve months ended December2005 increased by 36% (2004: 40%), although with wide regional variations.Prices in the capital, Sofia, where supply is expected to outstrip demand in2006, rose by an average of 20%, whilst those in the coastal regions close towhere the majority of the Fund is invested reported stronger growth. In Varnaprices rose by 26% and in Bourgas by 46%. In all three centres average pricelevels exceeded €1,000 per square metre for the first time. Land owners are becoming increasingly aware of the value of their assets andthis has been reflected in rising land prices. With the increasing number ofinvestors seeking land to develop, the Manager continues to focus its efforts insecuring high quality sites. Marketing the Fund's properties The Board is aware of the importance of sales if profits are to be realised. Themarketing campaign for the 'Magnolia' development at Pamporovo, the mostadvanced of the Fund's development projects, was launched to UK investors inJanuary this year. As announced the first phase of these sales has attracted 62reservations at an average price of €1150/m2. The market for holiday apartments abroad remains robust. According to the Officeof Deputy Prime Minister, 51,000 UK residents bought holiday apartments abroadin 2004, an increase of 25% over the previous year, bringing total number ofoverseas properties owned to 254,000. Similar dynamics are reflected in Ireland, Russia, Scandinavia and Germany. Investment background To a significant extent the success of your Fund will be dependant on Bulgaria'sability to continue to attract more tourists, particularly those who wish to ownholiday properties. Apart from the natural attractions of the country, suchtourism will be enhanced if there is a stable government, a strong economy withlow inflation and a firm currency. Tourism In the first 11 months of 2005 Bulgarian tourist numbers increased by 5.1% to4.6m. Tourist income for the year as a whole is expected to rise by between 8%and 9%. Tourism from the EU rose by 6.1% and accounted for 55% of the total,with Russian tourists to Bulgaria increasing by an above average 16.5%. OnlyGerman tourists registered a decline from record 2004 levels. On a regional basis the ski resort of Borovetz recorded growth of 20%, with 70%of visitors coming from the UK. This is particularly notable in the light of thegovernment's bid for the 2014 Winter Olympic Games. Following positive meetingswith the IOC, Bulgaria is hopeful that it will be on the short list to beannounced in July 2007. The government has selected Borovetz as the key site forthe Olympic village and is planning to invest more than €400m intoinfrastructure projects across the ski region including significant upgrades tothe road and rail networks. This bodes well for prices in the area. It is hoped that 2006 will again be a strong year for Bulgarian inward tourism,encouraged by a number of announcements from low cost and scheduled airlinesthat Bulgaria is to be added to their list of available destinations. From March2006 British Airways will fly direct from Luton airport to Varna at a cost ofbetween €150 and €200. Wizz Air, the low cost carrier from Hungary, willcommence flights from Luton to Sofia in May 2006. In addition, Norway's low costairline, Air Shuttle, has announced a direct service to both Varna and Bourgas. However, progress is not universal. The 12 month delay in the completion of theSofia airport up-grade to August 2006 and the uncertainty over the concessionfor the extension of both Varna and Bourgas airports is likely to have arestraining effect on the levels of tourism. Politics The elections in June 2005 brought about a change to the political scene. Afterlengthy negotiations, a three party coalition under the premiership of SergeyStanishev was formed. Although it is early days, the coalition appears to beworking well, forging a sensible agenda for economic growth and EU membership. The Economy The economic climate in Bulgaria remains generally favourable. Indications ofGDP growth in 2005 are coming in at around 5.5% after 5.8% in 2004, with bothprivate consumption and capital investment continuing to move strongly ahead.The IMF, which has received early repayments of Bulgarian debt, is rightlyinsisting that the 2006 budget surplus should be maintained at 3.0% of GDP inorder to offset the trade gap. 2006 growth is currently estimated at more than5.0%, with unemployment falling and inflation reducing slightly. The 2005 current account deficit at 14.9% of GDP however remains of concern.This is a function of rising wages on the one hand and the failure by theCentral Bank to rein in credit demand on the other. Currency As part of Bulgaria's EU accession plans, the government has pegged theBulgarian Lev to the Euro. from the outset, as indicated in the prospectus themajority of the Fund's assets are held in Euros, reflecting the nature of theinvestments the Fund will make. Whilst this allows a more clear view forinvestment planning, it does mean that gains and losses from exchange ratemovements will occur in the Financial Statements which are reported in Sterling.At the June interim stage the Euro to Sterling rate was 1.48. Since then a morehawkish stance by the ECB and a 0.25% rise in rates in December have promptedthe Euro to strengthen to 1.45 at the 31 December year end. Progress on EU accession At the time of writing, 13 EU members have ratified Bulgaria's accession treatyincluding Italy, the UK, the Netherlands and Spain. The final EU Commissionreport is due in April this year with the eventual entry decision announced at some point during May. The main area of concern remains corruption, but the adoption of a new penalcode, the arrest and removal of a number of senior people in areas of publicadministration and considerable progress on border control suggest that the oneyear delay clause will not need to be triggered. Only recently, EU JusticeCommissioner Franco Frattini made it clear that not only would the EU helpBulgaria meet its targets but that it was in the Union's best interests to seeBulgaria enter on schedule. This is far from a declaration of intent but it doesshow that the two sides are working together to achieve the same result. Share repurchase authority A resolution is being proposed at the AGM to renew the Company's authority torepurchase up to 14.99% of its share capital for cancellation. If approved itwould be your Board's intention to consider the repurchase of shares onoccasions where there were no other suitable sources of demand and where theprice paid would enhance shareholder value. Appointment of broker In September 2005, Numis Securities was retained on the Fund's behalf as brokerand nominated adviser. This followed the departure of the investment trust teamat Collins Stewart which sponsored the Fund's launch. Retirement of Director It is with regret that the Board announced on 2 March 2006, the retirement ofJames Ogilvy, due to health considerations. Mr Ogilvy was instrumental insupporting the Manager in the establishment and launch of the Fund in 2005 andcontinued to play an active role in its development. Both the Board and theManager wish to record their gratitude for all that Mr Ogilvy has done on behalfof the Fund since its launch and wish him well in his retirement. Outlook Competition has increased significantly, with a number of new funds and propertydevelopers looking to profit from the attractiveness of the Bulgarian holidayproperty market. This will inevitably place an upward pressure on developmentprices. However, your Fund's early entry into the market, a strong localmanagement team and the positive movement in property prices should allow forgood returns on the Fund's capital. The Manager is at advance stages of negotiation to acquire a number of otherattractive investments for your Fund. If these are successfully concluded, theFund's capital will be fully committed ahead of the time frame set out in theprospectus. The focus of the Fund's activities will then change to themanagement and realisation of these investments. I would like to thank the Manager for what has been achieved to-date, I believetheir excellent work will reward shareholders in the long term. Melville Trimble16 March 2006 Manager's Report The Fund The first mover advantage enjoyed by the Fund at the time of its launch allowedthe Manager to purchase options on 1,300 apartments, a discount of more than 50%to the valuation provided by Colliers International. In April a subsequentoption agreement was signed with BBT for 1,200 apartments as part of a majorholiday complex to be built at the coastal town of Byala. The total investmentrequired for these options, if exercised, will be €22m. Since then the property market in Bulgaria has become increasingly competitiveand more professional with a number of major players entering the scene. Thiswill of course place pressure on land prices and we are conscious of maintainingthe quality of the investments as the market expands. As a result of increasingdeal flow we have raised our staffing levels, securing the services of an inhouse lawyer, as well as an experienced valuer. The supply of second-homes in Bulgaria is still focused in the popular resortsof Sunny Beach, St Vlas and Sozopol. Sunny Beach in particular accounted fornearly half of the supply in 2005. Typically these developments have been smallto medium in scale, with approximately 140 apartments per development. The mainconcern in these areas is oversupply, lower quality projects and a lack ofdiversification in design, facilities and services. In selecting investments theManager has been seeking to find developments with a high degree ofdifferentiation, both in terms of location, quality and size. As the marketgrows buyers are beginning to look outside the traditional resorts and areincreasingly becoming more selective. It is these trends that good stockselection should address. During the period the decision to diversify led to the Fund's investment intothe southern ski resort of Pamporovo, securing a joint venture with MagnoliaHomes to acquire 353 of the 420 luxury apartments they are building to becompleted in time for the 2007 ski season. Immediately following the year end the Fund acquired development land inBorovetz, 45 minutes drive along the main Sofia/Borovetz road. Borovetz isBulgaria's number two ski resort and has been chosen to house the principal skivillage as part of the country's ambitious bid for the 2014 Winter Olympics. Theintention of the Manager is to form a joint venture partnership with a suitableconstruction team and to develop this land. The Economy Following 5.8% GDP growth in 2004, the Bulgarian economy got off to a good startin 2005, although as the table below demonstrates, Q3 growth eased somewhat asgovernment consumption and exports both slowed, leaving the consumer and capitalinvestment spending as the main economic forces of expansion. For the first nine months growth averaged 5.6% against 5.3% at the same stage in2004, giving rise to our belief that for the year as a whole a rate of 5.5% isachievable. It would seem reasonable to forecast a similar rate for 2006. Most other economic variables remained very much under control. Unemploymentfell from 12.0% at the start of the year to a nine year low of 10.4% by October,whilst inflation rose from 3.3% in January to 6.5% by December, driven by higheroil prices, increases in excise duties on cigarettes and tobacco and higherutility prices. Public finances continued to improve with the budget surplus coming in at 3.0%of GDP in 2005 after 1.7% the previous year. With much of the growth in importsdown to investment goods, this suggests the current account deficit, presentlyat 14% of GDP, should now start to flatten out. Total government debt was reinedback to 21.6% of GDP by the end of October, down from just over 30% at the startof the year. Although positive for growth, the rapid inflationary rise in consumer confidenceis being addressed by the central bank, which has raised minimum reserves tocounter bank lending growth. However more may need to be done. Retail salesgrowth remains close to 12%, whilst car sales, all imports, were up 46% in thefirst 9 months of the year alone. For the year ahead, the 2006 budget would seem somewhat too expansionary,raising pensions by 5% and public sector wages by 6%, whilst cutting the topmarginal rate of tax from 32% to 28%. Only an 8.0% increase in rail fares willtemper the resultant increase in demand. Overall, Bulgaria has a strong economy with powerful growth, good publicfinances, reducing unemployment and relatively benign inflation. Only theconsumer and the impact of increasing wealth on the trade balance remain ofconcern. Constraints from the currency board and requirements from the IMF andWorld Bank should keep these in check. Summary of GDP growth Jan-Sept 2005 (Dec unavailable at timeof going to press) Component Q1 2005 Q2 2005 Q3 2005Total GDP y.o.y. +6.0% +6.4% +4.6%Private consumption +7.3% +5.7% +9.7%Government consumption -8.6% -3.4% -5.9%Exports +8.8% +12.0% +0.9%Imports +10.8% +15.5% +19.0% Politics The June 25 elections followed a remarkable change in the political landscape.Simeon of Saxe- Coburg, who previously held 120 of the 240 seats in parliamentand had ruled with the support of the MRF Turkish minority party, gained only22% of the vote and 53 seats. The BSP Socialist party took the lead with 82seats, not enough to form a majority government, and the MRF third with 34seats. Following protracted negotiations, all three parties formed a coalitionunder the premiership of the BSP leader Sergey Stanishev. So far the coalitionhas worked well and consensus has been maintained with the key areas of theeconomy and EU accession remaining firmly at the top of the agenda. EU Accession April 2005 saw the Bulgarian government sign the EU accession document, onschedule along with Romania. When the EU published its progress report in lateOctober it pointed to a number of issues which still needed to be addressed. Topof the list was high level corruption and judicial reforms. In response theBulgarian government drew up a 766 point charter for accession which has beengiven top priority. Since then a new penal code has been implemented, border controls stepped up, aseries of high level officials dismissed or allowed to resign and judicialreforms set in motion. Olli Rehn, EU accession minister, has said that in hisview, Bulgaria can meet the requirements without triggering the one year delayclause, whilst EU justice minister Mario Frattini has offered to assist thegovernment and pointed out that it is in the EU's interest to see Bulgaria joinon time. Thirteen member states have approved Bulgaria's membership, including Italy, afounder member and Spain. Only Germany will wait until after the April 2006final EU Commission report before placing legislation before parliament. The Manager remains confident that EU accessionremains on track. Outlook Although slower than 2004, the growth in tourism continued, with tourist numbersrising 5.1% in the first 11 months of the year. Receipts from tourism areforecast to have risen by between 8% and 9% for the year as a whole. Withinthese numbers are divergent trends; Germany, until now the premier touristgroup, saw a decline in interest whilst UK tourists visiting Bulgaria increasedby a healthy 36%. At this stage, there seems no reason that this should notcontinue. The Manager believes that EU accession will make a considerable difference toboth tourism levels and the demand for holiday homes. It will also attract thelow cost carriers. Wizz Air announced recently that they would commence flightsto Sofia from London's Luton airport and would fly direct to Bourgas during thesummer season. British Airways will commence a direct flight to Varna,increasing the frequency during summer. This reflects a similar pattern to thatwhich occurred in Hungary. Following EU accession in May 2004, tourism therejumped by 30% in 2005, whilst the number of low cost carriers increased fromfive to eleven. The publicity given to the attractiveness of Bulgaria as a holiday homedestination, the cheapness of property relative to international competition andthe yields which are available, nearly twice the level elsewhere, are beingincreasingly highlighted in the UK media. This should add significantly to thedemand for property. Financial Summary & Investment Portfolio As at 31 December 2005 The portfolio currently consists of cash deposits, investments in accumulationMoney Market Funds, option agreements over apartments along the Black Sea coastand a financing agreement for the construction of apartments at Pamporovo. Inorder to show an indicative value for these investments, the projects have beenexternally valued on an 'as if built basis' and the cash flows over the life ofeach project have been discounted back by 11% per annum in order to arrive at acurrent net present value (NPV) as shown below. Within the financial statements,the options have been accounted for as interests in property and as a result donot reflect either the liability or benefit should the options be exercised. Thefinancing agreement is included within the loans item. NPV(£) Pence Book Value % of Pence per share (£) total per shareCash and moneymarket funds 43,563,518 17.3 43,563,518 99.7 17.3Interests in property* Byala 12,695,704 5.1 1 0.0 - Obzor 1,896,321 0.8 138,313 0.3 - Kavarna 1,735,076 0.7 0 0.0 - Shabla 9,423,776 3.8 0 0.0 - Magnolia-Pamporovo 3,811,190 1.5 4,297 0.0 - 73,125,585 29.2 43,706,129 100% 17.3 Upon exercise, the deposits required for each development are as follows: • £Byala 12,600,000 8,657,414Obzor 1,120,000 769,548Kavarna 1,118,624 768,602Shabla 7,200,000 4,947,094Magnolia-Pamporovo 4,700,000 3,229,353 26,738,624 18,372,011 * Interest in property The book value placed on the Obzor option reflects the value of shares issued inconsideration for the option. The options for the Kavarna and Shabla properties have been assigned to theFund. Consideration of 1,037,344 shares will be issued contingent upon finalconstruction permits being granted. At the period end final construction permitshad not been issued on either site and therefore no value has been ascribed. The book value of Magnolia-Pamporovo is based upon the share capital ofsubsidiary owned. The option over the Byala site has been valued at the nominal €1 paid inconsideration for it. Directors' Report For the period 27 January 2005 to 31 December 2005 The Directors submit their Report and audited Financial Statements for theperiod 27 January 2005 to 31 December 2005. The Company was incorporated on 27 January 2005 in Jersey and was launched as anunclassified Fund on 14 March 2005 within the provisions of the CollectiveInvestment Funds (Jersey) Law 1988. Principal Activity The Black Sea Property Fund Limited (the 'Fund') is a closed-ended, Jerseyregistered, investment company formed to access the Bulgarian property marketand more particularly properties, predominantly holiday apartments and villas,to be built along Bulgaria's Black Sea coastline. Listing The Fund is listed on AIM. Investment Strategy The Fund finances the construction of developments by acquiring rights overproperties, at a price below the 'as if built' current market value. The Fund aims to sell the properties 'off-plan' during the construction periodsharing the profits with the developer as they are sold. Early stage, wholesale investment offers the potential for significant returnswhile also affording a degree of protection against any future downturn incapital values. Results and Dividends It is not intended in normal circumstances that the Fund will pay dividends onthe shares. The proceeds realised from the portfolio will be available for reinvestment intofurther investment property (net of any costs). The Board will, however,consider the distribution of capital profits on the shares after the first threeyears of the Fund's life and at any time if the Manager does not believe thereto be further attractive investment opportunities. Following the end of thefifth year of the Fund's life, the proceeds of sale of the property portfoliowill be returned to Shareholders as determined by the Board. The income statement is set out below. The Directors do not recommend thepayment of a dividend. Life The Company will have a life of 5 years plus up to 2 further years for theplanned realisation of the Property Portfolio. The life may be extended byspecial resolution of Shareholders (requiring a two-thirds majority of thosevoting). Custodian - Fixed Income Portfolio BNP Paribas (Jersey branch) provides custody services in relation to the Fund. Board of Directors The Directors of the Company are Melville Trimble (Chairman), Roger Maddock, TheHon. James Ogilvy (retired 2 March 2006), Roger King and Evgeni Chachev. Theywere all appointed from the formation of the Company on 27 January 2005 exceptfor Evgeni Chachev who was appointed 31 January 2005, and as such stands forelection at the AGM. Shareholders' InterestsExtent of holdings No of Shareholders1 - 9,999 8910,000 - 99,999 115100,000 - 499,999 41500,000+ 51 296 At 6 March 2006 the Fund was aware of the following interests of 3% or more inthe Ordinary share capital of the Fund: Holder No. Held % heldNutraco Nominees Limited 39,352,650 15.70%Vidacos Nominees Limited 22,000,000 8.78%BNY (OCS) Nominees Limited 21,913,190 8.74%Citygate Nominees Limited 14,576,082 5.81%Barclays Capital Nominees (No 3) Limited 13,250,000 5.29%Goldman Sachs Securities (Nominees) Limited 11,300,000 4.51%Credit Suisse Client Nominees (UK) Limited 10,000,000 3.99%Chase Nominees Limited 9,875,000 3.94%HSBC Global Custody Nominee (UK) Limited 8,225,000 3.28% The Directors are not otherwise aware of interests of 3% or more in the Fund 'sissued share capital. Directors' Interests The maximum amount of remuneration payable to the Directors permitted under theArticles is 100,000 per annum. The Directors received in aggregate £60,103 forthe period ended 31 December 2005. The interests of the Directors in the Ordinary share capital of the Fund as at31 December 2005 are:- Non Executive Directors BeneficialMelville Trimble 50,000Roger Maddock 50,000The Hon. James Ogilvy (retired 2 50,000March 2006)Roger King 50,000 In accordance with the lock-in arrangements contained in the AIM rules, theDirectors have agreed not to dispose of their securities for a period of oneyear from the date of admission. Roger Maddock is both a director of the Fund and non-executive chairman of theManager. By Order Of The Board BNP Paribas Fund Services Jersey LimitedSecretary15 March 2006 Statement of Directors' Responsibilities The Directors are responsible for preparing the financial statements inaccordance with applicable law and International Financial Reporting Standards. Company law requires the directors to prepare financial statements for eachfinancial year which give a true and fair view of the state of affairs of theFund and of the profit and loss of the Fund for that period. In preparing thosefinancial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Fund will continue in business; and • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping accounting records that disclose withreasonable accuracy, at any time, the financial position of the Fund and enablethem to ensure that the financial statements comply with the Companies (Jersey)Law 1991. They are also responsible for safeguarding the assets of the Fund andhence for taking reasonable steps for the prevention and detection of fraud andother irregularities. Independent Auditors' Report to the Members of The Black Sea Property Fund Limited We have audited the financial statements of The Black Sea Property Fund Limitedfor the period ended 31 December 2005 which comprise the Consolidated IncomeStatement, the Consolidated Balance Sheet, the Consolidated Statement of CashFlows, the Consolidated Statement of Changes in Equity and the related notes.These financial statements have been prepared under the accounting policies setout therein. This report is made solely to the company's members, as a body, in accordancewith Article 110 of the Companies (Jersey) Law 1991. Our audit work has beenundertaken so that we might state to the company's members those matters we arerequired to state to them in an auditor's report and for no other purpose. Tothe fullest extent permitted by law, we do not accept or assume responsibilityto anyone other than the company and the company's members as a body, for ouraudit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As described in the Statement of Directors' Responsibilities, the company'sdirectors are responsible for preparation of the financial statements inaccordance with applicable law and International Financial Reporting Standards. Our responsibility is to audit the financial statements in accordance with therelevant legal and regulatory requirements and International Standards onAuditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a trueand fair view and are properly prepared in accordance with the Companies(Jersey) Law 1991. We also report to you if, in our opinion, if the company hasnot kept proper accounting records or if we have not received all theinformation and explanations we require for our audit. We read the Chairman's Statement, Manager's Report and Directors' Reportaccompanying the financial statements and consider the implications for ourreport if we become aware of any apparent misstatements within them. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing(UK and Ireland) issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgements made by the directors in the preparation ofthe financial statements, and of whether the accounting policies are appropriateto the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements: • give a true and fair view, in accordance with International FinancialReporting Standards, of the state of the company's affairs as at 31 December2005 and of its loss for the period then ended; and • have been properly prepared in accordance with the Companies (Jersey) Law1991. KPMG Channel Islands Limited, Chartered Accountants16 March 2006 Consolidated Balance SheetAs at 31 December 2005 Group Company 2005 2005 notes £ £Non current assetsInvestment in 9 - 4,300subsidiariesOptions over property 6 138,313 138,313Loans & receivables 7 729,696 765,379 868,009 907,992Current assetsOther receivables 10 35,300 35,300 Investments at fairvalue through profit or 5 39,132,200 39,132,200lossCash and cash 4,467,734 4,431,318equivalents 43,635,234 43,598,818Total assets 44,503,243 44,506,810 Current liabilitiesOther payables 11 (275,059) (274,374) Net assets 44,228,184 44,232,436EquityShare capital 12 50,138,313 50,138,313 Retained earnings 13 (5,910,129) (5,905,877) Total equity 44,228,184 44,232,436 Net asset value per 14 17.6 17.6Ordinary share (pence) These financial statements were approved by the Board of Directors on 16 March2006 Melville Fitzgibbon TrimbleRoger Charles Maddock Consolidated Income StatementFor the period 27 January 2005 to 31 December 2005 notes £ £IncomeBank interest 186,246Loan interest 8,245Net loss on investments 8 (123,640)Total income 70,851 Operating expensesManagement fees 2 (802,740)Other operating expenses 3 (669,031)Total operating expenses (1,471,771) Net (loss) for the period (1,400,920) Basic earnings per share 4 (0.6)(pence)Diluted earnings per share 4 (0.6)(pence) All income is attributable to the equity holders of The Black Sea Property FundLtd. There are no minority interests. Consolidated Statement of Changes in EquityFor the period 27 January 2005 to 31 December 2005 Share Retained Total Capital Earnings £ £ £Net operating loss for the period - (1,400,920) (1,400,920) Foreign exchange on subsidiarytranslation - 15,791 15,791 Issue of Ordinary share capital 50,138,313 - 50,138,313Sales commission and formationexpenses - (4,525,000) (4,525,000) Balance at 31 December 2005 50,138,313 (5,910,129) 44,228,184 Consolidated Statement of Cash FlowsFor the period 27 January 2005 to 31 December 2005 Notes Group Company £ £Cash flow from operating activitiesInterest received 183,754 183,754Investment management fees paid (802,740) (802,740)Other operating expenses paid (401,780) (399,716)Net cash outflow from operating 15 (1,020,766) (1,018,702)activities Cash flow from investing activitiesLoan to developer (706,881) (739,843)Purchase of property subsidiary - (4,297)Purchase of accumulation money market (59,668,115) (59,668,115)fundsSales of accumulation money market 20,412,275 20,412,275fundsNet cash outflow from investing (39,962,721) (39,999,980)activities Cash flow from financing activitiesIssue of Ordinary shares 50,000,000 50,000,000Sales commission and formation costs (4,550,000) (4,550,000)paidNet cash inflow from financing 45,450,000 45,450,000activities Net increase in cash and cash 4,466,513 4,431,318equivalents Cash and cash equivalents at start of - -the period Effect of foreign exchange rates 1,221 Cash and cash equivalents at 31 4,467,734 4,431,318December 2005 Notes to the Financial Statements 1 Accounting policies The consolidated financial statements of the Company for the period ended 31December 2005 comprise the Company and its subsidiaries (together, the 'Group')and have been prepared in accordance with International Financial ReportingStandards ('IFRS') issued by the International Accounting Standards Board (IASB)and interpretations issued by the International Financial Reporting Committee ofthe IASB (IFRIC). (a) Basis of preparation The financial statements have been prepared on a historical cost basis, exceptfor certain financial instruments detailed below. (b) Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company (its subsidiaries) made up to31 December each year. Control exists when the Company has the power, directlyor indirectly, to govern the financial and operating policies of an entity so asto obtain benefits from its activities. The financial statements of subsidiariesare included in the consolidated financial statements from the date that controlcommences up to the date that control ceases. (c) Revenue recognition Interest receivable on fixed interest securities is recognised on an effectiveyield basis. Interest on short term deposits, expenses and interest payable aretreated on an accruals basis. (d) Expenses All expenses are charged through the income statement, except for expenses whichare incidental to the disposal of an investment which are deducted from thedisposal proceeds of the investment. (e) Investments General Assets are recognised at the trade date on acquisition and disposal. Disposalproceeds will be measured at fair value which will be regarded as the proceedsof sale less any transaction costs. Options over property Options over property held either directly or by subsidiary undertakings forinvestment or resale are treated as non-current assets and are included in thebalance sheet at the lower of cost or net realisable value. Cost is deemed to bethe fair value of the consideration and includes acquisition expenses. Nodepreciation is provided on these assets. Loans and receivables Loans and receivables are recognised on an amortised cost basis. Quoted investments Quoted investments are categorised as held at fair value through profit or loss,and are measured initially at cost, the cost being the fair value of theconsideration. Subsequent to initial recognition, all held at fair value assetsare measured at fair value. The fair value of these financial instruments isbased on their quoted bid price at the balance sheet date without deduction forestimated future selling costs. Changes in the fair value of all held at fairvalue assets are taken to the income statement. On disposal, realised gains andlosses are also recognised in the income statement. (f) Cash and cash equivalents Cash and cash equivalents comprise current deposits with banks. (g) Taxation The Fund is an Exempt Company for Jersey taxation purposes. The Company pays anexempt Company fee, for each company within the group, which is currently £600per annum. The subsidiary BSPF Magnolia AD will be liable for Bulgariacorporation tax at a rate of 15%. The subsidiary is not liable for any furtherlocal taxes, however withholding tax may be liable on repatriation of assets andincome to the Fund, as currently there is no double taxation treaty between theUK and Bulgaria. Deferred tax is recognised in respect of all temporarydifferences that have originated but not reversed at the balance sheet date,where transactions or events that result in an obligation to pay more tax in thefuture or right to pay less tax in the future have occurred at the balance sheetdate. This is subject to deferred tax assets only being recognised if it isconsidered more likely than not that there will be suitable profits from whichthe future reversal of the temporary differences can be deducted. (h) Foreign currency The results and financial position of the Company are expressed in poundssterling, which is also the functional currency of the Company. Transactions in currencies other than sterling are recorded at the rates ofexchange prevailing on the dates of the transactions. At each balance sheetdate, monetary items and non monetary assets and liabilities that are fairvalued and that are denominated in foreign currencies are retranslated at therates prevailing on the balance sheet date. Gains and losses arising onretranslation are included in net profit or loss for the period whereinvestments are classified as fair value through profit or loss. Exchangedifferences on translation of the Company's net investment in foreign operationsare recognised directly in equity. (i) Share Capital Share capital Participating (Ordinary) shares are classified as equity. External costsdirectly attributable to the issue of new shares are shown as a deduction toreserves. Founder shares Founder shares are classified as equity. 2 Management fee Group 2005Management fee £802,740 The management fee paid to Development Capital Management (Jersey) Limited is 2%per annum of the amount subscribed plus any gains retained by the Fund forreinvestment. The management agreement between the Fund and the Manager is terminable byeither party on twelve month's notice, subject to an initial term of 36 monthsfrom admission. 3 Other operating expenses Group 2005 £Legal and professional fees 179,371Advisory and consultancy fees 113,331Marketing and public relations 69,903Directors' remuneration 60,103Travel and subsistence 48,096Secretarial fees 43,293Auditor's remuneration for:Audit services 38,295Non audit services 42,504Custodian fees and bank charges 16,433Other 57,702 669,031 The company has no employees, all operational activities are carried out by theManager on behalf of the Fund. 4 Earnings per share The earnings per Ordinary share is based on the net loss for the period of£1,400,920 and on 250,691,563 Ordinary shares. The diluted return per Ordinary share is based on the net loss for the periodand 251,728,907 Ordinary shares, which reflects the potential dilution asdiscussed in note 18. 5 Investments held at fair value through profit and loss Group & Company 2005 £ ListedAccumulation money market fundsOpening book cost and fair value -Purchase at cost 59,668,115Sales - proceeds (20,412,275)- realised gain on sales 25,795- realised exchange losses on sales (378,112)Closing book cost 38,903,523Closing unrealised appreciation on Money 633,230Market FundsClosing unrealised exchange loss (404,553)Closing fair value 39,132,200 6 Options over property Group & Company 2005 £ UnlistedPurchase at cost 138,313Closing book cost 138,313 The consideration for these options was in the form of shares in the Company. 7 Loans and receivables Group Company 2005 2005 £ £Loans 729,696 765,379 The Black Sea Property Fund Ltd made a loan of €1,100,000 to its subsidiary BSPFMagnolia AD on 14 November 2005. The interest rate is a multiple of 1.25 timesthe aggregate of 5% and the six month Euribor rate, a rate of 9.5% accrueddaily. The loan and interest are payable on the sale of property by thedeveloper. BSPF Magnolia-AD has made a loan of €1,050,000 to a developerMagnolia Holidays EOOD on 15 November 2005, also at the interest rate andrepayment dates detailed above. 8 Loss on Investments Group & Company 2005 £Foreign exchange loss in period (782,665)Movement in the value ofheld-at-fair-value 633,230investmentsGain on disposal of Money Market Fund 25,795Net loss on investments (123,640) 9 Investment in subsidiary undertakings Company 2005 •BSPF Magnolia AD 6,383BSPF Property Limited 1BSPF Property (2) Limited 1BSPF Property (3) Limited 1BSPF Property (4) Limited 1BSPF Property (5) Limited 1 6,388 The €6,388 has been translated to £4,300 at a rate of 1.4855 the rate prevailingat the date of acquisition. The Fund holds 50,000 Ordinary shares of Bulgarian Lev 1 in BSPF Magnolia AD,which is incorporated in Bulgaria. These shares are 25% paid up (€6,383). Thisrepresents the entire issued share capital. The principal activity of thiscompany is the lending of funds to the Bulgarian developer. The Fund also holds1 Ordinary share of €1 in each of the remaining subsidiaries which areincorporated in Jersey. This represents the entire issued share capital of thesecompanies, the authorised share capital of each is €10,000. 10 Debtors Group Company 2005 2005 £ £Bank and deposit interest 2,491 2,491receivablePrepayments 3,809 3,809Other debtors 29,000 29,000 35,300 35,300 11 Creditors - amounts falling due within one year Group Company 2005 2005 £ £Amounts due to - (3)subsidiariesAccruals (275,059) (274,371) (275,059) (274,374) 12 Called up share capital Company 2005Authorised: Founder shares of no par value 10 Ordinary shares of no par value Unlimited Issued and fully paid: £ 2 Founder shares of no par value - 250,691,563 Ordinary shares of 50,138,313 no par value On incorporation of the Fund, 2 Founder shares of no par value were issued tothe Manager. These shares are not eligible for participation in Fund investmentsand carry no voting rights at general meetings of the Fund. On the initial launch date, 14 March 2005, 250,000,000 Ordinary shares of no parvalue each were issued at 20p each and 691,563 shares were issued at 20p each inexchange for the Obzor option. A further 1,037,344 shares will be issued contingent upon final constructionpermits being granted for the options over the sites at Shabla and Kavarna. 13 Retained earnings Group Company 2005 2005 £ £At start of the period - -Bank and loan interest earned 194,491 195,819Operating expenses (1,471,771) (1,469,022) (1,277,280) (1,273,203) Net movement on foreign exchange (782,665) (766,699)Movement in held at fair value 659,025 659,025investmentsTotal operating expenses (1,400,920) (1,380,877) Foreign exchange on subsidiary 15,791 -translationSales commission and formation (4,525,000) (4,525,000)expensesAt 31 December 2005 (5,910,129) (5,905,877) The Fund's retained net loss for the period was £1,396,843. 14 Net asset value per share The net asset value per Ordinary share is based on the net assets attributableto equity shareholders of £44,228,184 and on 250,691,563 Ordinary shares, beingthe number of Ordinary shares in issue at the period end. 15 Reconciliation of net cash outflows to operating loss Group Company 2005 2005 £ £Net operating loss (1,400,920) (1,380,877) Increase in creditors 275,059 274,374Increase in loan interest (8,245) (9,573)receivableIncrease in debtors (10,300) (10,300)Add back net loss on investments 123,640 107,674Net cash outflow from operating (1,020,766) (1,018,702)activities 16 Financial instruments The Fund's financial instruments comprise money market funds, cash balances anddebtors and creditors that arise directly from its operations, for example, inrespect of sales and purchases awaiting settlement, and debtors for accruedincome. The main risks the Fund faces from its financial instruments are (i) marketprice risk, being the risk that the value of investment holdings will fluctuateas a result of changes in market prices caused by factors other than interestrate or currency movement, (ii) currency risk, (iii) credit risk, (iv) interestrate risk and (v) liquidity risk. The Board regularly reviews and agrees policies for managing each of theserisks. The Manager's policies for managing these risks are summarised below andhave been applied throughout the period. The numerical disclosures excludeshort-term debtors and creditors. Market price risk Market price risk arises mainly from uncertainty about future prices offinancial instruments used in the Fund's operations. It represents the potentialloss the Fund might suffer through holding market positions as a consequence ofprice movements and movements in exchange rates. It is the Board's policy to hold a broad spread of fixed interest investmentsusing collective schemes in order to reduce risk arising from factors specificto a particular country or sector. The Manager monitors the prices of the moneymarket funds throughout the year and reports to the Board, which meets regularlyin order to review investment strategy. Currency risk The functional currency and presentational currency of the Company is Sterling.Options over property, loans and other investments are denominated in Euros andthe Company is therefore exposed to movements in the exchange rate between theEuro and Sterling. As stated in the prospectus the company does not hedge thisrisk. Credit risk The company places funds with third parties and is therefore potentially at riskfrom the failure of any such third party of which it is a creditor. The Companyexpects to place any such funds on a short-term basis only and spread these overa number of different providers. Recovery of the loan (Magnolia) is dependent on successful completion and saleof properties by the developer. Interest rate risk The interest rate risk profile of financial assets at the balance sheet date wasas follows: Fixed Floating Rate Non-interest Interest Bearing At 31 December 2005 £ £ £Euro loan - 729,696 -Euro cashdeposit/investment - 66 39,132,200Sterling cash deposit - 4,467,668 - - 5,197,430 39,132,200 The floating rate assets consist of cash deposits on call earning interest atthe prevailing rate. The non-interest bearing assets consist of accumulationmoney market funds. Both of these categories are redeemable on demand. The Euroloan is detailed in note 7. Liquidity risk The Company's assets mainly comprise cash balances and readily realisablesecurities, which can be sold to meet funding commitments as necessary. 17 Post balance sheet events On 25 January 2006 a 10% deposit of €367,102 was paid on land at Borovetz. Thebalance of the initial purchase price (€3.5m) is due on completion of the notarydeed, once final approval of the build density is obtained. Further payments of€0.5m upon planning being granted and €0.5m upon completion of the developmentwill also be due. 18 Related party transactions The Fund purchased three options at launch from the Manager. The option over theObzor development was purchased in exchange for 691,563 shares. The tworemaining options have been assigned to the Fund. Consideration of 1,037,344shares will be issued contingent upon final construction permits being granted.At the period end, final construction permits had not been issued on either siteand therefore no value has been ascribed. Information regarding subsidiaries andsubsidiary loans can be found in notes 7 and 9. 19 Directors interests Total compensation to the Directors over the period was £60,103. Melville Trimble, The Hon. James Ogilvy, Roger King and Roger Maddock each hold50,000 Ordinary shares. Roger Maddock is both a Director of the Fund and non-executive Chairman of theManager. 20 Company domicile The Black Sea Property Fund Limited is a company domiciled in Jersey, ChannelIslands. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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