10th May 2007 15:11
Black Sea Property Fund Limited10 May 2007 For Immediate Release 10 May 2007 The Black Sea Property Fund Limited Final results for the twelve months ended 31 December 2006 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 itsinterim results for the twelve months ended 31 December 2006. The Fund is managed by Development Capital Management (Jersey) Limited. Copies of the Financial Statements are currently being sent to shareholders andmay be obtained free of charge from Development Capital Management Limited, 84Grosvenor Street, London, W1K 3JZ. List of Contacts Development Capital Management Roger Hornett Andrew Mitchell 020 7355 7600 Buchanan Communications Charles Ryland Isabel Podda 020 7466 5000 Numis Securities Iain McDonald Bruce Garrow 020 7260 1000 Annual Report and Financial Statements For the twelve months ended 31 December 2006 Chairman's Statement This, the second year of the Fund's life, has been a busy one, both in thepublic eye and behind the scenes. The investment phase of the Fund issubstantially complete, and the emphasis is shifting to the execution ofexisting investments and sales. The Fund's portfolio is now well balanced withhigher-end coastal developments, a substantial investment in the ski regions anda premium local housing development in Sofia. Challenges have been encountered.In Borovets legal difficulties with the land purchase arose but are now close tobeing resolved. The original off-plan investment model of the Fund has alsoproved difficult in some instances, particularly where developers areunrealistic in the sales prices expected. In reaction to this, and to theincreased availability of competing bank financing, the Fund is focussing moreon buying and developing land itself where the potential margins aresubstantial. Two of the Fund's developments are currently on sale: Magnolia in the Pamporovoski region and at Obzor on the coast. A total of 61 reservations have beensecured at Obzor, whilst reservations at Magnolia have been put on hold whilethe developer is in discussions regarding the possibility of a bulk sale. Overthe summer, a further two coastal developments will go on sale at Kavarna andNikea Park (a total of 348 units) and, later in the year, the Fund's developmentin Sofia should start marketing. Overall, substantial progress has been madeover the last twelve months which should stand investors in good stead for theyears ahead. Progress Progress during the year has seen investments in Nikea Park - Golden Sands,South Beach - Tsarevo, land at Borovets and Byala and the commencement ofdevelopment and sales at the Obzor site. Sales and marketing at the Magnolia and Obzor sites have been progressing. Bothdevelopments launched phases in November and, as we announced in January,reservations have been taken on a total of 125 apartments out of a total of 605.In response to the strong demand received so far, the developer of the Obzorsite has commenced active marketing of the site in Russia. As can been seen fromthe front cover, build is progressing at the Magnolia site and construction atObzor is on track. Following the year end, the Board has announced a €4 million purchase of land inSofia where high end local housing will be developed. The Fund has also acquiredland for €10.5 million in the ski region of Borovets, in an area designated forredevelopment as part of the new "Super Borovets" resort. At the same time, theFund has resolved the legal difficulties encountered in relation to the firstsite acquired by the Fund in Borovets (where a restitution claim was lodged) byexchanging the site for one in the same area. The Fund has chosen to exit the development at Tsarevo and has been returned thefinancing of €1.14m provided (which was 30% of the amount originally committedfor to the project). Off-plan sales of this development during the 2006 summerseason were hampered by the unrealistic prices expected by the developer and thepoor presentation of the site itself. Although it is disappointing not to havegenerated returns on this development, the Board is pleased to have been able torecover the capital investment. Valuation As is standard, the Fund's property portfolio has been independently valued atthe year end by Colliers International. Using RICS methodology, each developmentis valued on an "as-if-built basis" and land is valued on the basis of aweighted extraction and market comparison approaches. The average "when-built"valuation of the apartments being financed by the Fund is €1340 per squaremetre. The average valuation at the previous year end was €1254 per squaremetre. Although these valuations are not strictly comparable (as newdevelopments are included in the 2006 figures), they show a general steadyupward trend in apartment values. The Fund's land investment at Byala was madein March 2006 for €60 per square metre. The year end valuation by Colliers is€99 per square metre, an increase of 65%. This investment is accounted for atcost in the Fund's net asset value. Overall at the year end, the Fundparticipated in property worth over €134m. In the past the Fund has reported a discounted net present value for itsinvestments to give an indication of the value inherent in projects and optionsheld which are recorded at cost in the accounts. Because of the large number ofvariables and necessary assumptions in producing this net present value, notleast the time taken to execute deals and achieve sales, this measure has notproved to be a useful measure and will not be published in future. Changes to the Board The year has seen a strengthening of local experience on the Board. As mentionedin the interim report, Bill Drysdale joined in August and I'm pleased to welcomeIrena Komitova and Bogdan Stanchev, both of whom joined in October. Mr Stanchevhas wide experience in the management and administration of Bulgarian businessesand has, since early 2005, been the Chief Executive Officer of the VarnaBusiness Park. Ms Komitova has an extensive background and contacts in theBulgarian business community. She is the managing partner of a managementconsultancy based in Sofia. It is fair to say that all bring a wealth ofBulgarian expertise and provide an invaluable contribution to the Fund. I'd alsolike to take this opportunity to thank Evgeni Chachev for his contributionduring the Fund's early life. Shareholder resolutions to confirm the newappointments are being proposed at the AGM. Market The main news at the period end was the entry of Bulgaria to the European Unionas a full member from 1 January 2007. The importance of this cannot beunderestimated both in terms of the financial support for Bulgaria and in termsof integration with the rest of western Europe. The economy continues to performwell with strong GDP growth continuing and inflation under control. Steadygrowth in tourism continued, particularly in the ski regions, backed by anincrease in the number of flights to the country. Following EU accession eightlow cost airlines have now applied to fly into Bulgaria which will be core tothe continued growth in tourism. All of which helps to support the propertymarket in the areas in which the Fund focuses. Prospects We believe that the market outlook is promising. EU accession, strong economicgrowth and the arrival of low cost travel should provide a solid platform forproperty sales for the right projects, both in the second home and localmarkets. The Fund's focus on higher quality apartments (particularly at Obzorand Kavarna) should help avoid the issue of over-supply of lower quality producton the coast. The increased investment in the ski regions and diversificationinto the local housing market in Sofia should also add to the growth prospectsfor the year ahead. Land investments As referred to earlier, the Fund has moved more towards a model of buying anddeveloping land, for example in Sofia and Borovets. Amongst the normal courseresolutions to be proposed at the AGM is a resolution to increase the percentageof the Fund's assets which may be used to acquire land from 35% to 55%. Thepurpose of this increase is to allow the Fund's existing land investment atByala, which is currently structured as a loan backed by a first legal charge,to be directly held as a land investment. This will not involve any further cashinvestment by the Fund, or change the commercial position of the Fund, but wouldmake the value of the land more transparent for shareholders in futurereporting. Special resolutions As the Fund approaches full investment and its energies have become more focusedon the development and realisation of its investments, the Board has beenconsidering ways in which it can enhance shareholder value. The Board is alsoconcerned that their view of the value inherent in the Fund is not reflected inthe share price. As proposed at last year's AGM, the Board is again seeking shareholder approvalof the Fund's share buy back authority. Accordingly a special resolution isproposed at the AGM to renew the Fund's authority to repurchase up to 14.99% ofthe Fund's issued share capital through market purchases. However at this time,the ordinary shares trade at a premium to their underlying net asset value andtherefore any use of this authority would be dilutive to shareholders'interests. The Board and Manager's focus is now very much on execution of existingprojects, and on sales. Although the Manager continues to see a number of newpotentially profitable projects in Bulgaria, the Board considers it appropriateto return to shareholders the current cash held which is excess to theinvestment and working capital requirements for the existing portfolio. Thisexcess capital would in any event be sufficient for only one further investmentwhich may take some time to secure, and the Board is mindful that the 18 monthinitial investment period of the Fund has past. Accordingly, special resolution10 is to be proposed, that subject to the approval of the Royal Court in Jersey,the Fund's stated capital account be reduced from £50,138,313 to £32,138,313.The practical effect of the proposed capital reduction is to reduce the Fund'sstated capital account by £18,000,000 and to create a distributable reserve of£18,000,000. This will allow the directors the flexibility, subject to thefuture needs of the Fund and the consent of the JFSC, to make a cashdistribution of not less than 1p per share, to shareholders. Annual General Meeting The Annual General Meeting of the Fund will be held at 11:00am on 22 June at BNPHouse, Anley Street, St. Helier, Jersey. Melville Trimble May 2007 Manager's Report The Fund The year under review has seen the completion of several further investments andthe commencement of off-plan sales at a number of the sites. As we commented atthe interim stage, a further two new financing agreements were entered into andland was invested in at Byala and at Borovets. Since then, development of thesite at Obzor, previously held under option, commenced, a financing agreement atKavarna was signed and marketing of the Magnolia and Obzor sites launched towardthe year end. YooBulgaria Obzor At the beginning of November the Fund announced it had exercised the option overthe site at Obzor. The development is a co-operative venture between YOO (thedesign orientated development company formed by John Hitchcox and PhilippeStarck), Unique Developments and Canadian architects Diamond & Schmitt. Theinitial marketing launch of the development took place in November and a website is available at www.yoobulgaria.com. Obzor is located approximately midway between Varna and Bourgas, each home to aninternational airport. The site is a beach front property and consists ofstudio, one, two and three bedroom apartments. It has been branded by YOO as'YooBulgaria' and will be marketed globally by Knight Frank. Completion isexpected to be in Spring 2008. The terms of the option have been extended so that the Fund will now finance theentire first phase of the development, comprising 257 units, rather than the 20%first envisaged. The decision was taken as this development, through theinvolvement of the design and branding team, should significantly differentiateitself from other resorts on the Bulgarian coast. The finance price is €650 per square metre, a total financing of €17.5m. Thisincrease is a result of the higher quality build and design, associated with theinternational partners involved, which the Manager believes will help to drivesales. Colliers International valued the apartments as at 31 December 2006 on an'as-if-built' current market basis at €1,496/m2. The first €162.50/m2 of any netproceeds on the sale of apartments will be paid to the Fund, with the balanceshared in the ratio 70% to the developer and 30% to the Fund. The returnspayable to the Fund are subject to an IRR cap of 90% such that any profit inexcess of this will accrue to the developer. The Knight Frank marketing campaign of the entire first phase has been wellreceived, not only in the UK but internationally, with the agent seeingconsiderable interest from Moscow. Encouragingly, demand has been for apartmentsthroughout the price range. Sales prices so far have exceeded those expected bythe Manager and the first contracts are expected to be exchanged shortly. Thesuccess, particularly with Russian investors, has lead to the developer planninga Russian focused marketing campaign spread over the next four months. YooBulgaria Kavarna Shortly after the Ozbor agreement was announced, the Fund also exercised itsoption over the site at Kavarna. The same team behind the YooBulgariadevelopment at Obzor are involved with this project and it is intended the sitewill be co-branded. As with the Obzor site the Fund has financed the entire first phase, currentlyanticipated to comprise 230 units, rather than the 20% envisaged under theoriginal option agreement. Again the terms are broadly similar. The Fund's finance price is €625/m2, atotal financing of €15.5m. Colliers International valued the apartments as at 31December 2006 at €1,217/m2. The first €156.25/m2 of any net proceeds will bepaid to the Fund, with the balance shared 70/30 with the developer, up to an IRRcap of 90%. The marketing launch for this development is expected to take place later thissummer, with Knight Frank as the lead estate agent. Magnolia, Pamporovo Over the course of 2006 development at the Magnolia site progressed well. Duringthe first half of the year the planning permits were granted, technical designdrawings were finalised, a construction company appointed and blasting andfoundation work commenced. By the end of the period the main shell for the firstof the two blocks was nearly complete, construction of the spa had commenced andthe foundations for the second block are in. The developer expects to completein time for the 2008 ski season. Payments were released from the Fund, duringthe period with the final sum being released in November. At the period end€5.6m had been invested. Global Spaces and co-agent Avatar have witnessed strong UK demand for the secondphase (105 apartments). Again prices are above expectations. Reservations have,however, been put on hold while the developer is in discussions regarding a bulksale. Borovets In January 2006 the Fund purchased 53,047m2 of land in the Borovets ski region,one of Bulgaria's most popular ski resorts and the focus of the "Super Borovets"project designed to boost infrastructure in the area. The purchase price was€4.7m with a deposit of €0.4m being paid. Towards the end of 2006 we becameaware of a third party restitution claim being made against the vendor of theland. As a result of the purported claim the Fund did not complete the purchase.Whilst the Fund has received legal opinion that the challenge has no merit, thelength of time court proceedings may take, has led the Fund to seek to resolvethe matter in an equitable way. A resolution is expected soon. The Manager views the Borovets region as a particularly attractive area,particularly in light of the "Super Borovets" redevelopment program, Followingthe year end the Fund also acquired another parcel of land for €10.5m in thesame region. Nikea Park In May contracts were signed to finance 118 out of 154 apartments being built bythe Bulmix Group, a highly regarded developer in Bulgaria. The Nikea ParkRiviera Resort, 18 km from Varna on the Black Sea coast is set near the popularGolden Sands resort. The Fund has made a total investment of €4.2 millionagainst the Colliers International as-built valuation of €8.6m. The majority ofthe site is complete with the remaining finishing work due for completion byApril. Sadly the initial response to the marketing of this site has not beenconverted into sales. Problems have been encountered with the finishing works,which prevented conversion of the enquiries received over the summer. Thedeveloper, however has committed to rectify these to allow for a new refocusedmarketing campaign, commencing in time for the summer season. South Beach Holiday Village The Fund also made a smaller investment in March to finance 86 of the 147apartments currently under construction in the South Beach Holiday Village, nearTsarevo on the southern Black Sea coast. Following the year end the Fundannounced the termination of the agreement and the return of its capitalinvestment. High pricing and poor presentation of the site during inspectiontrips hampered sales at the development. Despite lengthy negotiations betweenall parties no agreement to resolve these issues was reached. Table of invested Funds as at December 2006 Development Build No of Start of Invested Committed Area Units Marketing Funds Funds Financings Magnolia 24,319 348 September 06 €5,612,825 €5,612,825 Nikea Park 8,013 118 April 07 €4,006,604 €4,006,604 YooBulgaria 27,050 257 November 06 €2,213,398 €5,274,750 Obzor YooBulgaria 24,798 230 July 07 - €4,649,625 Kavarna Land Byala 161,820 1,000 August 08 €9,709,200 €9,709,200 Borovets 56,100 900 December 07 €360,000 €4,875,740 Development 308,981 2,939 €23,016,708 €37,844,344 Totals Byala As reported in the interim report, in March the Fund invested €8.6m in 143,314m2of land in Byala, 50km south of Varna on the Black Sea Coast. This was followedby a further 18,506m2 for €1.1m. The investment remains at a 40% discount to thevaluation carried out as at 31 December. Byala beach is expected to become animportant area for tourist development. The land owner is looking to develop thesite within the next eighteen months, when the investment will be converted intoa 30% deposit once construction begins. Options The Fund retains two further options relating to land at Byala and at Shabla, onthe Northern Black Sea coast. Progress by the developer on its plans for thesite at Byala have progressed more slowly than anticipated and the developer isnow intending to develop the land under option in conjunction with a much largerarea. It is consequently not possible to say when or if the Fund would be in aposition to exercise this option. The timing of the Shabla project is alsouncertain; the land is remote from existing infrastructure and its development will depend on the state of the market over the next two years.These options are not assigned a value in the Fund's net asset valuation. Politics The political scene remained subdued throughout the period, with the three partycoalition working to ensure EU accession took place on schedule and without theimposition of "appropriate measures". The Brussels Commission had been expected to make their final decision mid May,but delayed their report until October, listing a number of requirements formembership to be completed on schedule. These related primarily to theaccountability of the judiciary, high level corruption and fraud. The cabinetworked through the summer break in tandem with EU officials to ensure this wascompleted in time. The result was the announcement late October that Bulgaria (and Romania) hadcomplied with EU accession requirements and would become full members fromJanuary 1st 2007. The Economy GDP growth, having reached 5.5% in real terms in 2005, continued to improve in2006, with the first nine months recording average year on year growth of 6.3%,increasing throughout the year to reach 6.7% in the third quarter. This wasdriven by capital investment on the one hand and private consumption on theother. Retail sales remained strong during the period and unemployment,excluding seasonal fluctuations, continued on a downward path, hitting 9.12% atthe year end, down from 11.6% at the start of the year. The difficult areas remain the trade and current accounts, together withinflation. The year on year CPI rate ended the year, at 6.5%, roughly where itstarted it. In the meantime oil price rises took it up to a February peak of8.8%. Since then large hikes in gas and other utility prices have prevented therate from falling back. Most economists estimate the underlying rate at between3.5% and 5.0%, a figure which appears accurate given the limited amount ofinformation available. The impact of EU accession has been to attract funds to the country as well asindustry and commerce. The EU will add 14% to infrastructure spending in both2007 and 2008, whilst a total of €11bn is to be fed into the system over thenext 8 years. GDP growth should therefore average at least 7.0% this year andnext. Tourism 2006 saw tourist numbers increase steadily for the fourth consecutive year,rising 5.5% to 5.2m. 2005 had witnessed a 5.1% increase from 4.7m in 2004 to4.9m. Tourist revenues, are expected to be a little in excess of €2.0bn. The ski season was especially strong with numbers rising by between 15% and 35%depending on the resort. Having put in a strong application to secure the 2014Olympics, Bulgaria was informed that having reached the last seven, they werenot to be short-listed. This has not dissuaded the government from completingthe planned €420m infrastructure improvements in the major ski centres, much ofwhich was earmarked for Borovets. The government sees tourism as a key area for improvement, establishing theNational Tourist Agency in May last year. The open skies agreement with theEuropean Common Aviation Authority, also in May, provided improved and easieraccess throughout the enlarged EU. As a result 11 major airlines announced newor additional flight schedules to Bulgaria's four main airports. Since the announcement of EU accession, eight low cost airlines, includingRyanair, have applied to fly to various Bulgarian airports. In their interimstatement Ryanair mentioned Plovdiv, the nearest airport to Pamporovo, as one ofthose in the frame. 2006 also saw the final decision on the 35 year concession for operating thecoastal airports at Varna and Bourgas. Awarded to Fraport of Germany, thedecision means that a sum in excess of €427m will be spent on improving andextending the runways, terminals and transfer facilities. The arrival of lowcost travel, combined with EU accession should produce a major boost. WhenHungary joined the EU in May 2005, tourism in the balance of the year shot up54%. Given Bulgaria has already achieved powerful growth since 2000, whentourist numbers were 2.3m, it would be wrong to extrapolate such a high 2007growth rate. However the impact is still likely to be very considerable. The property market It seemed at the start of the year that the media was determined to emphasisethe negative aspects of buying residential property in Bulgaria, which togetherwith uncertainty about EU accession, unquestionably held back average pricegrowth. House price inflation, which had reached 36.6% in 2005, only added 9.2%in the first nine months of the year, according to official statistics. Howeveronce entry had been agreed final quarter growth accelerated to 5.5%, anannualised rate of 23.8%. Since the end of the period under review "The 24 HourDaily" noted that the price of an average house in Bulgaria has risen byapproximately 10% in the first two months of 2007. Much print has been given over to the subject of oversupply in the second homesmarket in Bulgaria. As a result we commissioned a report by ColliersInternational midway through 2006. The Survey concluded that there were a totalof 22,564 apartments under construction or approved for construction at thatstage in 2006, a 37% increase on the number built in 2005. More than one thirdof these were in Sunny Beach, where the Fund is not active, with only 11% of thetotal of the size typical of the Fund's involvement. In the mountain resortsthere was an increase in new units from 4,842 apartments to 12,185. Two thirdsof these were in Bansko, again where the Fund is not involved. Only 4% of thetotal were substantial complexes. In all 34,749 second homes were under construction on the coast and in themountains. This compares with annual UK demand alone for international secondhomes in excess of 53,000 in 2005, whereas the principal buyers in Bulgaria areRussian, Scandinavian and German. Viewed as part of the Bulgarian market as awhole, some 260,000 residential properties changed hands last year to a value ofapproximately €5bn. It would seem therefore that although the supply situationhas to be watched closely, some of the more extreme comments are unfounded. Our own experience of sales on the Magnolia site at Pamporovo and the Yoodevelopment at Obzor, is that there is a lot of property on the market but notenough at the quality end of the spectrum, where the Fund is positioned. We haveseen a considerable number of enquiries for blocks from Scandinavian and easternEuropean investors, and sales have tended to be of the premium units at strongprice levels. The outlook for the 2007 property market seems positive, especially if latestpress reports are to be believed. The "24 Hour Daily" apart, FC Exchange, aproperty and money broker, believes that Bulgaria will be one of theinternational property hotspots for 2007, whilst Knight Frank's latest quarterlyinternational property report puts annual investment returns in Bulgaria justshort of 20%, a figure only exceeded in their universe by Latvia. Outlook With Bulgaria now a full member of the EU a lot of the uncertainty surroundingthe country's future has been alleviated. Economic growth remains strong,without causing too many concerns about overheating and many of the termsattached to EU/IMF funding should ensure economic discipline is maintained.Tourism continues to expand and the growth in the number of carriers,particularly the low cost airlines, is very promising. Thus the underlyingconditions remain positive for the sector. The property market remainsattractive particularly for quality product and it is this differentiation thatwill mark out the most successful developments. Overseas property investment hasalways been a hot topic with the UK media and despite some disparaging reportsat the beginning of 2007, Bulgaria, we believe, will remain as one of the topareas to buy. Development Capital Management (Jersey) Limited May 2007 Consolidated Balance Sheet As at 31 December 2006 Group Company Group Company 2006 2006 2005 2005 Notes £ £ £ £Non-Current AssetsInvestments in 9 - 17,199 - 4,300subsidiariesLand 6 247,238 - - -Exercised options over 6 150,799 150,799 138,313 138,313propertyInterest in property 6 518,561 - - -Loans & receivables 6 14,446,857 15,396,339 729,696 765,379 15,363,455 15,564,337 868,009 907,992Current assetsOther receivables 10 10,019 9,820 35,300 35,300Investments at fair 7 23,424,780 23,424,780 39,132,200 39,132,200value through profitor lossCash and cash 3,213,477 3,009,810 4,467,734 4,431,318equivalents 26,648,276 26,444,410 43,635,234 43,598,818Total assets 42,011,731 42,008,747 44,503,243 44,506,810Current liabilitiesOther payables 11 (216,503) (176,040) (275,059) (274,374) Net assets 41,795,228 41,832,707 44,228,184 44,232,436EquityShare capital 12 50,138,313 50,138,313 50,138,313 50,138,313Retained earnings (8,343,085) (8,305,606) (5,910,129) (5,905,877)Total equity 41,795,228 41,832,707 44,228,184 44,232,436Net asset value perOrdinary share (pence) 13 16.7 16.7 17.6 17.6 Consolidated Income Statement For the Year Ended 31 December 2006 Year ended 27 January to 31 Dec 2006 31 Dec 2005 Notes £ £Bank interest 173,143 186,246Loan interest 579,017 8,245Total revenue 752,160 194,491Gain/(Loss) on investments 8 90,016 (123,640)Currency losses (23,540) -Total income 818,636 70,851 Operating expensesManagement fee 2 (1,000,000) (802,740)Other operating expenses 3 (2,222,441) (669,031)Total operating expenses (3,222,441) (1,471,771)Loss before tax (2,403,805) (1,400,920)Tax 5 (35,057) - Loss for the year (2,438,862) (1,400,920)Basic earnings per share 4 (1.0) (0.6)(pence)Diluted earnings per share 4 (1.0) (0.6)(pence) Consolidated Statement of Changes in Equity Group For the period 27 January 2005 to 31 December 2005 Share Retained capital earnings Total £ £ £Net operating loss for the - (1,400,920) (1,400,920)periodForeign exchange on - 15,791 15,791subsidiary translationIssue of Ordinary share 50,138,313 - 50,138,313capitalSales commission and - (4,525,000) (4,525,000)formation expensesAt 31 December 2005 50,138,313 (5,910,129) 44,228,184For the year ended 31December 2006 Share Retained capital earnings Total £ £ £As at 1 January 2006 50,138,313 (5,910,129) 44,228,184Net operating loss for the - (2,438,862) (2,438,862)yearForeign exchange on - 5,908 5,908subsidiary translationAt 31 December 2006 50,138,313 (8,343,085) 41,795,228 Consolidated Statement of Cash Flows For the year ended 31 December 2006 Group Company Group Company 2006 2006 2005 2005 £ £ £ £Operating activitiesLoss before tax for the period (2,403,805) (2,366,521) (1,400,920) (1,380,877)Gain/(Loss) on investments heldat fairvalue through profit or loss (90,016) (90,016) 123,640 107,674Currency losses 23,540 23,540 - -Increase in loan interest (287,511) (306,230) (8,245) (9,573)receivableDecrease/(Increase) in other 281 480 (10,300) (10,300)receivables(Decrease)/Increase in other (93,613) (98,334) 275,059 274,374payablesNet cash outflow from operating (2,851,124) (2,837,081) (1,020,766) (1,018,702)activitiesInvesting activitiesLoans to developers (14,413,890) - (706,881) -Loans to subsidiaries - (14,592,343) - (739,843)Options over property payment (12,486) (12,486) - -Purchase of property subsidiary - (12,896) - (4,297)Purchase of accumulation money (2,385,090) (2,385,090) (59,668,115) (59,668,115)market fundsSales of accumulation money 18,385,014 18,385,014 20,412,275 20,412,275market fundsNet cash outflow from investing 1,573,548 1,382,199 (39,962,721) (39,999,980)activitiesFinancing activitiesShare issue - - 50,000,000 50,000,000Share issue expenses 25,000 25,000 (4,550,000) (4,550,000)Net cash inflow from financing 25,000 25,000 45,450,000 45,450,000activitiesNet increase in cash and cash (1,252,576) (1,429,882) 4,466,513 4,431,318equivalentsCash and cash equivalents at 4,467,734 4,431,318 - -start of the periodEffect of foreign exchange rates (1,681) 8,374 1,221 -Cash and cash equivalents at 31 3,213,477 3,009,810 4,467,734 4,431,318December 2006 Notes to the Financial Statements 1 Accounting Policies The consolidated financial statements of the Fund for the period ended 31December 2006 comprise the Fund 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 measurement The consolidated financial statements have been prepared on the historical costbasis except for the following: • financial instruments at fair value through profit and loss are measured atfair value. • investment property is measured at fair value. (b) Functional and presentation currency These consolidated financial statements are presented in GBP, which is theFund's functional currency. (c) Use of estimates and judgments The preparation of financial statements requires management to make judgments,estimates and assumptions that affect the application of accounting polices andthe reporting amounts of assets, liabilities, income and expenses. Actualresults may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisionsto accounting estimates are recognised in the period in which the estimate isrevised and in any future periods affected. (d) Revenue recognition Interest receivable on fixed interest securities is recognised in 'Interestincome' using the effective interest method. The effective interest method is away of calculating the amortised cost of a financial asset or a financialliability (or groups of financial assets or financial liabilities) and ofallocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated futurecash receipts or payments through the expected life of the financial instrumentor, where appropriate, a shorter period, to the net carrying amount of thefinancial asset or financial liability. When calculating the effective interestrate, the Fund estimates cash flows considering all contra actual terms of thefinancial instrument but not future credit losses. The calculation includes allamounts paid or received by the Fund that are an integral part of the effectiveinterest rate, including transaction costs and all other premiums or discounts. Interest on impaired financial assets is calculated by applying the originaleffective interest rate of the financial asset to the carrying amount as reducedby any allowance for impairment. (e) Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Fund and entities controlled by the Fund (its subsidiaries) made up to 31December each year. Control exists when the Fund has the power, directly orindirectly, to govern the financial and operating policies of an entity so as toobtain 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. (f) Expenses Expenses are charged through the income statement, except for expenses which areattributable to the disposal of an investment which are deducted from thedisposal proceeds of the investment. In addition certain expenses associatedwith the acquisition of an investment have been capitalised. (g) Investments General Assets are recognised at the trade date of acquisition, and are recognisedinitially at fair value plus any directly attributable transaction costs. Investments at fair value through profit or loss An instrument is classified as at fair value through profit or loss if it isheld for trading or is designated as such upon initial recognition. Financialinstruments are designated at fair value through profit or loss if the Fundmanages such investments and makes purchase and sale decisions based on theirfair value. Upon initial recognition, attributable transaction costs arerecognised in profit or loss when incurred. Financial instruments at fair valuethrough profit or loss are measured at fair value, and changes therein arerecognised in profit or loss. Loans and receivables Loans and receivables include loans and advances originated by the Fund whichare not intended to be sold in the short term and are recognised on an amortisedcost basis. Loans and receivables are recognised when cash is advanced toborrowers and are derecognised when the borrowers repay their obligations, theloans are sold or written off or substantially all the risks and rewards ofownership are transferred. They are initially recorded at fair value plus anydirectly attributable transaction costs and are subsequently measured atamortised cost using the effective interest method, less impairment losses.Where they are denominated in a foreign currency they are translated at theprevailing balance sheet exchange rate. Where the interest rate associated with such loans and receivables is belowmarket, an adjustment is made to reflect the fair value accordingly. Investment property Investment property is stated at fair value. Any gain or loss arising from achange in fair value is recognised in the income statement. Land held forcapital appreciation or for development as an investment property is immediatelyclassified as investment property. Interest in Property Interest in property represents amounts capitalised in relation tonon-derivative options to acquire property at future dates. Amounts capitalisedare amortised over the period of the corresponding options. (h) Movements in fair value Changes in the fair value of all held-at-fair-value assets are taken to theincome statement. On disposal, realised gains and losses are also recognised inthe income statement. (i) Cash and cash equivalents Cash and cash equivalents comprise current deposits with banks. (j) Taxation The Fund is an Exempt Company for Jersey taxation purposes. The Fund pays anexempt company fee, for each company within the group, which is currently £600per annum. The subsidiary BSPF Magnolia AD will be liable for Bulgaria corporation tax at arate of 15%. The subsidiary is not liable for any further local taxes, howeverwithholding tax is liable on repatriation of assets and income to the Fund, asthe withholding tax is not recoverable by the fund. Deferred tax is recognised in respect of all temporary differences that haveoriginated but not reversed at the balance sheet date, where transactions orevents that result in an obligation to pay more tax in the future or right topay less tax in the future have occurred at the balance sheet date. This issubject to deferred tax assets only being recognised if it is considered morelikely than not that there will be suitable profits from which the futurereversal of the temporary differences can be deducted. (k) Foreign currency The results and financial position of the Fund are expressed in pounds Sterling,which is the functional currency of the Fund. 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. (l) Share Capital Ordinary share capital Ordinary shares are classified as equity. External costs directly attributableto the issue of new shares are shown as a deduction to reserves. Founder shares Founder shares are classified as equity. (m)New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are notyet effective for the year ended 31 December 2006, and have not been applied inpreparing these consolidated financial statements: IFRS 7 Financial Instruments: Disclosures and the Amendment to IAS 1Presentation of Financial Statements: Capital Disclosures require extensivedisclosures about the significance of financial instruments for an entity'sfinancial position and performance, and qualitative and quantitative disclosureson the nature and extent of risks. IFRS 7 and amended IAS1, which becomemandatory for the Fund's 2007 financial statements, will require extensiveadditional disclosures with respect to the Fund's financial instruments andshare capital. IFRIC 8 Scope of IFRS 2 Share-based Payment addresses the accounting forshare-based payment transactions in which some or all of goods or servicesreceived cannot be specifically identified. IFRIC 8 will become mandatory forthe Fund's 2007 financial statements, with retrospective application required.The Fund has not yet determined the potential effect of the interpretation. IFRIC 9 Reassessment of Embedded Derivatives requires that a reassessment ofwhether embedded derivative should be separated from the underlying hostcontract should be made only when there are changes to the contract. IFRIC 9,which becomes mandatory for the Fund's 2007 financial statements, is notexpected to have any impact on the consolidated financial statements. IFRIC 10 Interim Financial Reporting and Impairment prohibits the reversal of animpairment loss recognised in a previous interim period in respect of goodwill,an investment in an equity instrument or a financial asset carried at cost.IFRIC 10 will become mandatory for the Fund's 2007 financial statements, andwill apply to goodwill, investments in equity instruments, and financial assetscarried at cost prospectively from the date that the Fund first applied themeasurement criteria of IAS 36 and IAS 39 respectively. The adoption of IFRIC 10is not expected to have any impact on the consolidated financial statements. 2 Management fee Group Group 2006 2005 £ £ Management fee 1,000,000 802,740 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 isterminable by either party on twelve month's notice, subject to an initial term of 36 months from admission. The Manager is entitled to receive a performance fee of 20% of any cash returnsfrom the sale of a property investment above a hurdle rate of 10% compound perannum up to 100% and 30% of any returns in excess of this. As at 31 December2006 there is no contingent performance fee. 20% of the performance feecalculated is subject to a claw back retention against the future performance ofthe Fund. 3 Other operating expenses Group Group 2006 2005 £ £Marketing and public relations 827,230 69,903Amortisation charge 291,506 -Legal and professional fees 167,102 179,371Investment expenses 497,036 -Advisory and consultancy fees 113,007 113,331Directors' remuneration 70,120 60,103Admin fees 55,933 43,293Travel and subsistence 47,163 48,096Auditor's remuneration for:Audit services 45,500 38,295Non audit services 27,687 42,504Custodian fees and bank charges 19,490 16,433Other 60,667 57,702 2,222,441 669,031 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£2,438,862 (2005: £1,400,920) and on 250,691,563 (2005: 250,691,563) Ordinaryshares. The diluted return per Ordinary share is based on the net loss for theperiod and 251,728,907 (2005: 251,728,907) Ordinary shares, which reflects thepotential dilution as discussed in note 17. 5 Tax Group Group 2006 2005 £ £ Irrecoverable overseas tax 35,057 - This tax represents irrecoverable withholding tax on the interest on loans tosubsidiaries and third parties. 6 Investing activities (a) Land Group Group 2006 2005 Opening book cost - - Purchases at cost 247,238 - Closing book cost 247,238 - The Fund has paid a 5% deposit for land at Borovets. The balance is due to bepaid upon completion of the notary deed once final approval of the build densityis obtained and other conditions are satisfied. (b) Exercised options over property Group & Company Group & Company 2006 2005 £ £ Unlisted UnlistedOpening book cost 138,313 -Purchases at cost - 138,313Expenses capitalised 12,486 -Closing book cost 150,799 138,313 (c) Interest in property Group Company Group Company 2006 2006 2005 2005 £ £ £ £Interest in property 518,561 - - - 518,561 - - - An Interest free loan has been made to a third party in order to secure anoption to acquire land at Byala, at a future date, under certain conditions.This interest free loan is accounted for at amortised cost, using the effectiveinterest rate method. As the loan bears interest at a rate below a market rate,a discount arises under the effective interest rate method. This discount hasbeen separately capitalised as 'interest in property' in recognition of theasset that the option represents, and is being amortised over its usefuleconomic life. (d) Loans Group Company Group Company 2006 2006 2005 2005 £ £ £ £Loans and interest 14,215,094 15,164,575 729,696 765,379Expenses capitalised 231,763 231,764 - - 14,446,857 15,396,339 729,696 765,379 The Fund has made loans totalling €5,521,096 to its subsidiary BSPF Magnolia AD,on 14 November 2005, 23rd May 2006 and 18th November 2006 respectively. Theinterest rate is a multiple of 1.25 times the aggregate of 5% and the six monthEuribor rate, the loan and interest are payable on the sale of property by thedeveloper. BSPF Magnolia has subsequently made loans totalling €5,248,245 to adeveloper, Magnolia Holidays EOOD, on the same terms. The Fund has made loans totalling €9,709,200 to its subsidiary BSPF PropertyLtd, which has then lent on the funds to the Bulgarian Property InvestmentTrust. No interest is accruing on these loans and they are repayable on propertycompletion. The Fund has made loans totalling €360,720 to its subsidiary BSPF Property 2Ltd, interest is payable at 5% per annum and repayable on property completion. The Fund has made loans totalling €1,114,680 to its subsidiary BSPF Property 3Ltd, which has then lent on the funds to Sirius-49. No interest is accruing onthese loans and they are repayable on property completion. Subsequent to theyear end this loan has been repaid. The Fund has made loans totalling €4,006,605 to its subsidiary BSPF Property 4Ltd, which has then lent on the funds to Bulmix 97 Group OOD. Interest isaccruing at 7% per annum on these loans and they are repayable on propertycompletion. The Fund has made loans totalling €1,350,000 to its subsidiary BSPF Property 5Ltd, which has then lent on the funds to Black Sea Investment Trust AD. Interestis accruing at 7% per annum on these loans. The loan to Black Sea InvestmentTrust has been secured by a share pledge, over its entire share capital of10,000 registered shares. 7 Investments held at fair value through profit or loss Group & Company Group & Company 2006 2005 £ £Accumulation money market funds Listed ListedOpening book cost 38,903,523 -Movements in year:Purchases at cost 2,385,090 59,668,115Sales - proceeds (18,385,014) (20,412,275)- realised gain on sales 485,798 25,795- realised exchange losses on sales (343,962) (378,112)Closing book cost 23,045,435 38,903,523Closing unrealised appreciation on 974,152 633,230Money Market FundsClosing unrealised exchange loss (594,807) (404,553)Closing fair value 23,424,780 39,132,200 8 Gain/(Loss) on Investments 2006 2005 £ £Foreign exchange on loans (202,488) -Movement in unrealised appreciation 150,668 228,677Gain on disposal of Money Market 141,836 (352,317)FundNet loss on investments 90,016 (123,640) 9 Investment in subsidiary undertakings Company Company 2006 2005 • £ • £BSPF Magnolia AD 25,562 17,194 6,383 4,295BSPF Property Limited 1 1 1 1BSPF Property (2) 1 1 1 1LimitedBSPF Property (3) 1 1 1 1LimitedBSPF Property (4) 1 1 1 1LimitedBSPF Property (5) 1 1 1 1Limited Bulgarian 25,567 17,199 6,388 4,300SubsidiariesTcherno More AD - - - -BSPF Super Borovetz - - - - 25,567 17,199 6,388 4,300 The €25,562 has been translated at rate prevailing at 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 fully paid and represent theentire issued share capital. The Fund also holds 1 Ordinary share of EUR 1 ineach of the remaining subsidiaries which are incorporated in Jersey. Thisrepresents the entire issued share capital of these companies. The authorisedshare capital of each is €10,000. 10 Debtors Group Company Group Company 2006 2006 2005 2005 £ £ £ £ Bank and deposit - - 2,491 2,491 interest receivable Prepayments 10,019 9,820 3,809 3,809 Other debtors - - 29,000 29,000 10,019 11 9,820 35,300 35,300 11 Creditors - amounts falling due within one year Group Company Group Company 2006 2006 2005 2005 £ £ £ £ Amounts due to - (3) - (3) subsidiaries Accruals (216,503) (176,037) (275,059) (274,371) (216,503) (176,040) (275,059) (274,374) 12 Called up share capital Authorised: 2006 2005 Founder shares of no par value 10 10 Ordinary shares of no par value Unlimited Unlimited Issued and fully paid: £ £ 2 Founder shares of no par value - - 250,691,563 Ordinary shares no par value 50,138,313 50,138,313 Founder shares are not eligible for participation in Fund investments and carryno voting rights at general meetings of the Fund. 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 Net Asset Value per share The net asset value per Ordinary share is based on the net assets attributableto equity shareholders of £41,795,228 (2005: £44,228,184) and on 250,691,563(2005: 250,691,563) Ordinary shares, being the number of Ordinary shares inissue at the period end. 14 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)market price risk, being the risk that the value of investment holdings willfluctuate as a result of changes in market prices caused by factors other thaninterest rate or currency movement, (ii) currency risk, (iii) credit risk, (iv)interest rate 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 tohold a broad spread of fixed interest investments using collective schemes inorder to reduce risk arising from factors specific to a particular country orsector. The Manager monitors the prices of the money market funds throughout theyear and reports to the Board, which meets regularly in order to reviewinvestment strategy. Currency risk The functional currency and presentational currency of the Fund is Sterling.Options over property, loans and other investments are denominated in Euros andthe Fund is therefore exposed to movements in the exchange rate between the Euroand Sterling. The Fund does not hedge this risk. Currency rate exposure An analysis of the Group's currency exposure is detailed below: 2006 2005 Financial Net monetary Financial Net Investments assets Investments monetary assets £ £ £ £Euro 37,871,637 1,401,425 39,861,896 66Bulgarian LEV cash - 5,322 - -balance 37,871,637 1,406,747 39,861,896 66 Credit risk The Fund places funds with third parties and is therefore potentially at riskfrom the failure of any such third party of which it is a creditor. As part ofthe management of its liquid assets, the Fund places cash on a short term basisin collective money market investments. The majority of the Fund's loans are ultimately made to property developers andrecovery is dependent on the successful completion and sale of the property overwhich the loan relates. Interest rate risk The interest rate risk profile of financial assets at the balance sheet date wasas follows: 2006 2005 Fixed Floating Non-interest Fixed Floating Non-interest interest rate bearing interest rate bearing £ £ £ £ £ £Euro loans 3,788,377 3,859,396 7,317,645 - 729,696 -Euro cash deposit/ - 1,401,425 23,424,780 - 66 39,132,200investmentBulgarian LEV cash - 5,322 - - - -depositSterling cash deposit - 1,806,730 - - 4,467,668 - 3,788,377 7,072,873 30,742,425 - 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 fixedinterest rate loan is detailed in note 6. Liquidity risk The Fund's assets mainly comprise cash balances and readily realisablesecurities, which can be sold to meet funding commitments if necessary. 15 Post balance sheet events Following the year end the Fund purchased 24,599m2 of development land in theMalinova district of Sofia at a purchase price of €4m. The Fund also terminated the loan agreement in respect of the South Beachinvestement at Tsarevo. The loan amount of €1,140,680 has been returned. Theeffective interest on this loan has been adjusted to reflect the early payment. 16 Commitments The Fund has an agreement to advance €5,274,750 to the developer of the site atObzor. At the period end €2,213,398 of this loan has been advanced. The Fund hasalso signed an agreement to advance up to €4,649,625 for the site at Kavarna. Noadvances have yet been made on this loan. 17 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. 18 Directors interests Total compensation to the Directors over the period was £70,120. MelvilleTrimble, Roger King and Roger Maddock each hold 50,000 Ordinary shares. RogerMaddock is both a Director of the Fund and non-executive Chairman of theManager. 19 Fund 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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