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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Orchid Dev | LSE:OCH | London | Ordinary Share | KYG6791P1072 | ORD EUR0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 1.875 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Jun 2019 to Jun 2024
TIDMOCH
RNS Number : 9935B
Orchid Developments Group Ltd
25 April 2012
25 April 2012
Orchid Developments Group Limited
("Orchid", "the Company" or "the Group")
Final Results 2011
Orchid Developments Group Limited (Orchid), the Bulgarian focused property developer and investor, today announces its audited final results for the year ended 31 December 2011.
Operational Highlights
o Grand Mall Varna - current leased area is 81.6% of which 72.8% is occupied and 8.8% is to be occupied by the end of the first half of 2012. Further 2,200 sqm (c.4.5%) of lettable space currently under negotiation.
-- During 2011 and 2012 to date, the Group let an additional area of 5,300 sqm representing more, than 10% of its entire lettable area.
-- Tenants include numerous well-known international brands such as Carrefour, Zara, Bershka, Intersport, Deichman Adidas, Nike, Tom Taylor, Bata, H&M and McDonalds, some of them appearing for the first time in the local market.
o Orchid Hills Varna - project construction completed in August 2011 within budget; occupancy permit granted in October 2011.
-- During 2011 the company recognised the income from the sale of 40 apartments and 11 parking spaces.
o Orchid Gardens Varna - this project has been delayed as a result of which practicalcompletion has been postponed to the second half of 2012.
-- Following the year end, the Group secured an extended credit facility for Orchid Gardens Varna
Financial Highlights
o Profit before tax was EUR0.3 million (2010: loss EUR22.0 million);
o Profit before tax includes the net valuation profit, relating to the Investment Property items in the amount of EUR3.6 million (2010: loss: EUR19.2 million);
o Net asset value stood at EUR73.1 million (2010: EUR73.3 million), equating to a net asset value per share of EUR0.83 (2010: EUR0.83);
o Revenues from rent and operation of the Grand Mall Varna totalled EUR8.0 million (2010: EUR4.4 million);
o Bellport Corporation has agreed to the deferral of approximately EUR0.9 million in payments due under the management services agreement (outstanding liabilities for 2011 and future liabilities for 2013), which constitutes a related party transaction.
Guy Meyohas, Chief Executive Officer of Orchid, said:
"During the last twelve months, the Group has noticed no significant change in the challenging nature of the markets, which as anticipated has resulted in trading in line with management's expectations.
"Grand Mall Varna, our flagship development, has become one of the leading malls in the City of Varna with 131 leased units occupying more than 80% of its lettable area".
"Management remains focused on the successful completion of Orchid Gardens Varna, letting the remaining area in the Grand Mall Varna and the sale of the remaining apartments in Orchid Hills Varna and Orchid Hills Sofia.
"In addition, having successfully restructured our project credit facilities, we continue to progress and pursue measures to realise value from the Group's assets,including reviewing the undeveloped portfolio for development or realisation."
Ends
Contacts: Orchid Developments Guy Meyohas +35 92 981 9955 Shore Capital and Corporate Limited Dru Danford / Bidhi Bhoma / Toby Gibbs +44 20 7408 4090 MHP Communications Reg Hoare / Tim McCall / Vicky Watkins +44 20 3128 8100
Notes to Editors:
Orchid Developments Group Ltd. (OCH.L), which listed on the AIM market in June 2005, was established with the aim of generating value for shareholders by investing in real estate and leisure business opportunities initially in Bulgaria.
The Group is active in all principal sub-sectors of the Bulgarian real estate and leisure markets and currently holds three residential and six commercial property developments in Sofia and Varna. Its principal investment is the Grand Mall in Varna, Bulgaria's leading shopping mall. www.orchid-dev.com
Chief Executive's Review
Market overview
The economic environment in 2011 has been challenging and the Group has faced tough market conditions as real estate prices remained vulnerable due to uncertainties in the financial markets and the very low volume of transactions.
However, by the end of 2011 some positive trends became apparent: the number of real estate transactions (mainly apartment purchases and sale of yielding assets) rose,whilst housing loans in Bulgaria became more accessible despite the domestic real estate market continuing to perform poorly for a third year in a row. These trends provide some comfort, although they do not necessarily indicate that the market is starting to recover.
During 2011 and especially at the end of the second half of 2011, prices for apartments declined compared to 2010 by 5%-10% (according to the Bulgarian National statistic institute). According to some forecasts, expectations are that the prices will remain at around current levels in 2012 with a possibility of a slight decline.
The retail property market remained unchanged during 2011 as far as new openings are concerned. Rental levels remained relatively stable during the second half of 2011. Leasing transactions are occurring, however, at a much slower pace compared to previous years.
Given the mix of trends outlined above, the Board continue to carefully consider its next steps with regards to its undeveloped properties and have continued to postpone its expansion and investment decisions, until such time as management has witnessed clear signs of the market recovering. At the same time the Board continue to progress and pursue measures to realise the value of its assets.
Portfolio review
Grand Mall (Orchid Multi Use Complex Varna)
Hot Features
Premium
Net Leasable Area: 49,750 sq.m.
Market Value: EUR137 m
Principal tenants: Carrefour, Zara, Pull & Bear,
Bershka, Arena (Cinema), Thechnomarket,
H&M.
Number of tenants: 131
Weighted average unexpired 7.14 years
lease term:
The Grand Mall is the Group's landmark retail development in Varna. The Grand Mall opened on 27 May 2010 with numerous well known international brands, some of them appearing for the first time in the local retail market, including Carrefour, Zara, Pull & Bear, Bershka, Technomarket, Humanic, Deichman, Intersport, Adidas, Nike, Tom Taylor, Butlers, Bata and DM. In September 2011 the company signed a lease agreement with one of the leading retailers on the market H&M.
The leased area of the Grand Mall is 81.6 %, of which 72.8% is occupied and 8.8% is expected to be occupied in the first half of 2012. This takes the total area occupied and soon to be occupied to approximately 40,500 sqm. The Group is also negotiating with potential tenants over a further 2,200 sqm (c. 4.45%) of lettable space.
Since the opening of the Grand Mall footfall levels have increased to 22,000 per day on average. As a consequence of this increased traffic, the Group has seen increased interest from retailers in renting available space.
Orchid Hills Varna
Total Gross area: 49,984 sq.m. Gross area apartments built/units: 30,190 sq.m./336 units Gross area apartments under construction/units: 8,700 sq.m./89 units Parking area: 11,094 sq.m Apartments sold as at 31.12.2011: 300 units Inventory Book value: EUR5.6m
The Group had secured financing for the current (third) stage of its gated residential complex with Unicredit Bulbank Bulgaria and in August 2011 completed the construction of the project. In October 2011 the Company obtained an occupancy permit for this part of the project, thus completing all its legal obligations. As announced in 2009, the Group scaled back construction to two buildings (comprising of 46 apartment units) due to the marked slowdown in the sales of apartment units caused by the ongoing adverse economic conditions. The remaining two buildings remain postponed.
As at 31 December 2011 the Group has 63 units available for sale from stages I and II, and 58 units available for sale from stage III, these representing a total book value as at 31 December 2011 of EUR4.8 million (expected sales value is EUR5.0 million). In addition to this the Group has 174 available parking spaces with a total book value of EUR0.8 million. As at 31 December 2011 the Group had sold 271 units with final agreement and two units with preliminary agreement out of 336 units from stage I and stage II. In addition the Group has signed preliminary agreements for the sale of two units and final agreement for 29 units out of 89 available in stage III of the projects.
Orchid Gardens Varna
Total Gross Area 42,570 sq.m.
Residential Area/units: 12,100 sq.m./107 units
Office Area/units: 9,500 sq.m./88 units
Retail Area/units: 7,700 sq.m./39 units
Parking/units: 13,270 sq.m./237 units
Investment Value (*): EUR29.8m (EUR21.7m WIP, EUR8.1m
Retail part value)
* WIP presented in book Value, Retail is valuated as investment property.
The construction of this high-end mixed-use development on a prime location in Varna city centre is progressing significantly behind the original schedule due to financial problems the general contractors was experiencing. Completion is now expected to take place in the second half of 2012. On completion the project will consist of 16 floors above ground and 3 underground parking levels. The project will consist of 107 apartments, 88 office units, and 39 retail units. On 11 April 2012 the Group announced it had reached an agreement with Unicredit Bulbank Bulgaria for a project-dedicated credit facility agreement to complete the project.
As stated in the 2010 annual report, the Group changed its marketing strategy as it believes that it will achieve better sales closer to completion as local and foreign potential clients, due to the market situation, are expected to purchase apartments only after completion of the construction and the issuance of the occupancy permit by the developer. As at 31 December 2011 the Group has signed preliminary agreements for the sale of 10 apartments out of 107, and 2 office units out of 88.
Orchid Hills Sofia
Total Gross Area 25,158 sq.m. Gross Area/units: 17,703 sq.m./163 units Gross area Parkings: 7,455 sq. m. Apartments sold as at 31.12.2010: 150 units Inventory Book value: EUR0.8 m
As at 31 December 2011, the Group had signed 150 final sale contracts, and had 12 units available for sale and 20 parking spaces with a total book value of EUR0.8 million (expected sales value c. EUR0.9 million).
The Group also continues to own and operate the Golden Yavor Hotel on the Black Sea. As in previous years, the hotel operates during the summer months and is closed for the low season. Management continues to seek ways to maximise shareholder value from this asset.
The Group continues to review its other projects with the intention to maximize value of the Group's assets when market conditions are appropriate.
Future Plans
The Group will continue to focus its efforts in the near future on progressing the construction of its existing development, Orchid Gardens Varna, as well as on letting the retail space in the Grand Mall, selling the remaining residential units in Orchid Hills Varna and Orchid Hills Sofia and marketing the various segments in the mixed used project Orchid Gardens Varna.
Outlook
In light of the economic downturn and the lack of funding available, the Group has limited its on-going developments to three projects, which the Board believes have the best prospects in terms of market demand and financing availability. These projects are: the Grand Mall retail centre; the Orchid Gardens Varna multi-use commercial and residential development; and the Orchid Hills Varna residential complex. Further to the EGM announcement of 15 February 2012, management will continue to focus their efforts to complete successfully the Group's current projects under construction with a plan to realise these assets over the course of the next two years. Proceeds will be used to both - strengthen the Group's cash position and to return cash to shareholders.
Financial review
The Group's net loss for the year ended 31 December 2011 was EUR182,000 (2010: Loss EUR20,203,000).
The revaluation of the Grand Mall by MBL, part of the CBRE Affiliate Network, at EUR136.9 million (2010: EUR133.6 million) (resulting in fair value increase of EUR3.3 million as at 31 December 2011) is the principal contributor to the smaller loss for the period. The main factors which have influenced this fair value adjustment are the increase of rentals due to steps historically agreed with the tenants of the Mall which are indexed to the Euro CPI. In addition new tenants have occupied the mall during 2011 at relatively better terms for the Group than the initial agreements signed before the opening. These changes are a direct result of the leading position that the Mall has taken in the City of Varna, a better diversity of tenants and higher number of visitors we are witnessing on a daily basis. The net change in fair value adjustment of EUR3.6 million has resulted in an increase in the deferred tax liability by EUR0.5million.
The Group recognises income and costs from the sale of residential units on transfer of ownership. The Group recognises rental income based on the straight line method in accordance with IAS 17. The revenue of EUR12.3 million (2010: EUR7.9 million) mainly consists of revenues from the rent and operation of the Grand Mall (EUR8.0 million) and from sales of completed apartment units in the Orchid Hills Sofia and the Orchid Hills Varna residential projects (EUR3.3 million).
The majority of the operating expenses are attributable to the development costs of the sold apartment units in the Orchid Hills Sofia and the Orchid Hills Varna residential projects and the operational costs of the Grand Mall. The level of hired services expenses has increased to EUR2.4 million (2010: EUR2.2 million) as a result of the first year of full operation for Grand Mall Varna.
As at 31 December 2011, the Group's net asset value stood at EUR73.1 million, (2010: EUR73.3 million), equating to a net asset value per share of EUR0.83 (2010: EUR0.83).
Non-current assets of EUR166.9 million increased from EUR163.5 million at the end of 2010 mainly due to the increase in fair value of the Grand Mall. Current assets of EUR38.7 million (2010: EUR42.4 million) include residential projects under development and inventory of residential units for sale of EUR29.7 million (2010: EUR29.9 million) that are recorded at cost.
Long-term borrowing liabilities have increased to EUR102.6 million (31 December 2010: EUR95.3 million) as a result of the drawdown of construction loans primarily to finance the construction of the Orchid Gardens Varna project. Short-term borrowing facilities of EUR3.1 million were repaid during the year. Short-term borrowing liabilities of EUR15.8 million consist mainly of credit facilities which are to be repaid in 2012 according to the following schedule:
-- EUR3.1 million overdue payment since October 2011 (details are set out in note 20 (Borrowing liabilities) of these financial statements);
-- EUR1.2 million in 3 quarterly payments till Aug 2012; and -- EUR11.5 million by the end of 2012.
All of the Group's major projects under development are being financed by committed facilities at the project level without recourse to the holding company. The Group has successfully restructured the repayment of its credit facilities due to the market downturn in the residential property market and in order to strength the cash position of the Group.
The current status of the loans as of 31 December 2011 before any extensions as detailed below can be presented as follows:
More then
Project loan financing: 1 year 2-5 years 5 years Total
EUR'000 EUR'000 EUR'000 EUR'000
Orchid Multi-Complex Varna
EOOD 2,317 10,986 83,173 96,476
Orchid Gardens Varna EOOD* 9,205 8,449 - 17,654
Orchid Center Varna EOOD** 3,106 - - 3,106
Orchid Seaside Apartments EOOD 1,200 - - 1,200
Total 15,828 19,435 83,173 118,436
* Extension agreed as announced on 11 April 2012, further details are provided below
** The Group is presently renegotiating the repayment terms of this short term loan
Post year end events
In January 2012, the Group reached agreement with Bellport Corporation, the vehicle which is controlled by and provides the services of the joint Chief Executive Directors, Guy Meyohas and Ofer Miretzky, to amend the provisions of Bellport's management agreement to capitalise part of an accrued bonus, to formalise the terms on which balance of the accrued bonus will be paid and to enter into a new bonus arrangement to replace the existing bonus scheme.
At the same time, the Board confirmed that its primary focus for the immediate and medium term is to maximise shareholder value and returns. To this end, the Group may, if market conditions permit and realistic valuations can be achieved to dispose of the Group's assets in such manner as it sees fit and in the best interests of shareholders and if circumstances arise, these measures could also involve the return of capital to shareholders.
The Company also completed amendments to the Articles of Association such that a general meeting will be called on or before 31 December 2013, where resolutions will be put to shareholders to allow them to decide whether the Group should realise its assets at that time, to defer such a decision for a year or to continue in its current form.
The Bellport agreement and amendments to the Articles were ratified by shareholders at an EGM held in February 2012.
In April 2012, the Group secured an extension to its credit agreement with UniCredit Bulbank JSC (a division of UniCredit Group) relating to the subsidiary Orchid Gardens Varna EOOD. The Revised Facility extends the facility term, including the repayment dates, with the facility amount and interest rate remaining unchanged, enabling the Group to market the development for an extended period. The details are set out in note 34 (Post-reporting date events of these financial statements).
Current trading
As previously stated, the economic environment in which the Group is operating in Bulgaria remains difficult and, with the continuing crisis in the Eurozone, will in all probability remain volatile for the foreseeable future. The recession and lack of available credit have had a negative effect on the ability of both local and international retailers to expand and the Group estimates that this climate will continue during 2012 and perhaps beyond. Notwithstanding the economic backdrop, the Group completed the Orchid Hills Varna development in August 2011 and continues to focus on selling its stock of remaining apartments. In addition, the completion of Orchid Gardens Varna, which was delayed significantly during 2011, is expected to occur in the second half of 2012.
As announced on 19 March 2012, the Board is cognisant of the large gap between the Group's market capitalisation and net asset value and the Board remains committed to closing this gap, in part through delivering on operational and financial milestones and in part through improving the understanding of Orchid's business and prospects.
The directors believe that Group is able to continue to operate within its current levels of funding in the immediate term. However, the quantum of free cash flow, which may be generated in the medium term from the sales of apartments and other assets, remains uncertain. In addition, the margin of forecast available cash over requirements remains small. The directors have further considered the Group's cash flow forecasts together with the associated judgments and the uncertainties related to the forecasted volumes of sales of residential units from the projects Orchid Varna Hills and Orchid Gardens Varna, the rescheduling of the loan payments in the subsidiary Orchid Center Varna EOOD and the deferral of certain payments to the joint executive directors.
After reviewing the Group's budgets, in addition to analysing the possibilities of selling some of the Group's property or renegotiating payment terms with suppliers, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis.
It should be noted that the Group's forecasts include the following assumptions:
-- the Group will be able to generate sufficient funds from the sales of its residential units during the next year in order to repay debt as follows: in relation to Orchid Gardens Varna EOOD an amount of approximately EUR3.4 million; and in relation to Orchid Seaside Apartments EOOD an amount of approximately EUR1.2 million;
-- that the Group will successfully renegotiate the repayment terms of its short term loan of EUR3.1 million in the subsidiary Orchid Center Varna EOOD; and
-- that certain payments to the joint executive directors can also be deferred.
The Group has agreed with Bellport Corporation that the liabilities of EUR541,660 due to Bellport as at 23 April 2012 under the management services agreement (the "Agreement") will not be paid to Bellport during the twelve month period commencing 25 April 2012, unless property owned by the Group is sold or the Group's cash flow during this period will allow such payment or part thereof.
In addition to the above, Bellport Corporation has agreed to postpone future payments under the Agreement of EUR324,996, relating to the period 1 January 2013 to 30 June 2013, unless property owned by the Group is sold or the Group's cash flow during this period will allow such payment or part thereof.
In consideration for the deferral of the above mentioned EUR866,656 in payments, (the "Deferral") Bellport Corporation shall be entitled to receive interest of five per cent per annum on the accrued, outstanding payments, commencing on 1 January 2012. Further details are provided in Note 34 of these financial statements.
The deferral of the EUR866,656 in payments due to Bellport and the related interest accrued under the Agreement constitutes a related party transaction under the AIM Rules for Companies. With the exception of Guy Meyohas and Ofer Miretzky, who together control Bellport Corporation and, therefore are, involved in the Deferral as related parties, the directors consider, having consulted with the Group's nominated adviser Shore Capital and Corporate Limited, that the terms of the Deferral are fair and reasonable insofar as the Group's shareholders are concerned.
Further disclosures regarding the assumptions used in the preparation of the Group's forecast financial information are made in note 4.25(i) of the notes to the financial statements.
These matters mentioned above, along with other matters explained in note 4.25(i), indicate the existence of a material uncertainty that may cast significant doubt about the ability of the Group to continue as a going concern.
Guy Meyohas
Joint Chief Executive
25 April 2012
Directors' Biographies
Joseph Drescher (aged 72), Non-Executive Chairman of the Board. He was appointed on 22 September 2010. Mr. Drescher has experience in the banking and finance sectors. Mr. Drescher has over 40 years of professional experience of banking in Switzerland and spent 25 years in management positions with the Dow Financial Services Group, the Royal Trust Bank (Switzerland), DG Bank (Switzerland) and BSI Banca della Svizzera Italiana. He currently serves on the Board of Orex Minerals Inc., a mineral exploration company listed on the TSX Venture Exchange.
Guy Meyohas (aged 47), Joint Chief Executive, is an experienced property developer and has undertaken real estate related transactions in several countries including Israel, the EEC, Switzerland and the United States. He is the Chief Executive of Orchid Group International Limited, an investment company which is separate from the Group.
Since qualifying as an industrial engineer in 1993 at Tel Aviv University, he has been involved in various businesses including Aquarius Capital Properties Ltd. ("Aquarius"), a major Israeli investment and development company, of which he was the President and CEO from 1997 to 2001.
He has been involved in the development and operation of commercial properties, shopping centres, hotels and residential project.
Ofer Miretzky (aged 56), Joint Chief Executive, was formerly the Joint Chief Executive of Ofer Miretzky Construction, a construction and real estate development business, founded in 1988, which established itself as one of Israel's leading construction companies. Projects included the construction of 50 duplex apartments in Petah Tikva and 350 apartments, office space and a business centre in Shikun Dan. Ofer has also served as a board member of the Association of Contractors and Builders in Israel for several years.
Mark Holdsworth, (aged 41) Non-Executive Deputy Chairman of the Board was appointed on 22 September 2010. Mr. Holdsworth has over 20 years' experience in property, including residential and commercial developments. He also has more than 15 years experience in Eastern European and other emerging markets. During his eight years at ING Barings in London he travelled extensively to the region, building up a network of contacts in the banking, business and governmental sectors. From January 2001, Mr. Holdsworth was the managing director in charge of all equity, broking and trading operations in Eastern Europe, South Africa and Latin America at the bank. In 2005, Mr. Holdsworth established the Fabian Romania Property Fund as a vehicle for investing in the Romanian property market. Fabian Romania was listed on AIM in 2006 and Mr. Holdsworth remained a Director until its sale in 2009 to Black Sea Global Properties. Mr. Holdsworth was a non-executive director of Netia S.A., Poland's alternative telecoms operator between 2004 and 2006. Mr. Holdsworth has a MA Hons. Degree in history from the University of Edinburgh and a postgraduate Masters Degree in political science from the University of Pennsylvania, where he was a Thouron Scholar. Mr Holdsworth has also graduated from the Owner President Manager programme, Harvard Business School's top executive education programme. Current Directorships: Fabian Capital Ltd; Fabian Romania Ltd (dormant); Holdsworth Property Holdings Ltd (dormant); RGI International LTD (Non executive director). Past directorships in the previous 5 years: XXI Century Investment PLC (2005-2007); Fabian Romania Ltd (2005-2009); AIG BVB Lakeview S.A. (2006-2009)
Amir Rosentuler, (aged 45)Non-Executive Director, was appointed on 22 September 2010. Mr. Rosentuler has over 20 years' management experience. He is currently a vice president of ECI Telecom, a supplier of networking infrastructure for carrier and service provider networks worldwide. Prior to this, he was a president of Press-Sense, a market leader in business flow automation systems and earlier to this, he acted as vice-president of international operations at Magic Software Enterprises, a developer of enterprise application technology. He also established the European organization of OpTier, a provider of transaction workload management software, and managed the sales operation in 20 countries for Novell, for which he was the sole European recipient of the Novell President's Award.
Directors' Report
The Directors present their report together with the audited financial statements for the year ended 31 December 2011.
Principal activities
Orchid is a real estate developer, investment property owner and hotel operator in Bulgaria. It is active in three principal sub-sectors of the Bulgarian real estate and leisure markets:
-- commercial property development;
-- residential property development;
-- hotels and related leisure facilities.
Business review
A review of the Group's activities during the year and future prospects is contained in the Chief Executive's Review.
Results
The net fair value adjustment of the investment portfolio recognised in the Consolidated Statement of Comprehensive income amounted to EUR3.6 million. Revenues for the year ended 31 December 2011 comprise mainly of rent and operational incomes for the Grand Mall and sales of apartments and hotel services. Our operational costs reflect the cost of the sold residential units, that we have recognised revenue on and the operational costs for the Mall.
Directors' remuneration and service contracts
The Group's Remuneration Policy and details of the Directors' service contracts are set out in the Directors' Remuneration Report.
Directors' interests in the Group's shares
As at 1 April 2012 the Directors and the Senior Management were interested in an aggregate of 28,162,688 ordinary shares, representing approximately 29.98 % of the Group's issued share capital.
In February 2012 5,500,000 new ordinary shares, were issued to the Directors of the Group.
Number Number % of
of Ordinary of Share Issued
Shares Options Capital
Guy Meyohas - held by HSBC Global
Custody Nominee (UK) 11,196,344 - 11.92
Ofer Miretzky - held by HSBC Global
Custody Nominee (UK) 11,196,344 - 11.92
Bellport - held by Guy Meyohas and
Ofer Miretzki 5,770,000 - 6. 14
Other substantial interests
As at 1 April 2012 the persons having interests in 2% or more of the Group's issued ordinary share capital were as follows:
Number %
of Shares
HSBC Global Custody Nominee
(UK)* 25,197,284 29.98
Midas Capital Partners Limited 11,035,000 11.74
Progressive Asset Management 6,565,447 6.99
Value investment Limited 4,750,000 5.06
Henderson Global investors 4,581,108 4.88
Barclays Stockbrokers Limited 4,253,880 4.53
Thames River Capital LLP 3,400,000 3.62
TD Direct investing 3,229,256 3.44
Shore Capital Group PLC 3,080,558 3.28
Smith & Willamson 2,499,532 2.47
Selftrade 2,022,849 2.15
*including executive directors'
interests
Payments to creditors
The Group's policy is to settle suppliers' invoices in accordance with their terms of business. Where no specific terms have been agreed, payment is usually made within one month of approval of invoice. At 31 December 2011 EUR5,069,000 (2010: EUR12,036,000) was due to trade creditors, the majority of which relates to Orchid Gardens Varna, the contractors of the multi use complex and residential developments in Varna.
Independent auditors
The financial statements are audited by Grant Thornton OOD, Bulgaria.
Approved by the Board and signed on its behalf by:
Guy Meyohas
Joint Chief Executive
25 April 2012
Corporate Governance and
Statement of Directors' Responsibilities
Operation of the Board
The Board currently consists of the two Joint Chief Executive Directors, Guy Meyohas and Ofer Miretzky, and three non-executive directors; Joseph Drescher (Chairman), Mark Holdsworth (Deputy Chairman) and Amir Rosentuler. Biographies are included separately. The non-executive directors, appointed by the management of the Group have experience in real estate financing and management. The non-executive directors are considered by the Board to be independent.
According to the articles of association of the Group, at each annual general meeting one third of the Directors who are subject to retirement by rotation or, if their number is not three nor a multiple of three, the number nearest to but not exceeding one third, shall retire from office. Furthermore, all Directors are required to seek re-appointment at the next annual general meeting after their appointment.
The Board convenes approximately every month. A formal schedule of matters reserved for their decision covers key areas of the Group's affairs including property development, acquisitions and disposals, remuneration for their decision management, treasury and fund raising. In 2011, 10 board meetings were convened and save for 4 meetings the rest of the meetings were attended by all Directors.
Audit and Remuneration Committees
The Group has established an audit committee and a remuneration committee with formally delegated responsibilities.
The Audit Committee is comprised of Joseph Drescher and Amir Rosentuler. This committee is presently chaired by Joseph Drescher. The Audit Committee is responsible for ensuring that the financial performance of the Group is properly reported and monitored and for reviewing the auditors' reports relating to accounts and internal control systems. Two meetings of the Audit Committee were held during the year.
The Remuneration committee comprised, Mark Holdsworth, Joseph Drescher and Amir Rosentuler and is chaired by Mark Holdsworth. The Remuneration Committee is responsible for the review and recommendation of the scale and structure of remuneration for senior management including the award of share options. During 2011 there was 1 meeting.
Internal Control
The Board is responsible for maintaining a sound system of internal control to safeguard shareholders' investment and the Group's assets.
The systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute assurance against material misstatement or loss. The Board has established a process for identifying, evaluating and managing the Group's key risks, mainly the group liquidity and projects time schedule control, which, in the context of the relative simplicity of the Group's business model, they believe to be adequate. The Board reviews this process. The Group's risk management objectives and policies are set out in note 33 (Risk management objectives and policies) to these consolidated financial statements.
The Group follows procedures for:
-- evaluating capital investment, with detailed appraisal, authorisation and post investment review and
-- production of management information on a monthly basis appraising the status of each project, along with the quarterly P&L reports.
Board performance evaluation procedures were not taken as the Board believes it will not add any value to its performance at the current stage.
Strategic Review Process
The Board reviews the strategic direction of the Group on a regular basis. Additional Board meetings will be called when it is felt necessary to devote more time to discussion of general strategic issues or a specific proposal that cannot be accommodated within the agenda of a regular Board meeting.
Going Concern
The directors have prepared cashflow forecasts based on their best estimate of the cashflows of the Group, which cover a period of over one year from the date of approval of these financial statements. The assumptions used in the forecast are set out in note 4.25(i) (Critical accounting estimates and judgements) of these financial statements.
The cash flow forecasts were prepared by taking into consideration the renegotiated terms between Orchid Gardens Varna EOOD and Unicredit Bulbank from 5 March 2012, which are described in details in note 34 (Post-reporting date events). According to the signed annex for restructuring the loan repayment, the short-term portion of EUR8.5 million as at 31 December 2011 was rescheduled as follows: a principal payment of EUR1 million by 30 September 2012, another principal payment of EUR2 million by 30 December 2012, EUR5 million until the end of the first quarter of 2013 and the remaining EUR0.5 million should be paid as monthly payments starting from 30 June 2012.
One of the subsidiaries of the Group, Orchid Center Varna EOOD is still negotiating with its financing bank the short-term loan liabilities amounting to EUR3.1 million as at 31 December 2011. Although the due date for repayment of the loan has past (October 2011) the bank did not recall the loan or the interest for immediate payment, but instead it opened discussions on a compromise solution that would serve both parties. The directors, considering all the information available to them and based upon the discussions with the bank, have no reason to believe that the bank will call for the loan repayment as such act will not serve the immediate interest of the bank. These conditions indicate the existence of a material uncertainty, which may cast doubt on the ability of the subsidiary Orchid Center Varna EOOD to continue as a going concern.If discussions with the bank fail, the legal recourse is limited only to this subsidiary and the real estate property owned by it and will not affect the remaining companies within the Group or any other projects and developments.
The directors have considered the forecasts together with the associated judgments and the uncertainties related to the forecasted volumes of sales of residential units from the projects Varna Hills and Orchid Gardens Varna, the rescheduling of the loan payments in Orchid Centre Varna and the deferral of certain payments to the joint executive directors. After reviewing the Group's budgets, in addition to analysing the possibilities of selling some of the Group's property or renegotiating payment terms with suppliers, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis.
Statement of Directors' Responsibilities
The Directors prepare the financial statements for each financial year, which give a true and fair view of the state of affairs of the Group and of the profit or loss for that period. In preparing these financial statements, the Directors are required to:
1. Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business;
2. Select suitable accounting policies and then apply them consistently; 3. Make judgments and estimates that are responsible and prudent;
4. State whether applicable International Financial Reporting Standards have been followed, subject to any material departures disclosed and explained in the financial statements.
In so far as the directors are aware:
(1) there is no relevant audit information of which the Group's auditors are unaware; and
(2) the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group, for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The maintenance and integrity of the Orchid Developments Group Ltd. website is the responsibility of the Directors. The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
Directors' Remuneration Report
The Remuneration Report has been prepared by the Remuneration Committee ("the Committee") and has been approved by the Board.
A) Joint Chief Executive Directors: Guy Meyohas and Ofer Miretzky
The Group pays to the Joint Chief Executive Directors via a "Management Service Company" a fee ("The Fee") of EUR325,000 per annum in respect of each joint Chief Executive Directors (being in total the sum of EUR650,000 per annum) which shall accrue from day to day and shall be payable in arrears by equal monthly instalments. For the avoidance of doubt, the fee shall only be payable by the Group to the Management Service Company in respect of services actually provided by the Joint Chief Executive Directors, so that if the Management Services Company does not provide the services of one of the Joint Chief Executive Directors for any period, the respective fee shall be reduced by EUR325,000 per annum pro rata for the period during which the services of that Joint Chief Executive Directors are not provided and if neither Joint Chief Executive Director provides services to the Group for any period, the fee for such period shall be nil.
The Management Services Company submits an invoice each month stating the services provided in the period covered, any expenses to be reclaimed and the amount of the fee due.
Expenses
The Group pays all expenses incurred by the Joint Chief Executive Directors for expenses in or about the performance of their duties under this Agreement including in relation to travelling, hotels and entertainment.
Bonus scheme
Till the year end the Group was calculating for the Management Services Company an annual performance related bonus ("The Bonus") in respect of each Joint Chief Executive Director which will be calculated as 5% of any profit before tax of the Group (on a consolidated basis) on profits in excess of EUR3 million and up to EUR8 million and 3% on any profits before tax thereafter. Such profits before tax are to be as set out in the consolidated audited accounts of the Group and payable 15 days after the Group's consolidated audited accounts are signed off by the auditors.
The Management Services Company's entitlement to the bonus in respect of each Joint Chief Executive Director shall accrue on a daily basis, and on termination of this Agreement pursuant to clause 2.1 of the Management Services Agreement, the amount of the bonus due for payment by the Group to the Management Services Company is calculated on a pro rata basis for the period from the date of the commencement of the financial period (in which such termination takes place) to the Termination Date.
On 15 of February 2012 the Management Service Company came to arrangement with the Group concerning the Accrued bonus liability on the amount of EUR1.9 million. In this arrangement the Management Service Company agreed to convert part of the accrued bonus in the amount of GBP1,100,000 to 5,500,000 shares of the company. The rest of the amount GBP548,150 shall be considered as loan bearing annual interest of 3% with repayment date scheduled for 31 December 2013. In addition the Management Service Company signed a new Bonus scheme, which is described in details in note 34 (Post-reporting date events).
Illness
In the event of illness or other incapacity beyond the control of the Management Services Company as a result of which one or both of the joint Chief Executive Directors Providers is unable to perform his duties under this Agreement, the Management Services Company shall remain entitled to receive the Fee in full and the Bonus for any continuous period of six months or an aggregate period of 130 days' absence of each Service Provider in any consecutive twelve month period.
B) Non-Executive Directors
The non-executive directors (Amir Rosentuler and Joseph Drescher) are entitled to a fee at the rate of EUR40,000 per annum, in addition, the non-executive director (deputy chairman) Mark Holdsworth is entitled to EUR60,000 per annum, payable in quarterly instalments in arrears for so long as their appointment lasts or is extended, their fee will be reviewed annually by the Board.
The directors are entitled to be reimbursed reasonable and proper travelling expenses for attendance at board meetings and other meetings at which the Group requires their attendance - together with reasonable and proper accommodation expenses of attending any such meetings, which necessitates an overnight stay.
Director's Remuneration and Interests
Remuneration in respect of the Directors was as follows:
Salary Benefits* Total
& Fees
----------------------- ------- --------- -------
EUR'000 EUR000 EUR'000
----------------------- ------- --------- -------
A) Executive Directors
----------------------- ------- --------- -------
Guy Meyohas 325 12.5 337.5
----------------------- ------- --------- -------
Ofer Miretzky 325 12.5 337.5
----------------------- ------- --------- -------
B) Non - executive
Directors
----------------------- ------- --------- -------
Mark Holdworth 60 - 60
----------------------- ------- --------- -------
Amir Rosentuler 40 - 40
----------------------- ------- --------- -------
Joseph Dreschner 40 - 40
----------------------- ------- --------- -------
Total A+B 790 25 815
----------------------- ------- --------- -------
* Insurance premium
and medical insurance
----------------------- ------- --------- -------
(No pension contributions have been made on behalf of the Directors. No share options have been granted to the Directors.)
Mark Holdsworth
Chairman of Remuneration Committee
25 April 2012
INDEPENDENT AUDITOR'S REPORT
To the shareholders of
Orchid Developments Group Ltd.
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Orchid Developments Group Ltd. and its subsidiaries, for the year ended 31 December 2011 which comprise the consolidated statement of financial position, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows, summary of significant accounting policies and the related notes. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards as adopted by the European Union and applicable law.
This report is made solely to the company's members, as a body. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Directors' Responsibility for the Consolidated Financial Statements
As explained more fully in the Statement of Directors' Responsibilities set out on pages 15 - 17 the directors are responsible for the preparation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and for being satisfied that they give a true and fair view.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
Scope of the audit of the financial statements
An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion the consolidated financial statements:
-- give a true and fair view of the state of the financial position of Orchid Developments Group Ltd. as at 31 December 2011 and of its financial performance and its cash flows for the year then ended; and
-- have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union.
Emphasis of matter - going concern
In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosures made in note 4.25 (i) to the financial statements concerning the assumptions used in the preparation of the Group's forecast financial information. These forecasts assume that the Group would be able to generate funds from an increase in the sales of its residential units during the next year, it will successfully renegotiate the repayment terms of a short term loan of EUR3.1 million in the subsidiary Orchid Center Varna EOOD, and it could defer certain payments to the joint executive directors.
These conditions, along with other matters explained in note 4.25 (i), indicate the existence of a material uncertainty that may cast significant doubt about the ability of the Group to continue as a going concern. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.
Report on other legal and regulatory requirements - Annual Report for the year ended 31 December 2011.
We have reviewed the other information contained within the Annual Report for the year ended 31 December 2011 of Orchid Developments Group Ltd., which is not part of the consolidated financial statements. The other information in the Annual Report, prepared by the directors, complies in its main aspects with the financial information, presented in the consolidated financial statements for the year ended 31 December 2011, prepared in accordance with International Financial Reporting Standards, as adopted by the EU. The preparation of the Annual Report is responsibility of the directors.
Grant Thornton OOD, Bulgaria
Chartered accountants
26, Cherni Vrah Blvd, 1421 Sofia
25 April 2012
Consolidated Statement of Financial Position
Notes 2011 2010
EUR'000 EUR'000
Assets
Non-current
Investment property 6 158,262 154,711
Property, plant and equipment 7 7,296 7,510
Investment in associates 8 218 237
Goodwill 9 3 3
Other intangible assets 10 15 17
Long-term loans due from associates 11 356 334
Deferred tax assets 12 707 680
-------- --------
Total non-current assets 166,857 163,492
Current
Development work in progress 13 22,911 23,640
Inventory - residential units for
sale 14 6,846 6,287
Trade receivables 15 3,506 3,410
Receivables from related parties 29.1 81 45
Tax receivables 16 848 1,882
Other receivables 17 922 970
Cash and cash equivalents 18 3,628 6,123
-------- --------
Total current assets 38,742 42,357
Total assets 205,599 205,849
-------- --------
Consolidated Statement of Financial Position (continued)
Notes 2011 2010
EUR'000 EUR'000
Equity and liabilities
Equity
Share capital 19.1 885 885
Share premium 19.3 69,122 69,122
Other reserves - 172
Retained earnings 3,100 3,110
Total equity 73,107 73,289
--------------- --------
Liabilities
Non-current liabilities
Long-term borrowing liabilities 20 102,608 95,266
Payables to employees 24.2 - 1,939
Deferred tax liabilities 12 4,021 3,521
--------------- --------
Total non-current liabilities 106,629 100,726
Current liabilities
Short-term liabilities to related
parties 29.1 108 66
Short-term borrowing liabilities 20 15,828 16,089
Trade payables 22 6,507 14,766
Deferred income 263 328
Interest payables 226 124
Tax liabilities 23 441 310
Payables to employees and social
security institutions 24.2 2,490 151
--------------- --------
Total current liabilities 25,863 31,834
Total liabilities 132,492 132,560
--------------- --------
Total equity and liabilities 205,599 205,849
--------------- --------
Approved by the Board and signed on its behalf by:
Guy Meyohas
Joint Chief Executive
25 April 2012
Consolidated Statement of Comprehensive Income
Notes 2011 2010
EUR'000 EUR'000
Revenue 25 12,304 7,856
Development costs 14 (3,205) (1,612)
Cost of materials 14 (839) (1,144)
Hired services expenses (2,379) (2,165)
Employee compensation and benefit expenses 24.1 (1,877) (2,095)
Depreciation and amortisation (302) (317)
Other expenses (1,782) (726)
Net change in fair value of investment
property 6 3,624 (19,208)
--------- ---------
Operating profit/(loss) 5,544 (19,411)
Share of loss from equity accounted
associates 8 (19) (14)
Interest expense 26 (5,229) (2,577)
Interest income 26 49 36
Exchange rate loss (14) (16)
Other financial expenses 27 (32) (36)
--------- ---------
Profit/(loss) for the year before tax 299 (22,018)
Tax (expenses)/income 28 (481) 1,815
--------- ---------
Net loss for the year (182) (20,203)
Total comprehensive loss for the year (182) (20,203)
--------- ---------
Loss and total comprehensive loss for
the year attributable to the owners
of the parent: (182) (20,203)
Loss per share EUR EUR
Basic and diluted loss per share 19.4 (0.002) (0.228)
Consolidated Statement of Changes in Equity
All amounts are presented Share Share Other Retained Total
in EUR'000 capital Premium reserves earnings Equity
Balance at 1 December
2010 885 69,122 224 23,261 93,492
---- ------- ------ --------- ---------
Share options expired - - (52) 52 -
---- ------- ------ --------- ---------
Transactions with
owners - - (52) 52 -
Net loss for the year - - - (20,203) (20,203)
---- ------- ------ --------- ---------
Total comprehensive
loss for the year - - - (20,203) (20,203)
Balance at 31 December
2010 885 69,122 172 3,110 73,289
---- ------- ------ --------- ---------
Share options expired - - (172) 172 -
---- ------- ------ --------- ---------
Transactions with
owners - - (172) 172 -
Net loss for the year - - - (182) (182)
---- ------- ------ --------- ---------
Total comprehensive
loss for the year - - - (182) (182)
Balance at 31 December
2011 885 69,122 - 3,100 73,107
---- ------- ------ --------- ---------
Consolidated Statement of Cash Flows
Notes 2011 2010
EUR'000 EUR'000
Cash flows from operating activities
Cash receipts from customers 13,281 8,832
Cash paid to suppliers (8,782) (20,376)
Cash paid to employees and social
security institutions (1,515) (2,193)
VAT received, net 414 6,935
Taxes paid, net (461) (524)
Other cash inflows 117 334
--------- ---------
Net cash flows from operating activities 3,054 (6,992)
Cash flows from investing activities
Cost of construction of investment
property (6,638) (18,944)
Purchase of property, plant and equipment (42) (44)
Purchase of intangible assets (4) (9)
Interest received 29 14
Loans granted (20) (92)
Loan repayments received 53 4
--------- ---------
Net cash flows from investing activities (6,622) (19,071)
Cash flows from financing activities
Proceeds from bank loans 10,178 39,858
Repayment of bank loans and related
fees (3,097) (6,546)
Discharge of finance lease liability - (2)
Interest paid (5,999) (4,445)
--------- ---------
Net cash flows from financing activities 1,082 28,865
Effect of exchange rate changes on
cash and cash equivalents (9) (16)
--------- ---------
Cash and cash equivalents, beginning
of year 6,123 3,337
Net (decrease)/ increase in cash
and cash equivalents (2,495) 2,786
--------- ---------
Cash and cash equivalents, end of
year 18 3,628 6,123
========= =========
Notes to the Consolidated Financial Statements
1. General information
As of 31 December 2011 Orchid Developments Group consists of Orchid Developments Group Ltd. (parent enterprise) and the following subsidiaries and an associate:
Name Country of incorporation % of ownership
Sica Holding Inc. British Virgin Islands 100
Midlung Company S.A. British Virgin Islands 100
Saint Vincent and the
Orchid Sofia Hills Ltd. Grenadines 100
Saint Vincent and the
Marington Inc. Grenadines 100
Saint Vincent and the
Crockett S.A. Grenadines 100
Saint Vincent and the
QC Investment Ltd. Grenadines 100
Saint Vincent and the
Rhodette Ltd. Grenadines 100
Saint Vincent and the
Norco Ltd. Grenadines 100
Orchid Multi Complex - Saint Vincent and the
Varna 2006 Ltd. Grenadines 100
Saint Vincent and the
Lakan Investments Ltd. Grenadines 100
Saint Vincent and the
Infocan Ltd. Grenadines 100
Saint Vincent and the
Digital Magic Ltd. Grenadines 100
Orchid Management - Bulgaria
EOOD Bulgaria 100
Orchid Capital Properties
EOOD Bulgaria 100
Orchid Seaside Apartments
EOOD Bulgaria 100
O.M. Razvitie EOOD Bulgaria 100
Orchid Sofia Hills EOOD Bulgaria 100
Orchid Center Varna EOOD Bulgaria 100
Orchid Multi Complex -
Varna EOOD Bulgaria 100
Orchid Gardens Varna EOOD Bulgaria 100
Orchid Airport City - Sofia
2006 EOOD Bulgaria 100
Orchid Logistic Centers
EOOD Bulgaria 100
Lyons Bulgaria EOOD Bulgaria 100
Kohav OOD Bulgaria 30
Orchid Developments Group Ltd. is a limited liability company incorporated on 2 June 2004 and domiciled in George Town, Grand Cayman, British West Indies.
The Group includes companies which have the following main activities:
-- commercial, financial, lending, borrowing, trading activities, sale and purchase of real estate;
-- tourist services, real estate property transactions and constructions of hotels; and -- commercial property and residential property development.
During the year 2011 the Group finished the voluntary liquidation process of five dormant companies (Nedlands Estate Inc., Harvest Holding Inc., Black Sea Developments EOOD, Orchid Projects EOOD, Orchid Airport City Sofia 2 EOOD).
2. Basis for preparation of the consolidated financial statements
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS), applicable to accounting periods ended on 31 December 2011, as developed and published by the International Accounting Standards Board (IASB) and as adopted by the European Union.
All amounts for the periods ended 31 December 2011 and 31 December 2010 are presented in the financial statements in thousand Euros (EUR'000).
The consolidated financial statements are prepared under the going concern principle (see note 4.25(i)).
The consolidated financial statements for the year ended 31 December 2011, were approved by the Board of Directors on 23 April 2012.
3. Change in accounting policies 3.1 Overall considerations
The Group has adopted the following new interpretations, revisions and amendments to IFRS issued by the International Accounting Standards Board, which are relevant to and effective for the Group's financial statements for the annual period beginning 1 January 2011:
-- IFRS 1 "First-time Adoption of International Financial Reporting Standards" (amended) - Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters - effective from 1 July 2010, adopted by the EU on 30 June 2010;
-- IAS 24 "Related Party Disclosures" (amended) effective from 1 January 2011, adopted by the EU on 19 July 2010;
-- IAS 32 "Financial Instruments: Presentation" (amended) effective from 1 February 2010, adopted by the EU on 24 December 2009;
-- IFRIC 14 "Prepayments of a Minimum Funding Requirement" (amended) effective from 1 January 2011, adopted by the EU on 19 July 2010;
-- IFRIC 19 "Extinguishing Financial Liabilities with Equity Instruments" effective from 1 July 2010, adopted by the EU on 23 July 2010;
-- Annual Improvements to IFRSs 2010 effective from 1 January 2011 unless otherwise stated, adopted by the EU on 18 February 2011, containing amendments to IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 21, IAS 28, IAS 31, IAS 34, and IFRIC 13.
The adoption of these new requirements did not have any impact on the financial position or the performance of the Group.
3.2 Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group
At the date of authorization of these consolidated financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Group.
Management anticipates that all of the pronouncements will be adopted in the Group's accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group's consolidated financial statements is provided below.
IFRS 10 "Consolidated Financial Statements" effective from 1 January 2013, not yet adopted by the EU. It introduces a new, principle-based definition of control which will apply to all investees to determine the scope of consolidation.
IFRS 13 "Fair Value Measurement" effective from 1 January 2013, not yet adopted by the EU. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Standard clarifies that fair value is based on a transaction taking place in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. The principal market is the market with the greatest volume and level of activity for the asset or liability.
IAS 12 "Income Taxes" - Deferred Tax, effective from 1 January 2012, not yet adopted by the EU. Currently IAS 12 "Income Taxes" requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40 "Investment Property". Hence this amendment introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21 "Income taxes- recovery of revalued non-depreciable assets", would no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is accordingly withdrawn.
The directors are currently considering the effects of these standards on the accounting policies of the Group.
Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group's consolidated financial statements:
-- IFRS 1 "First-time Adoption of International Financial Reporting Standards" (amended) - Fixed dates and Hyperinflation, effective from 1 July 2011, not yet adopted by the EU
-- IFRS 7 "Financial Instruments: Disclosures" - Derecognition, effective from 1 July 2011, not yet adopted by the EU
-- IFRS 9 "Financial Instruments" effective from 1 January 2015, not yet adopted by the EU -- IFRS 11 "Joint Arrangements" effective from 1 January 2013, not yet adopted by the EU
-- IFRS 12 "Disclosure of Interests in Other Entities" effective from 1 January 2013, not yet adopted by the EU
-- IAS 1 "Financial Statement Presentation" - Other Comprehensive Income, effective from 1 July 2012, not yet adopted by the EU
-- IAS 19 "Employee Benefits" effective from 1 January 2013, not yet adopted by the EU
-- IAS 27 "Separate Financial Statements" (Revised) effective from 1 January 2013, not yet adopted by the EU
-- IAS 28 "Investments in Associates and Joint Ventures" (Revised) effective from 1 January 2013, not yet adopted by the EU
-- IFRIC 20 "Stripping costs in the production phase of a surface mine" effective from 1 January 2013, not yet adopted by the EU
4. Summary of accounting policies 4.1 Overall considerations
The significant accounting policies that have been used in the preparation of these consolidated financial statements are summarised below.
The consolidated financial statements have been prepared using the measurement bases specified by IFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies below.
It should be noted that accounting estimates and assumptions are used in preparation of the consolidated financial statements. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates.
4.2 Presentation of consolidated financial statements
The consolidated financial statements are presented in accordance with IAS 1 "Presentation of Financial Statements" (revised 2007). The Group has elected to present the consolidated statement of comprehensive income as a single statement.
Two comparative periods are presented for the consolidated statement of financial position when the Group:
(i) applies an accounting policy retrospectively;
(ii) makes a retrospective restatement of items in its consolidated financial statements, or
(iii) reclassifies items in the consolidated financial statements.
4.3 Basis of consolidation
The consolidated financial statements incorporate the financial statements of Orchid Developments Group Ltd. and its subsidiaries drawn up to 31 December 2011. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. Subsidiaries are all entities over which the Group has the power to govern their financial and operating policies so as to obtain benefits from its activities. All subsidiaries have a reporting date of 31 December.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies into line with those used by the Group.
Where the Group acquires a subsidiary or group of assets which are not deemed to constitute a business, the cost of acquisition is allocated between the individual identifiable assets and liabilities acquired, based upon their relative fair values at the date of acquisition.
The results of subsidiaries acquired during the year are included in the Consolidated Statement of Comprehensive Income from the effective date of acquisition, as appropriate.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Unrealised gains and losses on transactions between Group companies are eliminated. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group.
Profit or loss and other comprehensive income of a subsidiary acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. The difference between the proceeds from the disposal of the subsidiary and its carrying amount as of the date of disposal is recognised in profit or loss as the gain or loss on the disposal of the subsidiary.
When the Group ceases to have control of a subsidiary, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities (i.e. reclassified to profit or loss or transferred directly to retained earnings as specified by applicable IFRSs).
The profit or loss on disposal is calculated as the difference between i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and ii) the previous carrying amount of the assets including goodwill and liabilities of the subsidiary and any non-controlling interest.
4.4 Business combinations
Business combinations are accounted for using the purchase method. For business combinations occurring since 1 January 2010, the requirements of IFRS 3 (revised) have been applied. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred.
The purchase method involves the recognition of the acquiree's identifiable assets and liabilities, including contingent liabilities, regardless of whether they were recorded in the financial statements prior to acquisition. On initial recognition, the assets and liabilities of the acquired subsidiary are included in the consolidated statement of financial position at their fair values, which are also used as the bases for subsequent measurement in accordance with the Group's accounting policies.
Prior to 1 January 2010, business combinations were accounted under the previous version of IFRS 3.
4.5 Investments in associates
Associates are those entities over which the Group is in a position to exert significant influence, but not control or joint control.
Investments in associates are initially recognised at cost and subsequently accounted for using the equity method. However, any goodwill or fair value adjustment attributable to the Group's share in the associate is included in the amount recognised as investment in associates.
All subsequent changes to the share of interest in the equity of the associate are recognised in the Group's carrying amount of the investment. Changes resulting from the profit or loss generated by the associate are reported within "Share of loss from equity accounted associates" in profit or loss. These changes include subsequent depreciation, amortization or impairment of the fair value adjustments of assets and liabilities.
Changes resulting from other comprehensive income of the associate or items recognised directly in the associate's equity are recognised in other comprehensive income or equity of the Group, as applicable. However, when the Group's share of losses in an associate equals or exceeds its interest in the associate, including any unsecured receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the investor resumes recognizing its share of those profits only after its share of the profits exceeds the accumulated share of losses that has previously not been recognised.
Unrealized gains and losses on transactions between the Group and its associate are eliminated to the extent of the Group's interest in those entities. Where unrealized losses are eliminated, the underlying asset is also tested for impairment losses from a group perspective.
Amounts reported in the financial statements of associates have been adjusted where necessary to ensure consistency with the accounting policies of the Group.
4.6 Foreign currency translation
The consolidated financial statements are presented in Euro (EUR), which is also the functional currency of the parent company. The functional currency of all Bulgarian subsidiaries is the Bulgarian leva, which has been fixed to the Euro since 17 July 1997.
The Group includes companies, whose functional currency is either Euro or Bulgarian leva and there are no exchange movements on retranslation to the presentational currency.
Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from the remeasurement of monetary items at year-end exchange rates are recognised in profit or loss.
Non-monetary items measured at historical cost are translated using the exchange rates at the date of the transaction (not retranslated).
In the Group's financial statements, all assets, liabilities and transactions of Group entities with a functional currency other than the Euro(the Group's presentation currency) are translated into Euroupon consolidation. The functional currency of the entities in the Group have remained unchanged during the reporting period.
On consolidation, assets and liabilities have been translated into Euro at the closing rate at the reporting date. Income and expenses have been translated into the Group's presentation currency at the fixed rate of Bulgarian leva to the Euro over the reporting period. Goodwill and fair value adjustments arising on the acquisition of a foreign entity have been treated as assets and liabilities of the foreign entity and translated into Euro at the closing rate.
4.7 Segment reporting
In identifying its operating segments, management generally follows the Group's service lines, which represent the main products and services provided by the Group.
The operating segments are aggregated into reportable segments, taking into consideration the nature of the business, operating markets and other factors. The operating segments are consistent with that which is reported to the chief operating decision maker.
Reportable segments are divided into three main segments:
- Development of office space and shopping malls ("Commercial property development");
- Development and sale of apartment units ("Residential property development");
- Hotel.
The activities undertaken by the hotel segment include the development, renovation and operation of a hotel on the Black Sea coast. The development and letting out of premises for offices and shops is undertaken by the commercial property segment. The residential property segment develops and sells residential units. All segments operate in Bulgaria.
All inter-segment transfers are priced and carried out at arm's length.
Each of these operating segments is managed separately as each of these service lines requires different technologies and other resources as well as marketing approaches. All inter-segment transfers are carried out at arm's length prices.
Management monitors the operating results of its business units for the purposes of making performance assessment and decision making. The resource allocation decisions made by the management are based on analysis of the same segments as for financial reporting purposes.
The measurement policies that the Group uses for segment reporting under IFRS 8 "Operating Segments" are the same as those used in its consolidated financial statements.
In addition, Group assets which are not directly attributable to the business activities of any operating segment are not allocated to a segment.
Information about the results of the separate segments that is regularly reviewed by the chief operating decision maker does not include isolated unrepeated events.
There have been no changes from prior periods in the measurement methods used to determine reported segment profit or loss. No asymmetrical allocations have been applied between segments.
4.8 Income and expense recognition
Revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates, allowed by the Group. Revenue comprises revenue from rental income, sale of goods (residential development units) and the rendering of services (mainly hotel and tourist services). Revenue from major products and services is shown in note 25.
Rental income
Rental income receivable from operating leases, less the Group's initial direct costs of entering into the leases, is recognised on a straight-line basis over the term of the lease, except for contingent rental income which is recognised when it arises.
Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where at the inception of the lease the management is reasonably certain that the tenant will exercise that option.
Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in profit or loss when they arise.
Income arising from expenses recharged to tenants is recognised in the period in which the expense can be contractually recovered. Service charges and other such receipts are included gross of the related costs in revenue, as the management considers that the Group acts as principal in this respect.
Sale of goods
Revenue from sale of goods is recognised, provided all of the following conditions are satisfied:
-- the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;
-- the Group retains neither continuing managerial involvement to the degree usually associated with ownership;
-- nor effective control over the goods sold; -- the value of the revenue can be measured reliably;
-- it is probable that the economic benefits associated with the transaction will flow to the Group; the cost incurred or to be incurred in respect of the transaction can be measured reliably.
Revenue relating to residential developments is treated as revenue from the sale of goods. The Group considers that the significant risks and rewards of ownership are transferred to the purchaser on the execution of a notary deed for ownership rights.
In cases where the notary deed is executed before completion of the construction the Group recognises income through the remaining development period using the percentage of completion method. The Group commences the recognition of revenue on execution of the notary deed. Revenue is recognised during the remaining development period using the percentage of completion method as it appropriately reflects the continuous transfer of the remaining risk and rewards of the development to the purchaser to completion. If the contract is considered profitable, profits are recognised by reference to the percentage of completion at the reporting date. Any expected loss on any individual contract is recognised immediately as an expense in the income statement. Income from sale of land and rights is recognised upon ownership transfer.
Rendering of services
Revenue from rendering of services comprises mainly hotel services and is recognised when the outcome of the transaction can be measured reliably. Revenue received from tour operators is recognised on completion of a client's stay at the hotel. Rental income is recognised as rental services are provided.
Operating expenses are recognised in profit or loss upon utilisation of the service or at the date of their origin. Interest income and expenses are reported on an accruals basis.
4.9 Borrowing costs
Borrowing costs are capitalised if these are directly attributable to the construction and production of a qualifying asset. They are included in the cost of that asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in profit or loss in the period in which they are incurred.
To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation is determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate is calculated as the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. During 2011 and 2010 the Group has not calculated a capitalization rate, because each loan has been received for particular project.
The capitalisation of borrowing costs as part of the cost of a qualifying asset commence when:
-- expenditure for the asset is being incurred; -- borrowing costs are being incurred; and
-- activities that are necessary to prepare the asset for its intended use or sale are in progress.
Capitalisation of borrowing costs is suspended during extended periods in which active development is interrupted and when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
4.10 Goodwill
Any excess of the cost of the acquisition over the acquirer's interest in the fair value of the identifiable assets and liabilities at the date of the exchange transaction is described as goodwill and recognised as an asset. Goodwill is tested annually for impairment, and is carried at cost less accumulated impairment losses.
If the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the Group:
-- reassesses the identification and measurement of the acquiree's identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and
-- recognises immediately in profit or loss any excess remaining after that reassessment. 4.11 Other Intangible assets
Other Intangible assets include acquired software licences used in administration and other intangible assets.
Intangible assets are measured initially at cost. If an intangible asset is acquired separately, the cost comprises its purchase price, including any import duties and non-refundable purchase taxes, and any directly attributable expenditure on preparing the asset for its intended use. If an intangible asset is acquired in a business combination, the cost of that intangible asset is based on its fair value at the date of acquisition.
After initial recognition, an intangible asset is carried at its cost less any accumulated amortisation and any accumulated impairment losses. Impairment losses are recognised in profit or loss in the period in which they are identified.
Subsequent expenditure on an intangible asset after its purchase or its completion is recognised as an expense when it is incurred unless it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance and this expenditure can be measured and attributed to the asset reliably. If these two conditions are met, the subsequent expenditure is added to the cost of the intangible asset.
Amortisation is calculated using the straight-line method over the estimated useful life of individual assets as follows:
-- Software 2 years -- Others 7 years
Amortisation charges for the current period are included in the line "Depreciation and amortisation" in the Consolidated Statement of Comprehensive Income.
4.12 Property, plant and equipment
An item of property, plant and equipment is initially measured at its cost, which comprises its purchase price and any directly attributable costs of bringing the asset to working condition for its intended use.
Subsequent to initial recognition as an asset, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Impairment losses are recognised in profit or loss in the period in which they are identified.
Subsequent expenditure relating to an item of property, plant and equipment that has already been recognised in the consolidated financial statements is added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the Group. All other subsequent expenditure is recognised as an expense in the period in which it is incurred.
Property, plant and equipment acquired under finance lease agreements are depreciated based on their expected useful economic lives, determined by reference to comparable assets or based on the period of the lease contract if shorter.
Depreciation is calculated using the straight-line method over the estimated useful life of individual assets as follows:
-- Buildings 25 years; 50 years -- Machines and equipment 2 - 7 years -- Vehicles 4 - 7 years -- Furniture and fixtures 7 years
No residual values are assumed. Useful economic lives of property, plant and equipment are reassessed annually.
Depreciation charges for the current period are included in the line "Depreciation and amortisation" in the Consolidated Statement of Comprehensive Income.
Assets under construction and land are not depreciated.
After commencement of a residential project land expenses and construction in progress expenditures are transferred from "Property, plant and equipment" to "Development work in progress".
4.13 Finance and operating leases
In accordance with IAS 17 (rev. 2007), the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset.
The related asset is recognised at the time of inception of the lease at the lower of the fair value of the asset and the present value of the minimum lease payments. A corresponding amount is recognised as a finance lease liability, irrespective of whether some of these lease payments are payable at the date of inception of the lease.
The corresponding finance lease liability is reduced by lease payments less finance charges, which are expensed as finance costs.
Assets acquired under the terms of finance leases are depreciated in accordance with IAS 16 Property, plant and equipment and/or IAS 38 Intangible assets.
All other leases are treated as operating lease agreements. Operating lease payments are recognised as an expense on a straight-line basis. Associated costs, such as maintenance and insurance, are expensed as incurred.
Assets subject to operating lease agreements are presented in the consolidated statement of financial position and are depreciated and amortized in accordance with the depreciation and amortization policy of the Group for similar assets and with the requirements of IAS 16 "Property, Plant and Equipment" and IAS 38 "Intangible Assets". Income from operating lease contracts is recognised on a straight-line basis in the consolidated statement of comprehensive income for the reporting period.
4.14 Impairment testing of assets
The Group's assets are subject to impairment testing when an indication for impairment is present.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level.
Individual assets or cash-generating units that include goodwill and other intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which the asset's or cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use, based on an internal discounted cash flow evaluation. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist.
4.15 Investment property
The investment property of the Group includes land, buildings and property that is being developed to hold to earn rentals, or for capital appreciation or both, and not for use in manufacture or supply of goods or services, or for administrative purposes.
The investment property is initially measured at cost, which comprises the purchase price and any directly attributable expenses, e. g. legal fees, property transfer taxes and other transaction costs.
After initial recognition, investment property is carried at fair value. It is revalued annually and is included in the consolidated statement of financial position at its open market value.This is determined by independent valuers with professional qualification and significant experience with respect to both the location and the nature of the investment property and supported by sufficient market evidence.
Any gain or loss resulting from either a change in the fair value or the sale of an investment property is immediately recognised in profit or loss within 'Net change in fair value of investment property'.
Fair value measurement on property under construction is only applied if the fair value is considered to be reliably measurable.
It may sometimes be difficult to determine reliably the fair value of the investment property under construction. In order to evaluate whether the fair value of an investment property under construction can be determined reliably, management considers the following factors, among others:
-- The provisions of the construction contract;
-- The stage of completion;
-- Whether the project/property is standard (typical for the market) or non-standard;
-- The level of reliability of cash inflows after completion;
-- The development risk specific to the property;
-- Past experience with similar constructions;
-- Status of construction permits.
Assets for which there is clear evidence that their fair value is not reliably determinable ona continuing basis, are presented at the lower of cost or recoverable amount.
The costs incurred to originate a lease (mainly brokers fees) for available rental space are included in the carrying value of investment property.
Subsequent expenditure relating to investment property, which is already recognised in the Group's consolidated financial statements, is added to the carrying amount of the investment property when it is probable that this expenditure will enable the existing investment property to generate future economic benefits in excess of its originally assessed value. All other subsequent expenditure is recognised as incurred.
The investment property is derecognised upon its sale or permanent withdrawal from use where no future economic benefits are expected from its disposal. Gains or losses arising from the disposal of investment properties are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss.
4.16 Financial assets
The Group's financial assets include cash and trade and other receivables, which comprise loans and receivables. All financial assets are recognised on their transaction date. All financial assets are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Loans and receivables are subsequently measured at amortised cost using the effective interest method, less provision for impairment.
Derecognition of financial instruments occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred.
An assessment for impairment is undertaken at least at each reporting date whether or not there is objective evidence that a financial asset or a group of financial assets is impaired.
Trade receivables are provided for when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of the receivables. The amount of the provision is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows.
4.17 Inventories
Inventories comprise ready for sale residential units, raw materials and others. At the reporting date, inventories are carried at the lower of cost and net realisable value.
Net realisable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Where inventories have been impaired to their net realisable value and in the following period the impairment conditions are no longer present, then a new net realisable value is determined up to the initial value prior to impairment. The inventory recovery amount is accounted for as a decrease in inventory expenses for the period in which the recovery takes place.
The cost of inventories is assigned by using the weighted average cost.
When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised.
4.18 Accounting for income taxes
The tax expense recognised in profit or loss comprises the sum of deferred tax and current tax.
Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the reporting date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate based on the taxable result for the year. All changes to current tax assets or liabilities are recognised as a component of tax expense in the Consolidated Statement of Comprehensive Income.
Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax assets in relation to carried forward losses are recognised to the extent that the realisation of the related tax benefits through the future taxable profits is probable. For management's assessment of the probability of future taxable income to utilize against deferred tax assets, see note 4.25(i).
Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that they will be able to be offset against future taxable income.
Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted by the end of reporting period.
Changes in deferred tax assets or liabilities are recognised as a component of tax income or expense in profit or loss, except where they relate to items that are recognised in other comprehensive income or directly in equity, in which case the related deferred tax is also recognised in other comprehensive income or equity, respectively.
4.19 Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand, including fiduciary deposits which may be revoked at any time by means of written notification from the Group to the bank. Any short term or highly liquid investments within three months, which can easily be turned into money and contain insignificant risk of change in value are also part of cash and cash equivalents.
4.20 Equity and other reserves
Share capital is determined using the nominal value of shares that have been issued.
The share premium reserve in capital includes any premiums received on the issue of the share capital.
Other reserves include amounts resulting from share options schemes.
Retained earnings includes the current result as determined in the Consolidated Statement of Comprehensive Income and all prior period results.
4.21 Pension obligations and employee benefits
The Group does not provide pension plans for employees.
The Group reports short-term payables relating to unutilised leave, which shall be compensated if the leave occurs within 12 months after the end of the accounting period, during which time the employees have performed the related work. The short-term payables to personnel include wages, salaries and related social security payments.
4.22 Share-based compensation
The Group operates a number of equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each reporting date, the Group revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.
The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium and debited to cash.
4.23 Financial liabilities
The Group's financial liabilities include loans and overdrafts, trade and other payables.
Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument.
Loans are raised for support of long term funding of the Group's operations. They are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to profit or loss on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Trade payables are recognised initially at fair value and subsequently measured at amortized cost less settlement payments.
Dividend distributions are recognised when the dividends are approved by the shareholders.
4.24 Other provisions, contingent liabilities and contingent assets
Provisions, representing current obligations of the Group arising from past events, the settlement of which is expected to result in an outflow of resources, are recognised as liabilities. A provision is recognised only when the following conditions are present:
-- The Group has a present obligation as a result of a past event;
-- It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation;
-- A reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at the reporting date. In reaching the best estimate of the provision, the Group takes into account the risks and uncertainties that inevitably surround many events and circumstances as well as the effect of the time value of the money, when it is material.
Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.
The Group does not recognise contingent assets in the consolidated financial statements as their existence is not yet confirmed and this may result in the recognition of income that may never be realised.
4.25 Critical accounting estimates and judgments
Estimates and judgments are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Critical judgements in applying the Group's accounting policies are:
(i) Going concern basis of preparation and cash flow forecasts
These financial statements are prepared on the going concern basis which assumes that the Group will have sufficient funding, cash flows and working capital resources available to it, to continue trading for at least twelve months from the date of approval of the consolidated financial statements.
The directors have prepared cashflow forecasts based on their best estimation of the cashflows of the Group, which cover a period of over one year from the date of approval of these financial statements. Such forecasts inherently contain management judgments and estimates in respect of future trading conditions, the timing of receipts and payments and other relevant matters. The main management judgments, estimates and assumptions used in the prepared cash flow forecast are that the management will be successful in its negotiations with the financing bank to reschedule the capital repayments of the Orchid Center Varna EOOD bank loan; there will be no breach in bank covenants during the forecasted period; the reduction in selling price for apartments and offices will drive sufficient sales in the projects Orchid Varna Hills and Orchid Gardens Varna; the Mall collection rate will run at 94% on average and the occupancy rate shall increase gradually during the forecasted years and the Group will be successful in deferring certain payments to the joint executive directors.
The cash flow forecasts were prepared by taking into consideration the renegotiated terms between Orchid Gardens Varna EOOD and Unicredit Bulbank from 5 March 2012, which are described in details in note 34 (Post-reporting date events). According to the signed annex for restructuring the loan repayment, the short-term portion of EUR8.5 million as at 31 December 2011 was rescheduled as follows: a principal payment of EUR1 million by 30 September 2012, another principal payment of EUR2 million by 30 December 2012, EUR5 million until the end of the first quarter of 2013 and the remaining EUR0.5 million should be paid as monthly payments starting from 30 June 2012.
One of the subsidiaries of the Group, Orchid Center Varna EOOD is still negotiating with its financing bank the short-term loan liabilities amounting to EUR3.1 million as at 31 December 2011. Although the due date for repayment of the loan has past (October 2011) the bank did not recall the loan or the interest for immediate payment, but instead it opened discussions on a compromise solution that would serve both parties. The directors, considering all the information available to them and based upon the discussions with the bank, have no reason to believe that the bank will call for the loan repayment as such act will not serve the immediate interest of the bank. These conditions indicate the existence of a material uncertainty, which may cast doubt on the ability of the subsidiary Orchid Center Varna EOOD to continue as a going concern. If discussions with the bank fail, the legal recourse is limited only to this subsidiary and the real estate property owned by it and will not affect the remaining companies within the Group or any other projects and developments.
Nevertheless, the directors having considered the forecasts together with the associated judgments and the material uncertainties related to the forecasted volumes of sales of residential units from the projects Varna Hills and Orchid Gardens Varna, the rescheduling of the loan payments in Orchid Centre Varna and the deferral of certain payments to the joint executive directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. In addition, it may sell some of its property and renegotiate payment terms with suppliers. For these reasons, they continue to adopt the going concern basis of accounting in preparing the financial statements.
(ii) Revenue recognition
The timing of revenue recognition related to property development in complex contractual arrangements is important and judgemental. Revenue and costs on residential developments' construction are recognised from the point when the significant risks and rewards of ownership are transferred to the buyer, which is usually the point at which a notary deed for sale of the land, the right to build or the unfinished unit is executed. The remaining contract to construct a residential unit is then accounted for as a contract for the sale of goods where control and the risks and rewards of ownership are continuously transferred to the buyer. This is measured by reference to the stage of completion of contract activity at the balance sheet date based on the physical work performed. This assessment necessarily requires a high degree of judgment. In addition, the percentage of completion of the project works is determined by independent valuers at each reporting date.
(iii) Classification of property
The Group determines whether a property is classified as investment property or inventory (residential units for sale):
- investment property comprises land and buildings, which are not occupied substantially for use by, or in the operations of, the Group, nor for sale in the ordinary course of business, but are held primarily to earn rental income and capital appreciation;
- inventory (residential units for sale) comprises property that is held for sale in the ordinary course of business. Principally, this is residential property that the Group develops and intends to sell before or on completion of construction.
(iv) Operating lease contracts - the Group as lessor
The Group has entered into commercial property leases on its investment property portfolio. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of these property and so accounts for the leases as operating leases.
(v) Impairment of property, plant and equipment
An impairment loss is recognised for the amount by which the asset's or cash-generating unit's carrying amount exceeds its recoverable amount. To determine the recoverable amount, management estimates expected future cash flows from each cash-generating unit, which is related to an ongoing project and determines a suitable interest rate in order to calculate the present value of those cash flows (see note 4.14). In the process of measuring expected future cash flows management makes assumptions about future gross profits. These assumptions relate to future events and circumstances. The actual results may vary, and may cause significant adjustments to the Group's assets within the next financial year. In most cases, determining the applicable discount rate involves estimating the appropriate adjustment to market risk and the appropriate adjustment to asset-specific risk factors.
(vi) Fair value of investment property, including property under construction
Investment property is carried at fair value which is established annually by an independent registered valuer. The valuation is based upon assumptions including future rental income, anticipated maintenancecosts and theappropriate discount rate. The valuer and directors also make reference to market evidence of transaction prices for similar properties.
The changes in the fair value of investment property are included in the statement of comprehensive income for the period in which it arises.
The instability in the region's financial markets is continuing to cause volatility and uncertainty in the capital and real estate markets.
There is a low liquidity level in the real estate market and transaction volumes are significantly reduced, resulting in a lack of clarity as to pricing levels and the market drivers. As a result there is less certainty with regard to valuations and market values can change rapidly due tothe current market conditions.
Significant accounting judgements related to investment property under construction are presented in note 4.15 and note 6.
Critical estimates in applying the Group's accounting policies are:
(i) Deferred income tax
Deferred tax assets require management judgement in determining the amounts to be recognised. In particular, significant judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration given to the timing and level of future taxable income. The assessment of the probability of future taxable income in which deferred tax assets can be utilised is based on the Group's latest approved cash flow forecast. A deferred tax asset is usually recognised if a positive forecast of taxable income indicates the probable use of a deferred tax asset, especially when it can be utilised within the statutory time limits (see note 12).
(ii) Useful lives of depreciable assets
Management reviews the useful lives of depreciable assets at each reporting date.
At 31 December 2011 management assesses that the useful lives represent the expected utility of the assets to the Group. The carrying amounts are analyzed in notes 7 and 10.
(iii) Inventories
Inventories are measured at the lower of cost and net realizable value. In estimating net realizable values, management takes into account the most reliable evidence available at the times the estimates are made (see note 14).
5. Segment reporting
Management currently identifies the following Group's operating segments as further described in note 4.7(Segment reporting). These operating segments are monitored and strategic decisions are made on the basis of adjusted segment operating results.
Segment information can be analyzed as follows for the reporting periods under review:
Commercial Residential Hotel Total
development development
EUR'000 EUR'000 EUR'000 EUR'000
Year to 31 December 2011
Revenue from external customers 8,046 3,380 868 12,294
Depreciation and amortisation (21) (47) (223) (291)
Reportable segment operating
profit/(loss) 9,399 (1,757) (119) 7,523
Interest expense (5,166) (24) - (5,190)
Interest income 38 11 - 49
Other financial expenses (16) (11) (4) (31)
Income tax (expense)/income (507) 23 12 (472)
Net profit/(loss) for the year 3,748 (1,758) (111) 1,879
Reportable segment assets 158,852 39,812 6,819 205,483
Reportable segment property,
plant and equipment 100 706 6,478 7,284
Investment property 150,211 8,051 - 158,262
Reportable segment liabilities 104,966 24,792 88 129,846
Commercial Residential Hotel Total
development development
EUR'000 EUR'000 EUR'000 EUR'000
Year to 31 December 2010
Revenue from external customers 4,624 2,161 812 7,597
Depreciation and amortisation (12) (54) (225) (291)
Reportable segment operating
(loss)/profit (18,354) 914 (280) (17,720)
Interest expense (2,574) (25) (6) (2,605)
Interest income 29 13 - 42
Other financial expenses (40) (13) (4) (57)
Income tax income/(expense) 1,956 (149) 16 1,823
Net (loss)/profit for the year (18,983) 740 (274) (18,517)
Reportable segment assets 155,447 42,914 7,096 205,457
Reportable segment property,
plant and equipment 44 746 6,698 7,488
Investment property 147,074 7,690 - 154,764
Reportable segment liabilities 106,165 24,921 74 131,160
In the segment Residential development is included the Mixed Use Project Varna Gardens, which has a retail part presented as investment property.
The totals presented for the Group's operating segments reconcile to the Group's key financial figures as presented in its consolidated financial statements as follows:
Year to 31 Year to 31 December
December 2011 2010
EUR'000 EUR'000
Reportable segment liabilities 129,846 131,160
Reconciling items:
Other liabilities 2,653 2,179
Elimination of payables to central
management (7) (779)
-------------- -------------------
Group's liabilities 132,492 132,560
Year to 31 Year to 31 December
December 2011 2010
EUR'000 EUR'000
Segment revenue from external
customers 12,294 7,597
Reconciling items:
Other revenues 10 259
Group's revenue 12,304 7,856
Details for the revenue from products and services are
set out in note 25 (Revenue).
Year to 31 Year to 31 December
December 2011 2010
EUR'000 EUR'000
Reportable segment assets 205,483 205,457
Reconciling items:
Other assets 62,387 52,179
Elimination of payables to central
management (62,271) (51,787)
-------------- -------------------
Group's assets 205,599 205,849
Year to 31 Year to 31 December
December 2011 2010
EUR'000 EUR'000
Reportable segment operating profit/(loss) 7,523 (17,720)
Reconciling items:
Other income not allocated 10 741
Other expenses not allocated (1,989) (2,432)
-------------- -------------------
Group's operating profit/(loss) 5,544 (19,411)
Interest expense (5,229) (2,577)
Interest income 49 36
Other financial expenses (65) (66)
-------------- -------------------
Group's profit/(loss) before tax 299 (22,018)
-------------- -------------------
In 2011 an impairment charge of EUR21,000 was identified for the Group's segment "Residential development" in relation to Other receivables and in 2010 an impairment charge of EUR17,000 in relation to receivables related to sold apartments.
In 2011, an impairment charge of EUR259,000 was identified for the Group's segment "Commercial development" in relation to receivables related to the Grand Mall.
In 2010 an impairment charge of EUR91,000 was identified for the Group's segment "Hotel" in relation to receivables of the hotel.
6. Investment property
The investment properties that are owned by the Group are land, buildings and property under construction.
Following the amendments to IAS 16 "Property, plant and equipment) with prospective application from 1 January 2009, property being constructed or developed for future use as investment property were reclassified from property, plant and equipment at 1 January 2009 at their carrying amount.
As at 31 December investment property of the Group comprises the following real estate property acquired and developed by the Group:
2011 2010
Project Name EUR'000 EUR'000
Grand Mall Varna, Retail and Commercial
Project - completed 136,900 133,621
Logistic Centre, Varna - under construction 9,321 9,010
Airport City Commercial project - under
construction 1,159 1,250
Ring Road Project, Sofia - under construction 315 335
Business Park, Varna - under construction
(halted) 2,211 2,451
The retail element of Varna Gardens Mixed
Use Project - under construction 8,051 7,686
Other - completed 305 358
158,262 154,711
The investment property is measured at fair value as follows:
2011 2010
EUR'000 EUR'000
Completed investment property 137,205 133,979
Investment property under construction 21,057 20,732
158,262 154,711
The fair value of the Group's investment property was determined at the end of the reporting period by independent professionally qualified valuers who hold a recognised relevant professional qualification and have recent experience in the locations and categories of the investment properties valued.
Properties are valued on an open market basis based on active market prices adjusted, if necessary, for any differences in thenature, location or condition of the specified asset. If this information is not available, alternative valuation methods are used such as recent prices on less active markets, ordiscounted cash flow projections.
The valuation of Grand Mall Varna and "The rental element of Varna Gardens Mixed Use Residential and Retail Project" was performed by MBL part of the CBRE Affiliated Network in accordance with RICS Valuation Standards. The market value estimate is based on the Income approach, using the DCF method.
Key assumptions used by MBL in the valuations ofinvestment property - completed and under construction, as 31 December are presented below:
2011 Grand Mall Varna Gardens
Varna - completed Mixed Use
Project -
under construction
------------------- --------------------
* discount rate 10.5 % 10.5%
* terminal cap rate 9.5 % 9.5%
* weighted average rental level of rent per sqm EUR 16 EUR 10
2010 Grand Mall Varna Gardens
Varna - completed Mixed Use
Project -
under construction
------------------- --------------------
* discount rate 9 % 10%
7.75 %
* terminal cap rate /8.25% 8.25%
* weighted average rental level of rent per sqm EUR 17 EUR 10
The table below presents the sensitivity of profit before tax as of 31 December due to change in underlying assumptions (the values are presented in absolute numbers as a change can either be positive or negative):
2011 2010
EUR'000 EUR'000
Change of 5 % in estimated rental income 1,298 1,149
Change of 0.25% in the discount rate 2,217 2,734
The valuations of Airport City Commercial project,Ring Road Project, Sofia and Business park Varna were performed by Yavlena Impact OOD, and the valuations of Logistic Centre, Varna and other investment property were performed by Consulting Company Creativ OOD. The market value estimates in these valuations are based on the open market basis based on active market prices, adjusted, if necessary, for any differences in the nature, location or condition of the specified asset.
Changes to the carrying amounts presented in the consolidated statement of financial position can be summarized as follows:
2011
EUR'000
Carrying amount at 1 January 2011 154,711
Additions
- from subsequent expenditures 1,259
- brokerage fees 54
Disposals (1,386)
Net gain from fair value adjustments 3,624
Carrying amount at 31 December 2011 158,262
--------
2010
EUR'000
Carrying amount at 1 January 2010 155,953
Additions
- from subsequent expenditures 17,860
- brokerage fees 106
Net loss from fair value adjustments (19,208)
---------
Carrying amount at 31 December 2010 154,711
---------
Borrowing costs capitalised within the carrying value of investment property during 2011 amounted to EUR268,000 (2010: EUR1,505,000)
Rental income for 2011 amounts to EUR6,131,000 (2010: EUR2,767,000Error! Not a valid link.) included within "Revenue".
In 2011 the Group has recognised direct operating rental expenses at the total amount of EUR2,781,000 (2010: EUR1,740,000), which includes the following lines: cost of materials - EUR485,000 (2010: EUR814,000), hired services expenses EUR1,448,000 (2010: EUR742,000), other expenses EUR848,000 (2010: EUR184,000).
Bank borrowings are secured on investment property to the value EUR147,162,000.
7. Property, plant and equipment
The carrying amounts of the property, plant, and equipment presented in the financial statements at 31 December 2011 are calculated as follows:
Land Buildings Machines Vehicles Furniture Total
and equipment and
fixtures
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Gross carrying
amount
Balance at 1
January 2011 855 6,212 1,007 301 692 9,067
Additions - 2 2 80 84
Balance at 31
December 2011 855 6,212 1,009 303 772 9,151
Depreciation
Balance at 1
January 2011 - (633) (173) (262) (489) (1,557)
Depreciation - (134) (30) (20) (114) (298)
--------- ---------- --------------- --------- ---------- ---------
Balance at 31
December 2011 - (767) (203) (282) (603) (1,855)
Carrying amount
at 31 December
2011 855 5,445 806 21 169 7,296
========= ========== =============== ========= ========== =========
The carrying amounts of the property, plant, and equipment presented in the financial statements at 31 December 2010 are calculated as follows:
Land Buildings Machines Vehicles Furniture Assets Total
and and under
equipment fixtures construction
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Gross
carrying
amount
Balance at 1
January 2010 855 6,212 995 298 644 10 9,014
Additions - - 14 3 48 - 65
Disposals -
cost - - (2) - - (10) (12)
Balance at 31
December
2010 855 6,212 1,007 301 692 - 9,067
Depreciation
Balance at 1
January 2010 - (499) (144) (207) (391) - (1,241)
Depreciation - (134) (29) (55) (98) - (316)
--------- ---------- ---------- --------- ---------- -------------------------------------- ---------
Balance at 31
December
2010 - (633) (173) (262) (489) - (1,557)
Carrying
amount
at 31
December
2010 855 5,579 834 39 203 - 7,510
========= ========== ========== ========= ========== ====================================== =========
As at 31 December 2011 the land and buildings included within the property, plant and equipment of the Group comprise the following real estate property acquired and developed by the Group:
-- Golden Yavor Hotel in Golden Sands Resort, Varna -- Administrative building, Varna (located in the project Orchid Hills Varna)
The Group has no property, plant and equipment pledged as security for its liabilities.
8. Investment in associates
The Group holds a 30 per cent voting and equity interest in Kohav OOD, which will act as a managing company for entertainment and leisure complexes. Its shares are not publicly listed on a stock exchange and hence published price quotes are not available.
The carrying value of investments in associates is set out as follows:
2011 2011 2010 2010
EUR'000 Share % EUR'000 Share %
Acquisition of share
capital 1 30 1 30
Goodwill 313 30 313 30
Share of previous years'
losses (77) 30 (63) 30
Share of current year
loss (19) 30 (14) 30
-------- -------- -------- --------
218 30 237 30
The investment is accounted for under the equity method.
Financial information for Kohav OOD is summarised as follows for the period ended 31 December:
2011 2010
EUR'000 EUR'000
Assets 931 942
Liabilities (57) (5)
Revenue 18 30
Loss (62) (48)
Loss attributable to the Group (19) (14)
As of 31 December 2011 the total recognised loss for the Group from 2004 to 2011 amounts to EUR 96,000.
The carrying amount presented on the Consolidated Statement of Financial Position includes goodwill recognised on the initial acquisition of Kohav OOD in year 2004. In 2011 the Group did not receive any dividends (2010: Nil).
The Group has not incurred any contingent liabilities or other commitments relating to its investments in associates.
9. Goodwill
The net carrying amount of goodwill is analysed as follows:
Goodwill
EUR'000
Opening net book amount at 1 January 2010 3
Closing net book amount at 31 December 2010 3
Closing net book amount at 31 December 2011 3
10. Other intangible assets
The carrying amounts of the other intangible assets presented in the financial statements at 31 December 2011 are calculated as follows:
Acquired software Others Total
licences
EUR'000 EUR'000 EUR'000
Gross carrying amount
Balance at 1 January 2011 15 40 55
Additions 1 3 4
Balance at 31 December 2011 16 43 59
Amortization and impairment
Balance at 1 January 2011 (15) (23) (38)
Amortization - (6) (6)
Balance at 31 December 2011 (15) (29) (44)
Carrying amount 31 December
2011 1 14 15
================== ======== ========
The carrying amounts of the other intangible assets presented in the financial statements at 31 December 2010 are calculated as follows:
Acquired software Others Total
licences
EUR'000 EUR'000 EUR'000
Gross carrying amount
Balance at 1 January 2010 15 32 47
Additions - 8 8
Balance at 31 December 2010 15 40 55
Amortization and impairment
Balance at 1 January 2010 (13) (18) (31)
Amortization (2) (5) (7)
------------------ -------- --------
Balance at 31 December 2010 (15) (23) (38)
Carrying amount 31 December
2010 - 17 17
================== ======== ========
All amortization is included within 'Depreciation and amortization'.
No intangible assets were provided as security for Group's liabilities.
11. Long-term loans due from associates
The amount of EUR 356,000 (2010: EUR334,000) recognised in the Consolidated Statement of Financial Position refers to loan receivables from Kohav OOD, which is an associate company to Crockett S.A belonging to Orchid Group. The long-term loan was discounted for a period of 4 years, starting 2007, with an interest rate EUROLIBOR +2%. In the reporting period interest income on the amortised loan in the amount of EUR21,632 was recognised. Refer to note 26for the effect of the discount.
12. Deferred tax assets and liabilities
Deferred tax arising from temporary differences and unused tax losses under the liability method, using a principal tax rate for 2011 of 10% according to the Bulgarian Corporate Income Tax Act, can be summarised as follows:
Deferred tax liabilities 1 January Recognized 31 December Recognized 31 December
(assets) 2010 in profit 2010 in profit 2011
and loss and loss
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Non-current assets
Investment property 5,095 (1,574) 3,521 500 4,021
Current assets
Inventory - - - (57) (57)
Trade receivables - - - (29) (29)
Current liabilities
Trade payables (12) 7 (5) (22) (27)
Short-term liabilities
to related parties (6) - (6) 5 (1)
Payables to employees
and social security
institutions (8) 4 (4) 2 (2)
Unused tax losses (370) (295) (665) 74 (591)
---------- ----------- ------------ ----------- ------------
4,699 (1,858) 2,841 473 3,314
---------- ----------- ------------ ----------- ------------
Recognized as:
Deferred tax asset (396) (680) (707)
---------- ------------ ------------
Deferred tax liability 5,095 3,521 4,021
========== ============ ============
The amount of deductible temporary differences and unused tax losses for which no deferred tax asset is
recognised in the consolidated statement of financial position is EUR4,518,000.
The management is satisfied in view of the on going plans and projects that the tax losses will be used. See note 28 for further information on the Group's income tax expense.
13. Development work in progress
2011 2010
EUR'000 EUR'000
Orchid Hills Sofia residential
project - 775
Orchid Hills Varna residential
project 403 3,833
Orchid Gardens Varna mixed
project 21,725 19,032
Lyons Bulgaria residential
project 783 -
22,911 23,640
Revenue and costs on residential developments' construction are recognised from the point when the significant risks and rewards of ownership are transferred to the buyer, which is usually the point at which a notary deed for sale of the land, the right to build or the unfinished unit is executed. The remaining contract to construct a residential unit is then accounted for as a contract for the sale of goods where control and the risks and rewards of ownership are continuously transferred to the buyer. This is measured by reference to the stage of completion of contract activity at the balance sheet date based on the physical work performed.
During 2011 the Group has executed 51 notary deeds for the sale of land or building rights in respect of Orchid Hills Varna residential project.
EUR 2,608,905 has been recognised as revenue corresponding to signed notary deeds. The percentage of completion of the project works as of 31 December 2011 is 100% of the development costs of stage 3. During October 2011 the project received it's occupancy certificate.
The following table provides information about such continuous transfer agreements that are in progress at the reporting date:
Notes 2011 2010
EUR'000 EUR'000
Revenue arising from residential
developments' construction 25 - 125
Aggregate costs incurred and expensed
to date - (70)
-------- --------
Profit (before tax) recognised to
date - 55
Advances from customers for residential
developments' construction 22 - 25
In 2011 EUR856,000 borrowing costs were capitalised in development work in progress (2010: EUR402,000).
13.1 Development work in progress for the Orchid Gardens Varna mixed use residential and retail project
Development work in progress for the Orchid Gardens Varna mixed use residential and retail project of value EUR 21,725,000 includes construction expenses of EUR 14,170,000 capitalized financial expenses of EUR 1,486,000 and land cost of EUR 6,069,000 being the relative value of the residential part of the total project.
The development work in progress for the Orchid Gardens Varnamixed use residential and retail project is pledged as security for a bank loan.
13.2 Development work in progress for the Orchid Hills Varna residential project
Development work in progress for the Orchid Hills Varna residential project of EUR403,000 includes construction expenses of EUR 321,000 and land cost of EUR 82,000 corresponding to withheld stage 4 of the project.
The development work in progress for the Orchid Hills Varna residential project is pledged as security for bank loan.
14. Inventory - residential units for sale
2011 2010
EUR'000 EUR'000
Apartment units in Orchid Hills Sofia 838 1,795
Apartment units in Orchid Hills Varna 5,642 3,925
Others 364 387
Materials 2 180
-------- --------
6,846 6,287
Total development costs of EUR 3,205,000 were expensed in the Consolidated Statement of Comprehensive Income in 2011 (2010: EUR1,612,000).
Total expenses for materials of EUR 839,000 were recognised in the Consolidated Statement of Comprehensive Income in 2011 (2010: EUR1,144,000) under "Cost of materials".
In 2011, a total of EUR 567,000 of inventories has been recognised within 'Other expenses' resulting from write down of inventories to net realizable value. In 2011 impairment charges of EUR139,000 related to apartments in Orchid Hills Sofia, of EUR255,000 related to apartments in Orchid Hills Varna and of EUR173,000 related to materials in Grand Mall was identified.
Based on the facility agreement signed with Unicredit Bulbank for the financing stage 3 of Orchid Hills Varna the inventory of 58 units with value of EUR2,558,000 is pledged as security for the facility loan granted by the Bank. Other then this no inventory is pledged as securities for liabilities.
15. Trade receivables
2011 2010
EUR'000 EUR'000
Advances for development work paid to subcontractors
and suppliers 769 704
Receivables from tour operators 163 153
Receivables from clients in respect of
sold apartments 56 758
Receivables from clients of the Mall 587 1,122
Accrued rental incomes
Accrued rental incomes 1,754 481
Other 177 192
-------- --------
3,506 3,410
2011 2010
EUR'000 EUR'000
Trade receivables, gross 4,650 4,295
Impairment of trade receivables (1,144) (885)
-------- --------
Trade receivables, net 3,506 3,410
Trade receivables are usually due within 45 days (when there are no specific requirements in the signed contracts) and do not bear any interest. All trade receivables are short term. The net carrying value of trade receivables is considered a reasonable approximation of fair value. All trade receivables are subject to credit risk exposure. All trade receivables of the Group have been reviewed for indicators of impairment.
Certain trade receivables were found to be impaired and an allowance for credit losses of EUR 259,000 (2010: EUR 108,000) has been recognised within 'Other expenses'. The impaired trade receivables are mostly due from trade customers that are experiencing financial difficulties.
The movement in the allowance for credit losses can be reconciled as follows:
2011 2010
EUR'000 EUR'000
Balance at 1 January 885 777
Impairment loss 259 108
Balance at 31 December 1,144 885
An analysis of unimpaired trade receivables that are past due is presented in note 33.2.
16. Tax receivables
2011 2010
EUR'000 EUR'000
Refundable VAT 822 1,829
Others 26 53
-------- --------
848 1,882
The refundable VAT is attributable to the following companies within the Group:
2011 2010
EUR'000 EUR'000
Orchid Gardens Varna EOOD 699 1,719
Lyons Bulgaria EOOD 66 1
OM Razvitie EOOD 49 50
Orchid Sofia Hills EOOD 6 -
Orchid Centre Varna EOOD 1 2
Orchid Logistics Centers EOOD 1 -
Orchid Multi Complex Varna EOOD - 52
Orchid Seaside Apartments EOOD - 5
-------- --------
822 1,829
17. Other receivables
2011 2010
EUR'000 EUR'000
Incentives paid to tenants 755 764
Prepayments 69 76
Advances to employees 8 3
Loans 57 93
Court claims 14 -
Others 19 34
-------- --------
922 970
Other receivables, gross 943 970
Impairment of other receivables (21) -
-------- --------
Trade receivables, net 922 970
The movement in the allowance for credit losses can be reconciled as follows:
2011 2010
EUR'000 EUR'000
Balance at 1 January - -
Impairment loss 21 -
Balance at 31 December 21 -
18. Cash and cash equivalents
2011 2010
EUR'000 EUR'000
Bank deposits 242 2,852
Cash at bank 3,346 3,228
Restricted cash at bank 30 30
Cash in hand 10 13
3,628 6,123
-------- --------
The Group's projects are financed by loans to specific subsidiaries in order to provide finance at the project level. All loans are non recourse to the holding company. Cash and cash equivalents available at the project level are required to be utilised only by the particular subsidiary to which the loan has been provided. As of 31 December 2011, an amount of approximately EUR3.3 million was ring fenced and therefore not available to finance the Group's other activities or any other subsidiary other than that to which the loan relates.
19. Equity
19.1 Share capital
Authorised share capital 2011 2011 2010 2010
number EUR'000 number EUR'000
Ordinary shares of
EUR 0.01 each 125,000,000 1,250 125,000,000 1,250
2011 2011 2010 2010
Allotted, called up
and fully paid number EUR'000 number EUR'000
Ordinary shares of
EUR 0.01 each 88,466,260 885 88,466,260 885
Share capital for the year ended 31 December can be presented as follows:
Analysis of movements
in shares 2011 2011 2010 2010
number EUR'000 number EUR'000
Shares issued:
- at the beginning
of the period 88,466,260 885 88,466,260 885
Shares outstanding
and fully paid at 31
December 88,466,260 885 88,466,260 885
19.2 Share options
Share options were granted to the former chairman of the board and to selected employees. The options have different vesting periods that are divided in tranches with lengths between six months and three years. The exercise price of the granted options is equal to the market price except for certain options granted in the IPO in 2009.
The movements in the number of share options outstanding and their related weighted average exercise price are as follows:
2011 2011 2010 2010
EUR per EUR per
share '000 share '000
Weighted Number Option Weighted Number Option
average average
exercise exercise
price price
At 1 January 1.42 555 1.42 590
Expired - (555) - (35)
---------------- ---------- -------------- ---------- --------------
At 31 December 1.42 - 1.42 555
EUR 172,000 was transferred from other reserves to retained earnings in relation to the 555,000 share options which expired in 2011. As of 31 December 2011 there are no outstanding share options.
The share options outstanding at the end of 2010 had the following vesting date and exercise prices:
2010 2010
EUR per
share '000
Weighted
average
exercise
price Number Options
30 June 2007 1.35 176
30 June 2008 1.48 379
---------- ----------------
1.42 555
The share options were denominated in sterling. However, for consistency the notes are disclosed in euro. The weighted average fair value of options granted determined using the Black-Scholes valuation model was EUR0.73 per option. The significant inputs into the model were a weighted average share price of EUR1.87 at the grant date, the exercise prices shown above, volatility of 20% and expected option life of 2 years, and an annual risk free interest rate of 4.82%. The volatility measured at the standard deviation of continuously compounded share returns was based on statistical analysis of monthly share prices since 2009.
19.3 Share premium
The share premium amounting to EUR69,122,000 (2010: EUR 69,122,000) as at 31 December 2011 comprises the difference between the price paid for the issued shares of Orchid Developments Group Ltd. net of related expenses and their par value.
19.4 Loss per share
The basic loss per share has been calculated using the net results attributable to shareholders of the Group as the numerator.
The weighted average number of shares used to calculate basic loss per share and the loss attributable to shareholders is as follows:
Basic and diluted loss (EUR per share) 2011 2010
EUR EUR
Loss for the year (182,000) (20,203,000)
Weighted average number of ordinary shares
in issue 88,466,260 88,466,260
----------- -------------
Basic and diluted loss (EUR per share) (0.002) (0.228)
----------- -------------
The diluted loss per share does not differ from the basic loss per share as the exercisable share options would have the effect of decreasing loss per share and are therefore not dilutive under the terms of IAS 33.
The amounts per share are not influenced by any tax consequences.
On 16 February 2012 the Group issued 5,500,000 new ordinary shares. Details are set out in note 34(Post-reporting date events).
20. Borrowing liabilities
The borrowings comprise the following components:
2011 2010
EUR'000 EUR'000
Long-tern borrowing liabilities 102,608 95,266
Short-tern borrowing liabilities 15,828 16,089
-------- --------
118,436 111,355
Changes in loans during the period are presented as follows:
EUR'000
For the period ended 31 December 2011
Beginning balance 1 January 2011 111,355
Received during the period 10,178
Repaid during the period (3,097)
--------
Ending balance 31 December 2011 118,436
The Group received funding for its projects in accordance with the following loan agreements signed with banks and financial institutions:
-- The Group has site-specific loan facilities with a European banking consortium led by OTP Bank in respect of its Grand Mall development. The investment facility totals EUR97.6 million and is repayable in 78 quarterly instalments from 31 December 2010. The revolving VAT facility of BGN 11.3 million (EUR5.8 million) has been fully repaid. During the year 2010 the banks declared a market disruption event, and consequently changed the calculation of the annual interest rate from EURIBOR plus a margin to bank costs of fund raising plus a margin. As collateral the Group provided pledges over the subsidiary enterprise, its shares and its bank accounts.
On the 24 March 2011 the Group signed an amendment to the credit facility agreement according to which the payments of principal start from 31 December 2011, in addition the Group has committed to refinance from it's own sources or by another financing bank 50% of the MKB bank share in the loan (reflecting the amount of EUR 24.2 Million as at the date of approval of the Financial statements) with in 3 years from signing the amendment to the credit facility agreement. As of the 31 December 2011 the remaining amount is EUR96.5 million.
-- The Group has site-specific facilities with Raiffeisenbank, Bulgaria in respect of its Business Center Varna office development. The existing drawdown amount of EUR3.1 million was due to be paid on October 2011. Until that date the Group was paying quarterly interest, which consists of three-month EURIBOR plus margin. The collateral provided to the bank is land in Varna owned by the borrower with an area of 4,629 sq m and the right to build related to it, a first ranking pledge on all future receivables under lease agreements and a pledge over the shares of Orchid Center Varna. As of the date of these financial statements the Bank proposal is to grant additional 12 months grace period for payments under the loan (both interest and principal) in order to ensure needed time for voluntary sale of the asset (project) on fair market price.
-- The Group has site-specific facilities with Unicredit Bulbank, Bulgaria in respect of its Orchid Gardens mixed-use development. The investment facility totals EUR21.4 million and is repayable up to 30 May 2017 starting from 30 June 2012. The revolving VAT facility totals EUR1.2 million repayable on 30 June 2012. The annual interest rate consists of three-month EURIBOR plus margin. The collateral provided to the bank is land in Varna owned by the borrower with an area of 6,850 sqm and pledges over the borrower's receivables. As of the 31 December 2011 the remaining amount of the investment facility is EUR16.9 million and the remaining amount of the revolving VAT facility is EUR0.7 million.
-- On 5 March 2012 the Group has signed new annex for restructuring the loan repayment and extending the availability-drawing period till 31 May 2012, following the additional delay with the completion of the project. More details are set out in note 34 (Post-reporting date events). The Group has site-specific facilities with Unicredit Bulbank, Bulgaria in respect of its Orchid Hills Varna 3rd stage construction. The investment facility totals EUR2.4 million and is repayable in 6 quarterly equal principal repayments to August 2012. The annual interest rate consists of one-month EURIBOR plus margin. The collateral provided to the bank is land in Varna owned by the borrower with an area of 11,378 sqm and pledges over the borrower's receivables. As of the 31 December 2011 the remaining amount representing a short term liability is EUR1.2 million.
21. Operating leases 21.1 Operating leases - as a lessor
The Group has entered into leases on its property portfolio. The commercial property leases typically have lease term between 5 and 15 years and include clauses to enable periodic upward revision of the rental charge according to the prevailing market conditions. Some leases contain options to break the lease agreement before the end of the lease term.
Future minimum rentals receivable under non-cancellable operating leases as at 31 December are as follow:
Minimum lease payments to be received
Lease Payments Up to 1 From 2 After Total
year to 5 years 5 years
EUR'000 EUR'000 EUR'000 EUR'000
As at 31 December 2011 5,982 24,195 15,286 45,463
As at 31 December 2010 4,986 21,418 13,043 39,447
21.2 Operating leases - as a lessee
Operating lease expenses in 2011 were as follows:
2011 2010
EUR'000 EUR'000
Rental expenses 17 44
The Group's future minimum operating lease payments are as follows:
Lease Payments Up to 1 From 2 Total
year to 5 years
EUR'000 EUR'000 EUR'000
As at 31 December 2011 10 - 10
As at 31 December 2010 28 49 77
The rent agreements signed by the Group for the rent of the offices located in Sofia and Varna do not contain any contingent rent clauses. The contracts do not contain purchase options.
No contingent rents were recognised as an expense and no sublease income is expected to be received as all assets are used exclusively by the Group.
22. Trade payables
2011 2010
EUR'000 EUR'000
Advances from customers for residential
developments' construction - 25
Advances from customers for residential
units sold 1,385 2,704
Liabilities to building companies 3,518 11,270
Advances from clients for tourist services - 1
Others 1,604 766
-------- --------
6,507 14,766
The Directors consider the carrying amounts recognised in the Consolidated Statement of Financial Position for trade payables to be a reasonable approximation of their fair value.
23. Tax liabilities
2011 2010
EUR'000 EUR'000
VAT liabilities 219 207
Withholding tax liabilities 178 73
Others 44 30
-------- --------
441 310
24. Employees
24.1 Employee compensation and benefit expenses
Employee compensation and benefit expenses include:
2011 2010
EUR'000 EUR'000
Directors' remuneration (790) (877)
Key management remuneration (521) (534)
Wages and salaries (496) (602)
Social security (70) (82)
-------- --------
(1,877) (2,095)
24.2 Payables to employees and social security institutions
2011 2010
EUR'000 EUR'000
Non-current:
Payables to Directors - 1,939
-------- --------
- 1,939
Current:
Payables to Directors 2,469 108
Wages and salaries 19 40
Social security 2 3
-------- --------
2,490 151
Payables to Directors include a provision for profit related bonus to the joint chief executive directors of EUR 1,939,000. In February 2012 the Management service Company and the Group reached to an agreement regarding to converting part of the amount to 5,500,000 shares and postponing part of the amount as a loan which should be paid no later then 31 December 2013. More details are provided in note 34 (Post-reporting date events).
25. Revenue
2011 2010
EUR'000 EUR'000
Rental income 6,131 2,767
Straight -lining of lease incentives (62) (30)
Service charge and utilities income 1,976 1,468
Advertisement income - 168
Recognised income from residential units
sold (sale of goods) 3,314 2,036
Revenue arising from residential developments'
construction - 125
Services rendered (tourist services) 856 755
Other income 89 567
-------- --------
12,304 7,856
Rental income includes income of EUR1,272,000 (2010: EUR481,000) recognised on a straight-line basis under IAS 17 "Operating leases".
26. Interest income and interest expense
The following amounts have been included in the Consolidated Statement of Comprehensive Income for the reporting periods presented:
2011 2010
EUR'000 EUR'000
Interest expense
Interest expense on borrowings (5,190) (2,574)
Other interest expenses (39) (3)
-------- --------
(5,229) (2,577)
Interest income
Interest income from fiduciary deposits 20 16
Other interest income 29 20
-------- --------
49 36
Interest expenses for 2011 are mainly in relation to the project "Orchid Multi Complex Varna", "Orchid Hills Varna" (after completion of the construction) and the project "Business Park, Varna" (halted).
Other interest income includes interest on amortised loan to an associate in the amount of EUR 22,000 (2010: EUR 20,000).
27. Other financial expenses
2011 2010
EUR'000 EUR'000
Bank charges (32) (36)
-------- --------
(32) (36)
28. Tax (expenses)/income
Orchid Developments Group Ltd. is a registered offshore company exempt from taxes. Its offshore subsidiaries are also tax-exempt companies. The current income tax expenses are attributable only to the Bulgarian subsidiaries of the Group.
The net actual tax expenses are as follows:
2011 2010
EUR'000 EUR'000
Loss of Orchid Group for the year (182) (20,203)
* Loss attributable to non - Bulgarian subsidiaries the
financial result of which is not taxable (266) (20,443)
* Profit attributable to Bulgarian subsidiaries, the
financial result of which is taxable in Bulgaria 84 240
Corporate income tax rate 10% 10%
-------- ---------
Expected tax expense (8) (24)
Tax effect from deduction of the financial
result (permanent differences) - (19)
Deferred tax (expense)/income:
- origination of deferred tax related
to temporary differences and tax losses 189 317
- reversal of deferred tax related to
temporary differences and tax losses (162) (33)
- origination of temporary differences
related to fair value of investment property (500) 1,574
Actual tax (expenses)/income (481) 1,815
Please refer to note 12 (Deferred tax assets and liabilities) for information on Group's deferred tax assets and liabilities.
29. Related parties transactions
The Group's related parties include the Group's key management, directors and associates.
Orchid Developments Group Ltd. has not paid dividends to shareholders in 2010. Should dividends have been paid, there would not be tax consequences for the company as it is tax exempt.
One of the Group's companies signed contracts for sale of apartment units to related parties. None of the transactions incorporate special terms and conditions and no guarantee has been given or received.
At 31 December 2011 the details of the signed contracts are as follows:
Related party Number Total Instalments
of purchased price, received,
apartments net of net of
VAT VAT
EUR'000 EUR'000
Directors
Ofer Miretzky through Shahar EOOD
(in Orchid Gardens Varna) 1 304 30
Key management
Anatoly Drayluk through A.D. Razvitie
(in Orchid Gardens Varna) 1 183 37
In year 2010 Ofer Miretzky (through Noa Cafe EOOD and Adagio Bulgaria EOOD) has signed lease agreements with Orchid Multi Complex Varna EOOD for 4 units of 269 sq m in total, additional sitting area of 230 sq.m. and a storage of 87 m2. The lease period is non-breakable 5 years, plus additional 15 years, commencing as from the opening date of Grand Mall Varna, with a break option on each 5-th year. The total estimated rent receivables under these agreement amounts to EUR84,000 per annum and depends on the occupancy of the Mall. The reported rental income in year 2011 is at the total amount of EUR 40,000.
The Directors' shareholdings are disclosed in the Director's Report. Please refer to Note 19.1 (Share capital) for information on the entity's fully paid share capital. The remuneration and benefits paid to the Directors during the year, together with details of share options and other long term incentive plan details are set out within the Directors' Remuneration Report on page 16 of the Annual Report.
29.1 Year-end balances
2011 2010
EUR'000 EUR'000
Receivables from related parties
Receivables from Directors 81 45
-------- -------
81 45
Short-term liabilities to related parties
Loan to Directors 75 37
Liabilities to the associated company
of the Group 33 29
108 66
30. Contingent liabilities
30.1 Court claims
The court claims described below relate to Orchid Sofia Hills EOOD.
There are two pending court claims at Sofia City Court, Civil division, namely civil court case (1) 10556/2009 and civil court case (1) 10558/2009 against "Orchid Sofia Hills" EOOD /hereinafter "Orchid"/ as a defendant. Each claim is for the amount of EUR10,000 which amount represents a deposit paid under concluded preliminary agreement for purchase and sale of a real estate property. The plaintiffs request return of the paid deposits. Their claims challenge the timely and qualitative delivery of units. Orchid as Defendant has submitted to the Court its written statements of defense. The Court has allowed preparation of technical expertises with regards to the units and has appointed experts and specified the fees due by the plaintiffs for the expertises. The Court indicated it was the plaintiffs' task to prove that they were correct parties under the agreements and that the defendant was in delay for execution of its obligations. The court hearing for case 10556/2009 is scheduled for May 2012. Case 10558/2009 is waiting for a court decision.
There is a pending court claim at Sofia City Court, Commercial division, namely commercial court case (1) 2036/2010 against "Orchid Sofia Hills" EOOD as a Defendant. The claim is submitted by "Consortium Remi Group" AD - general contractor under the Construction Contract dated 14 December 2005 between "Orchid Sofia Hills" EOOD and "Consortium Remi Group" AD ("Remi Group") which was signed for the development of the complex "Orchid Hills Sofia" in Sofia city, Bulgaria, for a Contract lump sum. Under the concluded Contract Remi Group has executed partially the agreed works, not with the due quality and not according to the agreed term and schedule. From the invoice No 503 dated 19 February 2008, issued by Remi Group, Orchid has made a deduction for low quality execution of works. Orchid has retained in total EUR186,000 under the Contract for bad quality execution of works. In their court claim Remi Group requested payment of the retained guarantee for execution of works at the amount of EUR197,710 (according to an excerpt from their accountancy books this is the due amount). Remi Group pointed that the Project is finished; an occupancy permit is issued; the guarantee amounts are subject to repayment and they have issued invoices for this. The court case is pending on Sofia City court. The first court hearing is scheduled for 20 April 2012.
There is a court case that "Orchid Sofia Hills" EOOD is not a party of, but is a concerned party. The court claim is submitted by Toshko and Evelina Goranovi on 18 June 2002 and challenges the validity of an agreement for voluntary partition executed with regards to land plots No 1724 and No 1088 included in a land plot belonging to "Orchid Sofia Hills" EOOD having total area of 10 326 sq.m.The claim has been rejected in the first two court instances. The Supreme Court - third and final instance, returned the case for consideration to the Court of Appeal and the next court hearing is scheduled for July 2012.
There are no other pending court claims against the Group, nor any circumstances concerning the Group to give rise to claims.
31. Capital commitments
At 31 December 2011, the Group has signed contracts with subcontractors and building companies for construction works, project and design works, excavation and supervision for a total amount of EUR 2,892,000 (31 December 2010: EUR 10,009,000) related to commercial development property and EUR 1,036,000 (31 December 2010: EUR 3,857,000) related to residential development property.
32. Capital management policies and procedures
The Group's capital management objectives are:
-- to ensure the Group's ability to continue as a going concern; and
-- to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
The Group monitors capital on the basis of the correlation between equity and net debt.
Net debt is calculated as total liabilities less the carrying amount of cash and cash equivalents.
The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt.
The amount of the correlation for the presented accounting periods is summarized as follows:
2011 2010
EUR'000 EUR'000
Equity 73,107 73,289
Debt 132,492 132,560
- cash and cash equivalents (3,628) (6,123)
-------- --------
Net debt 128,864 126,437
Equity to net debt 1:1.76 1:1.73
33. Risk management objectives and policies
The Group is exposed to a market risk, currency risk, interest rate risk and certain other price risks, which result from both its operating and investing activities. The Group does not use financial instruments to decrease the level of financial risks.
The significant financial risks to which the Group is exposed to are described below.
33.1 Foreign currency risk
Most of the Group's expenditure is carried out in Euros. All of the Group's sale/lease contracts are denominated in Euros, as well as its financing agreements. The exchange rate BGN to Euro has been fixed since 1997.
33.2 Credit risk
The Group's trade and other receivables are monitored to avoid significant concentrations of credit risk.
The Group's exposure to credit risk is limited to the carrying amount of financial assets recognised at the reporting date, as summarised below:
Classes of financial assets - carrying
amounts 2011 2010
EUR'000 EUR'000
Loans 356 334
-------- --------
Long-term exposure to credit risk 356 334
Trade and other receivables 1,140 2,397
Cash and cash equivalents 3,628 6,123
Short-term exposure to credit risk 4,768 8,520
The Group monitors defaults of customers and other counterparties, identified either individually or by group, and incorporates this information into its credit risk controls.
The Group's management considers that all the above financial assets that are not impaired for each of the reporting dates under review are of good credit quality.
In 2011 impairment was recognised at the amount of EUR280,000 (2010: EUR108,000).
Some of the unimpaired trade receivables are past due as at the reporting date. Financial assets past due but not impaired can be shown as follows:
Not more More than More than More than Total
than 3 3 months 6 months 1 year
months but not more but not
than 6 months more than
1 year
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
As at 31 December
2011 292 108 94 315 809
As at 31 December
2010 477 315 382 825 1,999
As at the date of approval of the financial statements EUR 393,000 from the unimpaired overdue receivables have been received.
Part of the Group's financial assets is secured by bank guarantees.
In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds and other short-term financial assets is considered negligible, since the counterparties are reputable institutions.
33.3 Cash flow and Interest rate risks
As at 31 December 2011, the Group is exposed to changes in market interest rate through its bank borrowings, which are subject to variable interest rates. All other financial assets and liabilities have fixed rates. The interest charges on bank borrowings in relation of the project "Orchid Gardens Varna" are capitalised. The amounts in relation of the halted project "Business Park, Varna", Grand Mall Varna and the project "Orchid Hills Varna" (after completion of the project) are assumed to have an impact on the net result for the year.
The following table illustrates the sensitivity of the net result for the year and equity to a reasonably possible change in interest rates of +1% and -1% (2010: +/- 1%), with effect from the beginning of the year. These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on the Group's financial instruments held at each reporting date. All other variables are held constant.
Interest rate sensitivity 2011 2010
EUR'000 EUR'000
+1% -1% +1% -1%
Change in net result for the
year (1,000) 1,000 (563) 563
Change in equity (1,000) 1,000 (563) 563
33.4 Liquidity risk analysis
The Group manages its liquidity needs by monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash-outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a weekly basis, as well as on the basis of a rolling 30-day projection. Long-term liquidity needs for a 180-day and a 360-day lookout period are identified monthly.
The Group maintains cash to meet its liquidity requirements for up to 30-day periods. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities.
The additional available funds under signed loan contracts as of 31 December 2011 amount to EUR4.5 million (31 December 2010: EUR13.8 million).
At the date of the financial reports there are no cross guarantees between the companies with the exception of a new signed amendment for a loan facility agreement with Orchid Gardens Varna (see note 34 Post-reporting date events), nor recourse to the holding company. Therefore, in a hypothetical event of financing default, an underperforming asset can be released to the appropriate lender to limit the financial damage to the Group.
As at 31 December 2011 the following are contractual maturities of the financial liabilities including estimated interest payables:
Gross cash flows
Carrying 1 year from 2 More
amount to 5 years than
5 years
Financial liabilities at carrying
amount:
Loans 118,737 22,689 41,823 129,990
Trade and other liabilities 5,155 5,155 - -
123,892 27,844 41,823 129,990
As at 31 December 2010 the following are contractual maturities of the financial liabilities including estimated interest payables:
Gross cash flows
Carrying 1 year from 2 More
amount to 5 years than
5 years
Financial liabilities at carrying
amount:
Loans 111,516 19,738 31,630 110,894
Trade and other liabilities 12,065 12,065 - -
123,581 31,803 31,630 110,894
The above contractual maturities reflect the gross cash flows, which may differ from the carrying values of the liabilities at the reporting date.
33.5 Summary of financial assets and financial liabilities by category
The carrying amounts of Group's financial assets and liabilities as recognised at the reporting date of the reporting periods may be categorised as follows:
2011 2010
EUR'000 EUR'000
Non current assets
Loans and receivables
Loans 356 334
Current assets
Loans and receivables:
Loans and receivables 1,140 2,397
Cash and cash equivalents 3,628 6,123
Non current liabilities
Financial liabilities measured at amortised
cost:
Loans 102,608 95,266
Current liabilities
Financial liabilities measured at amortised
cost:
Loans 16,129 16,250
Trade and other liabilities 5,155 12,065
The Group's loan facilities are project specific and secured at the local company level.
34. Post-reporting date events
No adjusting or significant non-adjusting events have occurred between the reporting date and the date of authorization, except for those described below:
Bellport Bonus scheme
As of 31 December 2011 the Group has a bonus liability to the Management Services Company in respect of the joint chief executive officers for the amount of EUR1.9 million as described in note 24 to the financial statements. On 15 February 2012 the Management Service Company came to arrangement with the Group, according to which the Management Service Company agrees to convert part of the accrued bonus in the amount of EUR1,294,000 (GBP1,100,000 at the spot exchange rate on 11 January 2012) to 5,500,000 newly issued ordinary shares of Orchid Developments Group Ltd. The rest of the amount EUR645,000 (GBP548,150) is agreed to be considered as a loan bearing annual interest of 3% with repayment date scheduled for 31 December 2013. In addition, the Management Service Company signed with the Group a new Bonus scheme, according to which the new performance related bonus will be calculated as:
-- zero per cent of the total shareholder returns up to and including EUR0.24 (GBP0.20) per ordinary share;
-- 10 per cent of the total shareholder returns over EUR0.24 (GBP0.20) per ordinary share up to and including EUR0.36 (GBP0.30) per ordinary share; and
-- 25 per cent of the total shareholder returns over EUR0.36 (GBP0.30) per ordinary share.
As a result of this post-reporting date event EUR1.9 million short-term payables to employees and social security institutions would be transferred to EUR1.3 million equity and EUR0.6 million long-term liabilities to related parties in the consolidated financial statements.
Bellport's potential entitlement to a replacement bonus shall continue in the event that the management agreement is terminated by the Group prior to 31 December 2013, other than where such termination is for material breach. If the management agreement is terminated by the Group prior to 1 January 2013 or any change of control transaction, the full replacement bonus remains payable. If the management agreement is terminated by the Group after 1 January 2013, or prior to such date but after a change of control transaction occurs, a proportion of the replacement bonus is payable, if applicable, to reflect the contribution made by Bellport prior to termination.
Issue of new shares
On 16 February 2012 the Group issued 5,500,000 new ordinary shares. Each share has the same right to receive dividend and the repayment of capital and represents one vote at the shareholders' meeting of Orchid Developments Group Ltd. Bellport Corporation, a company in which the Company's joint Chief Executives, Ofer Miretzky and Guy Meyohas are interested, has been allotted 5,500,000 ordinary shares of EUR0.01 each in the capital of the Group in relation to the amendments to the Management Services Agreement with Bellport Corporation.
Orchid Gardens Varna restructuring of Bank credit facility
On 5 March 2012 Orchid Gardens Varna EOOD, which develops the high end mixed use project in Varna, has signed a new annex with Unicredit Bank for restructuring the loan repayment and extending the availability-drawing period till 31 May 2012. According to the revised terms of the facility agreement, the repayment of the principal amount of the facility is to be made as follows:
- EUR2.5 million in 60 monthly payments of EUR41,500; - EUR1 million by no later then 30 September 2012; - EUR2 million by no later then 30 December 2012; - EUR5 million by no later then 30 March 2013; - EUR5.45 million by no later then 30 September 2013; - EUR5.45 million by no later then 30 March 2014.
Additionally, the bank has agreed to include interest due until 31 May 2012 amounting to EUR0.3 million into the aggregate principal amount due under the revised facility agreement; the payment of the VAT revolving loan to be no later then 30 December 2012 and it has requested additional collateral to be provided for a value of EUR2.8 million, by 30 April 2012, in the form of a second mortgage on the apartments for sale in Orchid Seaside apartments EOOD, stage 3 (approximately 55 apartments) and the land for stage II of the Orchid Seaside Appartments EOOD's project, which is also mortgage in first rate mortgage for securing the facility loan given by Unicredit Bulbank for financing of the third stage of the project Orchid Hills Varna.
As e result of this post-reporting date event EUR8.5 million short-term borrowing liabilities would be transferred to EUR3.4 million short-term borrowing liabilities and EUR5.1 million long-term borrowing liabilities in the consolidated financial statements.
Deferral of payments to Bellport
As of 31 December 2011 the Group has a liability to Bellport Corporation under the management services agreement in respect of the joint chief executive officers for the amount of EUR0.5 million as described in note 24 to the financial statements.
The Group has agreed with Bellport Corporation that the liabilities of EUR541,660 due to Bellport as at 23 April 2012 under the management services agreement (the "Agreement") will not be paid to Bellport during the twelve month period commencing 25 April 2012, unless property owned by the Group is sold or the Group's cash flow during this period will allow such payment or part thereof.
In addition to the above Bellport Corporation has agreed to postpone future payments under the Agreement of EUR324,996, related to the period 1 January 2013 to 30 June 2013, unless property owned by the Group is sold or the Group's cash flow during this period will allow such payment or part thereof.
In consideration for the deferral of the above mentioned EUR866,656 in payments, (the "Deferral") Bellport Corporation shall be entitled to receive interest of five per cent per annum on the accrued, outstanding payments, commencing on 1 January 2012. Notwithstanding the Deferral, Bellport will receive payments pursuant to the Agreement for the period 24 April 2012 to 31 December 2012.
In case of insolvency of the Group all amounts due to Bellport Corporation will become payable immediately.
The directors of the Group consider that for the period after the reporting date until the date of the approval of the consolidated financial statements no other significant and/or material non-adjusting events took place concerning the activities of the Group, the non-disclosure of which could influence the true and fair presentation of the consolidated financial statements.
Directors Joseph Drescher (Non-executive Chairman) Appointed 22 September 2010
Guy Meyohas (Joint Chief Executive) Appointed 30 June 2005
Ofer Miretzky (Joint Chief Executive) Appointed 30 June 2005
Mark Holdsworth (Non-Executive Deputy Chairman) Appointed 22 September 2010
Amir Rosentuler (Non-Executive) Appointed 22 September 2010
Secretary The Secretary Ltd.
Boundary Hall, Cricket Square
P.O. Box1111
Grand Cayman KY1-1102
Cayman Islands
Registered Office Paget-Brown Trust Company Ltd.
Boundary Hall, Cricket Square
P.O. Box1111
Grand Cayman KY1-1102
Cayman Islands
Nominated Adviser Shore Capital and Corporate Limited
Bond Street House
14 Clifford Street
London W1S 4JU
United Kingdom
Broker Shore Capital Stockbrokers Limited
The Corn Exchange
Fenwick Street
Liverpool L2 7TP
United Kingdom
Auditors Grant Thornton OOD
Chartered Accountants
26, Cherni vrah Blvd.
Sofia, 1421 Bulgaria
Registrars Capita IRG (offshore) Ltd.
Victoria Chambers
Liberation Square
1/3 The Esplanade
St. Helier, Jersey, JE4 0FF
This information is provided by RNS
The company news service from the London Stock Exchange
END
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