Q VARA Consolidated financial report for the I half of 2007 Powering the real estate development in major Baltic cities with uncompromising dedication to quality and services | 1 | Q Vara OÜ Beginning of the first quarter: January 1, 2007; End of the first quarter: June 30, 2007; Registration number: 10907184; Address: Tartu Road 2; 10145 Tallinn; Republic of Estonia; Telephone: +372 668 1600; Facsimile: +372 668 1601; E-mail: [email protected]; Web page: www.qvara.ee; Main activities: Real estate development; Construction; Property management; Supervisory Council: Alo Lillepea, Jürgen Järvik, Ivo Lillepea; Management Board: Meelis Šokman, Andre Poopuu; Auditor: AS Deloitte Audit Eesti. | 2 | Contents Financial summary..................................................................................................................................................................................4 Management report.................................................................................................................................................................................5 Overview of the projects .........................................................................................................................................................................9 Principles of financial accounting..........................................................................................................................................................15 Consolidated income statement............................................................................................................................................................17 Consolidated balance sheet..................................................................................................................................................................18 Consolidated cash flow statement ........................................................................................................................................................19 Notes to the consolidated quarterly accounts .......................................................................................................................................20 | 3 | Financial summary Income Statement IH 2007 IH 2006 2006 IH 2007 IH 2006 2006 (thousands) EEK EEK EEK EUR EUR EUR Revenue 133 693 143 623 227 643 8 545 9 179 14 549 Sales revenue 57 109 38 458 63 231 3 650 2 458 4 041 Operating profit/loss 53 232 90 033 113 250 3 402 5 754 7 238 Net profit/loss 36 961 100 131 99 358 2 362 6 400 6 350 Balance Sheet 30.06.2007 30.06.2006 31.12.2006 30.06.2007 30.06.2006 31.03.2006 ( thousands) EEK EEK EEK EUR EUR EUR Total assets 869 229 566 859 765 237 55 554 36 229 48 909 Total liabilities 532 381 261 078 460 269 34 025 16 686 29 417 Total equity 336 848 305 781 304 968 21 529 19 543 19 492 Minority interests 263 281 276 922 256 280 16 827 17 699 16 378 Performance Indicators I pa 2007 I pa 2006 2006 ROA 6,1% 15,9% 19,9% ROE 11,0% 32,7% 38,9% Equity ratio 38,6% 53,9% 39,9% Current ratio 2,1 2,9 1,12 Management report Introduction As stated in Q vara’s first quarter report, cash flow is the main performance indicator in 2007 for Q Vara and the net profit expectation is relatively low. The resoning behind this is presented in Q Vara Group’s first quarter report and in the current report’s paragraph “Principles of financial accounting”. This statement has gained even more importance during the second quarter as the developers’ liquidity in the market has deteriorated. The effect is partly caused by slower sales pace but also banks have an active role in this – their financing policy has become more conservative that has decreased the cash available for real estate development. In the sluggish real estate market situation of the second quarter Q Vara has made a very good sales result. Altogether the company’s sales revenues for the six months in 2007 were 57 109 that exceeded the sales results of the first half of 2006 by 48,5%. The main revenue sources were Kirsiaed and Terminal 11 projects. At the same time also the negative cash flows have been quite substantial. The main cash outflows are generated by the following projects: Terminal 11 construction, Pinki project’s reorganization and construction. Also Taevasmaa, Sofia and Trophy projects have reached the phase in which substantial negative cash flows occur. The regular additional cash outflows are Group’s overhead costs and financial costs. As a result planning and managing cash flows has been tight. Q Vara’s gross profit from sale (sales revenue minus cost of goods sold), was 16 329 thousand EEK in the first half of 2007. Development, marketing, financial, and other operating expenses were partly covered by this amount but altogether these expenses exceeded gross profit. It must be kept in mind that development expenses that form the majority of the after-gross- profit-expenses, are made in order to generate revenues in the future. So these should not be compared to current period’s revenues. Q Vara’s overdue tax liability that was reported by the media was not a bad surprise but as stated in the stock exchange release on July 18, 2007 an agreement with Estonian Tax and Customs Board. Since the cash flow forecast showed that in the coming months cash flows out exceed cash flows in it was decided to postpone the tax payments by two months until the end of August. As Q Vara has agreed several important sales transactions for August the management is confident in the company’s ability to meet the deadline. The expectations of strong operating cash flows for the whole 2007 have not changed because despite the market sentiment the projects sell well considering. The main cash flow sources are Terminal 11 land plots, Kirsiaed row house units and Kirsiaed residential land plots. Pinki project’s cash flows are directed into construction of the further stages so in the near | 5 | future this project does not generate free cash flows for other uses. Reorganizing Pinki project is also the main reason why the actual revenue will be lower than the preliminary forcasts – previously most of the project revenues were planned into 2007 but as the delay has been longer than expected a major part of revenues will fall into 2008. Other projects’ revenues should be in line with the beginning of the year forecasts. More detailed overview of the current sales situation is presented in “Projects’ overview”. According to the Terms and Conditions of Q Vara’s January 2006 bond issue, Q Vara presents financial information to investors quarterly. On the other hand the regulation of OMX Tallinn Stock Exchange requires the bond issuers to file financial information once in 6 months and present the information for 6 months. Because Q Vara presented its first quarter results and management report in April, the current report’s management overview consists of only the developments in the second quarter of 2007. The financial results are presented for 6 months. Structure According to the shareholders’ decision from March 6, 2007 Q Vara OÜ will be reorganized from private limited company (osaühing) into public limited company (aktsiaselts) (see also the I quarter report of 2007). By the end of July the transaction is not completed due to administrative dealys in the Central Commercial Registry. The reorganization will be expectedly completed in autumn 2007. In the second quarter it was decided to abort the buy-out of SIA Quality Nami minority shareholders that was also approved by the same shareholders’ meeting in March. The reasons for cancelling the negotiations were the minority shareholder’s too high price expectations and relatively low interest of the financiers to finance the transaction (refusals were related to the cooling down of the real estate market). After the transaction was taken off the agenda both shareholders decided to continue developing the Jonathan project with the same ownership structure. Management and personnel As stated also in the first quarter report Q Vara OÜ’s Supervisory Board decided on April 24, 2007 to withdraw Tõnis Vare from Q Vara OÜ’s management board. No new management board member was elected and Q Vara OÜ’s management board continues with two members: Meelis Šokman and Andre Poopuu. The Supervisory Board’s decision is related to the deeper integration of Q Vara OÜ’s and Q Ehitus OÜ’s activities as a result of which several development activities are shifted from Q Vara OÜ over to Q Ehitus OÜ. In the second quarter of 2007 Q Vara Group’s team grew by 18 people up to 107 people. Altogether 25 new employees joined the group and 7 people left. The most significant development during the first half of 2007 has taken place on Q Vara Group’s construction side. By the end of the second quarter Q Ehitus employed 42 people. The estimated annual capacity of the | 6 | team is 200 000 thousand of construction revenue which currently exceeds Q Vara’s needs. As a result Q Ehitus is ready to offer construction main contracting services also outside the Group. The first outside projects are being already analyzed. Similar notable development has taken place in SIA Q Buve in Latvia where similar strong team is being completed. Q Buve’s capacity is approximatelty half of Q Vara’s capacity. Since Q Buve currently works on Pinki project it is realistic to offer its services to the outside market too. The construction team formation is also being prepared in Lithuania. In the beginning Q Vara Group does not establish a special construction company