1. MAIN FACTORS INFLUENCING THE RESULTS OF THE FIRST HALF OF 2008
1.1. Additional Equity Investment by Shareholders
According to Q Vara bond investors' vote that ended on April 7, 2008 the
investors granted Q Vara time until June 30, 2008 to bring its equity share in
line with the bond issue terms. In order to secure the required equity level in
Q Vara, OÜ SLProductions, shareholder of Q Vara, issued an assurance letter on
March 24, 2008 according to which it confirmed its readiness to invest
additional capital into Q Vara if needed.
On June 25th 2008, Q Vara and the subsidiary of OÜ SLProductions, OÜ Q Capital,
entered into loan agreement, pursuant to which OÜ Q Capital gave AS Q Vara a
loan of 86,000 thousand kroons subordinated to all the liabilities of Q Vara.
The additional capital shall be used for paying current liabilities and for
creating a liquidity buffer. After the signing of the loan agreement, the
process of converting the subordinated loan into equity capital was initiated.
On July 27th 2008 the conversion was entered in the commercial registry and the
share capital of AS Q Vara was increased by 8 600 thousand kroons up to 190 111
thousand kroons. This means that by the moment of issuing this report, the
volume of liabilities was 86 000 thousand kroons smaller and the equity capital
bigger by the same amount compared to the balance sheet of June 30th, 2008.
According to the decision of Q Vara AS shareholders, OÜ Q Capital was issued
860 thousand new shares with nominal value of 10 kroons and issue premium of 90
kroons per share, so altogether the share capital of Q Vara increased by 8 600
thousand kroons and the issue premium increased by 77 400 thousand kroons. As a
result of the transaction, OÜ Q Capital acquired the total of 4.5% of the share
capital of AS Q Vara.
After the increase of equity capital Q Vara has fulfilled the bond issue terms'
requirement to keep the company's equity share at 30% of the total assets. But
as the subordinated loan was converted into equity capital only in July, the
balance sheet of the first 6 months reflects the sum invested by shareholders
as subordinated loan. Thus, by analysing the balance sheet, the subordinated
loan must be added to the equity capital when calculating the equity share of
the total assets.
1.2. Reduced operating expenses
The reduction of operating expenses that was started by Q Vara in the second
half of 2007 saw the first results in the first half of 2008. The total amount
of Q Vara's development and general expenses (in Income statement: direct
development expenses, general development expenses, marketing expenses,
administrative expenses and other operating expenses) was 12 066 thousand
kroons. In 2007, the average half year amount of the same expenses was 25 103
thousand kroons so the operating expenses were reduced by 51.9% in the first
half of 2008. The decrease in expenditure resulted from reduced number of
employees and from decrease of various operating costs in Estonia and Latvia.
At the same time, in Lithuania, where the team is being built up the
development and general expenses have increased compared to the same period of
the previous year so in percentage terms the decrease of operating expenses in
Estonia and Latvia was higher than the Group average.
1.3. Sale of the Jonathan Project
After the completion of the investors' due diligence, on March 28, 2008 SIA
Quality Nami, that belongs to the Group, entered into a sale-purchase contract
with SIA Jonathan, according to which SIA Quality Nami sells the property
(28,443 square meters), located on Maskavas street in Riga, together with the
Jonathan development project. SIA Jonathan represents real estate investors
from the Netherlands. The agreed sale price is 186,976 thousand kroons.
The prerequisites for the final enforcement of the transaction are a positive
technical project audit and a positive court's decision concerning the dispute
about the detailed plan of the property (hereinafter "prerequisites"). The
ongoing court proceeding was initiated by the Latvian Seimas, who turned to the
Constitutional Court and brought legal action against the Riga City Government
for the approval of the detailed plan of the registered immovable at Maskavas
street 264, Riga . The abovementioned litigation takes place between third
persons. When applying for the detailed plan, SIA Quality Nami has followed all
the laws effective in the Republic of Latvia and achieved all approvals
necessary for enacting the detailed plan. According to the information
available today and the assessments given by lawyers, the management board of Q
Vara estimates the length of the court proceeding to be approximately six
months, after which the final formulation of the sale transaction shall
immediately take place.
The transaction amount shall accrue to the seller by instalments. The first
instalment in the amount of 140,819 thousand kroons shall be paid within five
days after fulfilling the Prerequisites. The second instalment in the amount of
30,511 thousand kroons shall be paid within two months after fulfilling the
Prerequisites. The third instalment in the amount of 15,665 thousand kroons
shall be paid within five days after submitting the building permit of the
project to the purchaser.
In the second quarter, the design of the building was finished and the auditing
of the technical project was initiated. The audit of the technical project
should be finished and the court dispute should conclude in the third quarter
2008.
1.4. Capital raising for Terminal No. 11 Project
In the last quarter of 2007, AS Q Vara (hereinafter as “Q Vara”) started
negotiations with a German company HIH Global Invest GmbH (hereinafter as
“HIH”) for raising additional equity to finance the development of Terminal No.
11 project (Q Vara' and HIH are hereinafter collectively referred to as
”Parties”). HIH Global Invest GmbH belongs to M. M. Warburg & CO KGaA Group,
which is the second largest privately held bank in Germany. HIH operates in
setting up of investment funds and raising capital from German investors.
As a result of the negotiations, the Parties signed a letter of intent on March
3rd 2008, with an objective to regulate the Parties' intention to cooperate on
the Terminal No. 11 project and to confirm the Parties' will to finalise the
transaction by April 7th 2008 (the term of validity of the letter of intent was
prescribed to be May 7th 2008). At the start of April, the Parties agreed to
extend the negotiation period until the end of the term of validity of the
letter of intent. By the end of April, the project audit by HIH was finished
and the negotiations for shareholders' agreement were continued. Due to a very
thorough analysis carried out by the investors, the analysis has so far
required more time than planned. According to Q Vara's managements' current
estimations the transaction shall be finalized in August-September of 2008.
1.5. Group's Liquidity
As a result of the delayed capital raising transaction for the development of
Terminal No. 11 project, a subsidiary of Q Vara, OÜ Q Ehitus (whose current
largest project is Terminal No. 11) experienced some payment delays to the Tax
Board and suppliers in the second quarter of 2008. Namely, the management of Q
Vara estimated that the aforesaid negotiations would be finished in spring, and
proceeding from this prognosis, the development activities of Terminal No. 11
were continued. Due to a very thorough analysis by the investors, the final
investment was not made by the time several payments were due that caused
payment delays, which could not have been eliminated immediately from other
cash flows. Regardless of the delays in the capital raising process, the
payables shall be covered in the beginning of the third quarter 2008, as the
necessary funds were obtained from the additional resources invested in the
company's shareholders.
2. EXPECTATIONS FOR SECOND HALF OF 2008
In addition to increasing the share capital in July, the aim for the second
half of 2008 is to finalize the capital raising transaction for Terminal No.11
project and to finalize the sales transaction of Jonathan project, as a result
of which the volume of high yield liabilities shall be significantly reduced
(through that also financial expenses will be reduced) and the liquidity of
company will be increased. As a result the equity share shall increase up to
40% of total assets by the end of 2008. Also considering the already done
corrections in Q Vara's balance sheet (asset discounts done in 2007, due to
which the assets are recorded at today's actual market price), the situation of
Q Vara will be strong by the end of 2008, and the company is ready to undertake
new investments.
As the redemption deadline of Q Vara's bonds arrives in the first half of
January 2009, the management of the company has already started with activities
needed to redeem the bonds. More information about the redemption shall be
provided by Q Vara through stock exchange information system during the second
half of 2008.
3. ORGANISATION AND PEOPLE
3.1. Personnel
At the end of the second quarter of 2008, the number of employees of Q Vara
Group was 84. Compared the first quarter, the number of employees has increased
by 6 people. 4 new people were recruited to the Group's construction companies
and one to UAB Q Vara in Lithuania. At Q Vara one employment contract was
signed with a person whose previous cooperation was based on the contract of
services. The number of Group employees by companies and countries is presented
in the following table.
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Q Vara Q Design Q Estate Q Vara Q Ehitus Q Buve Q Haldus Total
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Estonia 11 4 36 5 56
Latvia 8 15 23
Lithuania 5 5
Total 84
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3.2. Changes in group management
Several important changes have been made in the management of Q Vara Group
within the first four months of the year 2008. In accordance with resolution,
adopted by the shareholders of SIA Q Estate and SIA Zebru on April 2, 2008,
Sarmite Sazoncika was withdrawn from the management boards of the companies.
Alo Lillepea was elected as a new member of the management board in both
companies.
In accordance with the resolution, adopted by the supervisory board of AS Q
Vara on April 23, 2008, Andre Poopuu was withdrawn from the management board of
AS Q Vara. Andre Poopuu was also withdrawn from the management boards of OÜ Q
Haldus and AS Maakri City.
On April 25, 2008, the general meeting of shareholders of Q Vara AS decided to
withdraw Alo Lillepea from the position of chairman of the supervisory board of
AS Q Vara and elected Tanel Peeters to be a new member of the supervisory
board. Tanel Peeters is a member of the management board of OÜ Q Capital, a
member of the supervisory board of AS Väätsa Agro and a member of the
supervisory board of AS Fotoluks at the present moment. Tanel Peeters was a
member of the management board of Q Vara during the years 2005-2006. The
meeting of the supervisory board of Q Vara, which took place on the same day
(April 25, 2008), elected Ivo Lillepea as a new chairman of the supervisory
board and Alo Lillepea as a new member of the management board. Thus, as at the
end of April, Meelis Šokman (chairman of the management board) and Alo Lillepea
belong to the management board of Q Vara and Ivo Lillepea (chairman of the
supervisory board), Tanel Peeters and Jürgen Järvik belong to the supervisory
board of Q Vara.
4. OVERVIEW OF DEVELOPMENT PROJECTS
4.1. Kirsiaed row houses
Sales: in the second quarter of 2008, two units were sold. As at the end of the
first quarter of 2008, a total of 19 units(out of 30) were sold.
4.2. Kirsiaed land plots
Sales: in the second quarter of 2008 no new land plot sales transactions were
concluded. According to Q Vara's previous experience the sale of plots is
seasonal and more active interest emerges rather in winter and early spring,
when the plots are purchased in order to start building in spring.
4.3. Taevasmaa
There were no new developments as to the Taevasmaa project in the first half of
2008.
4.4. Terminal No. 11
Development: The construction of the first building of the Terminal No. 11
warehouse park reached its final stage by the end of the first quarter of 2008
and indoor works were started. The interior works continued also in the second
quarter. Due to the delay of the additional investments, the completion of
certain construction works was also slowed so the completion of communication
lines and the first warehouse is planned into the third quarter.
Sales: by the end of the second quarter of 2008, two warehouse units had been
sold. At the same time, it has to be taken into consideration that since it is
a large investment for small- and medium-size enterprises, the process of
negotiations takes relatively long. Many clients have been interested also in
the next warehouse buildings, which instead of the present ca. 500 m2 units
have offer units in the size of ca. 300 m2. As soon as the construction of the
next warehouses has been started, preliminary contracts with potential clients
can be entered into.
Due to the initiation of negotiations with new investors, the sale of plots was
temporarily suspended at the end of 2007, as the interest of co-investors is
the uniform development of the entire area into warehouse premises. Thus, in
the first quarter of 2008., no new plot sales transactions were concluded. The
transaction to raise capital for the development of this project is described
in section “Main factors influencing the results of the first half of 2008”.
4.5. Maakri
Development: At the start of the year, Tallinn City Government approved the
general plan for high-rise buildings in Tallinn, establishing the maximum
height of the buildings in Maakri district at 140 meters. As a negative piece
of news, the construction density was also fixed for the district, which is
somewhat lower than expected. On these assumptions the project team has started
the preparations for the architectural competition of the project. In the third
quarter, AS Maakri City plans to launch the second stage of the architectural
competition. The architectural competition shall be organised in cooperation
with the Union of Estonian Architects.
4.6. Silukalni
Development: Although at the end of the first quarter, the management board of
Q Vara estimated the completion of six units, one row house with three
apartments was completed and handed over in the second quarter. However, the
second row house with three apartments is almost finished and shall be handed
over in the third quarter. Furthermore, the construction of another three
houses is under the way, two of which are covered with sale contracts. Units
sold today with new contracts already produce positive margin for the project
(in the case of apartments sold in 2005 and completed now, the margin is 0
(zero), as the loss incurred by the difference between construction price and
sales price initially agreed with the clients was written off in 2007).
Sales: In addition to units already sold in the past and to be given over this
year, the yet to be completed development arouse new interest among clients,
and in April 2008, two new contracts were signed with customers. As a decent
demand is visible at the current price level, the construction and marketing
activities will be activated in the coming periods.
4.7. 365
As in the second quarter the sales pace of the project was lagging behind the
forecasts, the construction process was also slowed down in order to avoid
excessive use of capital in uncertain market situation. At the end of the
second quarter, most of the facades were completed and indoor operations
continued.
4.8. Jonathan
Development: In the second quarter of 2008, the technical plans of the building
were finished and the auditing of technical project started. After the
completion of the technical project the development process continued with
applying for a building permit (also see Chapter ” Main factors influencing the
results of the first half of 2008”).
4.9 Trophy
Development: In the first half of the second quarter of 2008, the construction
of Trophy project was started. During the quarter the earth works and the
construction of the pile foundation were finished. The construction of
underground parking lot was also started.
Sales: The booking contracts signed in the first quarter of 2008 were
formalised into sales contracts in the second quarter, and the clients started
to pay in the first instalments. By the end of the second quarter, three new
contracts under the law of obligations were entered into, after which 9
apartments of 31 have been sold. In addition, booking contracts have been
entered into regarding two apartments, so altogether one third of all
apartments have been covered with client contracts.
5. FINANCIAL RESULTS
5.1. Operating revenue
In the first six months of 2008. Q Vara's consolidated operating revenue was
42,394 thousand kroons. In the reference period of 2007, the operating revenue
amounted to 133 693 thousand kroons (14,101 thousand euros). The reduced
operating income amount resulted from the fact that there were no property
investment revaluations in the first half of 2008. Of the operating revenue,
the realized sales revenue amounted to 41,813 thousand kroons (2007 6m: 57,109
thousand kroons) and other operating revenues 518 thousand kroons (2007 6m:
3,097 thousand kroons). In the first half of 2007 73,487 thousand kroons of
property revaluation income was added to the above mentioned amounts.
Compared to the first half of 2007 the operating revenues decreased by 68.3%
and sales revenues decreased by 26.8% in the first half of 2008. The
considerably lower operating revenues resulted from the fact that in 2008 no
investment property revaluations were made. Compared to the forecasts made at
the end of 2007, the development projects' sales revenues in Estonia and Latvia
remained lower than expected, whereas in Lithuania successful sale of
apartments continued (the sales revenues will be recorded after the completion
of the project, when the apartments are handed to the clients and full sales
price amounts will be paid in) and three new sales contracts were entered into,
after one third of the apartments in the 31 apartment building has been sold.
5.2. Operating expenses
The reduction of operating expenses that was started by Q Vara in the second
half of 2007 saw the first results in the first half of 2008. The total amount
of Q Vara's development and general expenses (in Income statement: direct
development expenses, general development expenses, marketing expenses,
administrative expenses and other operating expenses) was 12 066 thousand
kroons. In 2007, the average half year amount of the same expenses was 25 103
thousand kroons so the operating expenses were reduced by 51.9% in the first
half of 2008. The decrease in expenditure resulted from reduced number of
employees and from decrease of various operating costs in Estonia and Latvia.
At the same time, in Lithuania, where the team is being built up the
development and general expenses have increased compared to the same period of
the previous year so in percentage terms the decrease of operating expenses in
Estonia and Latvia was higher than the Group average.
5.3. Operating profit
The operating loss of the first half of 2008 was 8 166 thousand kroons. In the
first half of 2007 the Company's net profit was 53 232 thousand kroons. The
exchange of profit for loss resulted from the fact that no investment property
revaluations were made in 2008, whereas the sum of the revaluations thereof for
the first half of 2007 was 73 487 thousand kroons. Not considering the
revaluations, the operating loss of the first half of 2008 was 59.7% lower than
in the first half of 2007.
To reach a positive operating result, the operating expenses shall be further
reduced in the coming quarters and the structure of the Group shall be made as
thin as possible. Even more important improvement is estimated to result from
the growth of sales turnover and gross profit, as from the third quarter 2008,
in addition to Kirsiaia and Silukalni projects also Terminal No. 11 and 365
projects reach the sales phase (the expected earlier completion of Terminal No.
11 warehouses in the second quarter was delayed into the third quarter due to
the delay of additional investments).
5.4. Financial income and expenses
Net financial result of the first half of 2008 was -12 112 thousand kroons.
Interest costs comprised 14 480 thousand kroons of this amount. The average
interest cost amount for six months in 2007 was 20 334 thousand kroons which
means that the interest expenses were 28,8% lower in the first half of 2008.
The decline of interest expenses resulted from the partial return of high yield
loans in the second half of 2007. According to the estimates presented in
earlier reports, the financial expenditure of Q Vara Group shall decrease
considerably in 2008, and more important changes thereof will most likely occur
in the third quarter.
5.5. Net result
Q Vara Group's consolidated net loss of the first half of 2008 was 20 278
thousand kroons, of which the 19 705 thousand kroons is attributable to the
parent company's shareholders. In the comparable period of 2007, the Group's
net profit was 36 961 thousand kroons, which also entailed the revaluations of
investment properties in the amount of 73 487 thousand kroons.
5.6. Loans
The total amount of short- and long-term loans and issued bonds was 435 507
thousand kroons at the end of the first half of 2008. In end same period of
2007, the amount of similar liabilities was 381 383 thousand kroons - and as at
the end of 2007 477 587 thousand kroons. The increased loan amount resulted
mainly from the increased development projects' construction loan amounts . The
presented loan amounts do not include the subordinated liability granted by OÜ
Q Capital in the amount of 86 000 thousand kroons, which as at 27.07.2008 was
converted into equity.
5.7. Balance sheet structure
As at the end of the first half of 2008 the amount of equity of Q Vara was 151
904 thousand kroons, but adding the subordinated loan invested in the company
by OÜ Q Capital in the amount of 86 000 thousand kroons (which on July 27th
2008 was converted into equity) the total equity capital was 237 904 thousand
kroons. The volume of assets as at the same time was 791 578 thousand kroons,
so the shareholdrs' equity constituted 30.1% of total assets (with the
subordinated liability invested by OÜ Q Capital). Q Vara continues its efforts
towards increasing the equity as expressed in earlier reports, of which capital
raising for Terminal No. 11 project and reducing the loans with the funds
collected from the sale of Jonathan project are after the additional equity
investment made by the owners of Q Vara most important.
6. Consolidated income statement
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6m 2008 6m 2007 6m 2008 6m 2007
(in thousands) EEK EEK EUR EUR
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Operating revenue
Sales revenue 41 813 57 109 2 672 3 650
Revaluation of inv. properties 0 73 487 0 4 697
Other income 581 3 097 37 198
Total operating revenue 42 394 133 693 2 709 8 545
Operating expenses
Construction expenses -38 494 -40 780 -2 460 -2 606
Direct development expenses -1 316 -14 076 -84 -900
General development expenses -6 501 -16 966 -415 -1 084
Marketing expenses -1 799 -3 904 -115 -250
Administrative expenses -2 314 -1 779 -148 -114
Other expenses -136 -2 256 -9 -144
Total operating expenses -50 560 -79 761 -3 231 -5 098
Operating profit (-loss) -8 166 53 932 -522 3 447
Net financial income and expense
Interest income 2 676 556 171 36
Interest expenses -14 480 -17 276 -925 -1 104
Loss exchange rate changes -416 0 -27 0
Other financial income/ expense 108 20 7 1
Total financial income/ expense -12 112 -16 700 -774 -1 067
Profit before tax (-loss) -20 278 37 232 -1 296 2 380
Postponed income tax 0 -211 0 -13
Tax on real estate 0 -60 0 -4
Net profit (-loss) -20 278 36 961 -1 296 2 362
Parent company owners' profit share -19 705 8 578 -1 259 548
Minority interests' profit share -573 28 383 -37 1 814
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7. Consolidated balance sheet
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30.06.2008 31.12.2007 30.06.2008 31.12.2007
(in thousands) EEK EEK EUR EUR
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Assets
Current assets
Cash and cash equivalents 3 457 11 831 221 756
Investment property for sale 181 058 183 102 11 572 11 702
Accounts receivable 24 659 14 802 1 576 947
Short term loan receivables 34 441 30 605 2 201 1 956
Other short term receivables 87 557 849 5 596 55
Interest receivable 5 748 3 254 367 208
Prepayments made 12 990 1 509 830 96
Prepaid value-added tax 0 10 753 0 687
Real estate to be sold 395 647 428 913 25 286 27 413
Total current assets 745 557 685 618 47 650 43 820
Non-current assets
Long-term loan receivables 186 186 12 12
Associated companies 31 360 31 339 2 004 2 003
Tangible fixed assets 8 894 9 654 568 617
Intangible assets 5 581 5 581 357 356
Total non-current assets 46 021 46 760 2 941 2 988
Total assets 791 578 732 378 50 591 46 808
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30.06.2008 31.12.2007 30.06.2008 31.12.2007
(in thousands) EEK EEK EUR EUR
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Liabilities and shareholders' equity
Current liabilities
Short-term loans 322 627 375 861 20 620 24 022
Finance lease liabilities 242 718 15 46
Customers' prepayments 9 816 7 723 627 494
Accounts payable 49 644 34 383 3 173 2 197
Due to employees 3 242 3 186 207 204
Interest payable 14 193 10 952 907 700
Tax payables 3 487 3 398 223 217
Guarantee liabilities 96 159 6 10
Liabilities for constr. co. clients 6 306 0 403 0
Total current liabilities 409 653 436 380 26 182 27 890
Non-current liabilities
Long-term loans 34 647 23 493 2 214 1 502
Other long-term payables 6 862 0 439 0
Bonds issued 78 233 78 233 5 000 5 000
Finance lease liabilities 1 471 1 341 94 85
Deferred income tax liabilities 22 808 23 062 1 458 1 474
Total non-current liabilities 144 021 126 129 9 205 8 061
Subordinated loan 86 000 0 5 496 0
Total liabilities 639 674 562 509 40 883 35 951
Shareholders' equity
Equity attributable to the parent company
Share capital 181 511 181 511 11 601 11 601
Reserves 7 361 7 361 470 470
Unrealized exchange rate differences -851 126 -54 8
Retained earnings -86 376 -68 331 -5 520 -4 367
Total equity attributable parent co.101 645 120 667 6 496 7 712
Minority interests 50 259 49 202 3 212 3 145
Total shareholders' equity 151 904 169 869 9 708 10 857
Total liabilities and equity 791 578 732 378 50 591 46 808
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Additional information:
Meelis Šokman
Chairman of the management board
AS Q Vara
Phone: 668 1600
Q Vara's financial results for 6 months 2008
| Source: Q Vara
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