Preliminary Results

RNS Number : 6184U

Equest Investments Balkans Ltd

16 May 2008

 



EQUEST INVESTMENTS BALKANS LTD

PRELIMINARY ANNOUNCEMENT FOR YEAR ENDING 31 DECEMBER 2007

Equest Investments Balkans Ltd ('EIB' or the 'Company') today announces its preliminary results for the year ended 31 December 2007.

2007 Highlights

•  An increase in proforma net asset value per share of 31% to €23.40 at 31 December 2007 (€17.90 as at 31 December 2006) and net assets of €405 million as at 31 December 2007 (31 December 2006: €310 million) includes investments at fair value of €391 million (31 December 2006: €228 million);

•  Having completed six investments during the period, the Company is now fully invested in a total of 12 companies. New investments were in waste management, property development and infrastructure and electronics retailing sectors.

Post Year End Events

• Restructuring of the Company from an externally managed fund to an internally managed holding   company, which was approved at a general meeting of shareholders on 25 April 2008. The restructuring will take effect upon de-listing of the Company's shares from the Irish Stock Exchange;

• Application for the de-listing of the Company's shares from the Irish Stock Exchange was made immediately prior to the release of these results and de-listing will become effective at 8.00 a.m. on Tuesday 17 June 2008. The Company's shares will continue to be admitted to trading on AIM;

• Operational focus now on growing the operating businesses of select core holdings including TechnomarketDomo, Borovets, Novera and Avto Union within the South East European region whilst seeking the disposal of the other property holdings of EIB;

• Board is now actively considering the possible listing of EIB shares on a regional stock exchange to widen the  shares audience.
  

Petri Karjalainen of Equest Partners Limited, EIB's Investment Adviser, added:

'The past year was a successful year for EIB. Operating results for EIB's subsidiaries have been strong, led by TechnomarketDomo. These strong results, together with acquisitions completed in 2007 and increases in value of the Borovets land portfolio, have resulted in an increase in NAV of approximately 31%. EIB is currently implementing the internalisation of the management approved by shareholders in April 2008, with the objective of achieving a more concentrated holding company structure. We are confident that our strong results, coupled with the financial and other benefits of the management internalisation to shareholders, should make EIB's shares more appealing to a wider group of institutional and other investors'.  

Equest Partners Limited                  Petri Karjalainen               [phone]

                                                              Naomi Kora

Financial Dynamics                          Ed Gascoigne-Pees        [phone]

                                                              David Cranmer

Collins Stewart Europe Limited     Hugh Field                         [phone]

Chairman's Statement

This is Equest Investment Balkans Limited fifth set of full annual results, and our second since we listed on the AIM Market of the London Stock Exchange plc. I am pleased to be able to report another year of growth in net asset value per share, by 31% to €23.40.

Our strategy is to acquire significant, usually majority, stakes in unlisted companies in the Balkan region, often with the potential for future listing, but to continue to work with proven managements. At the end of 2006 we were invested in three broad sectors, retail, finance and property development; to these we have, in 2007, added a fourth sector, that of waste management. We also made further acquisitions in retail and property development.  We believe that these four sectors should be well placed to benefit from growth in domestic consumer spending in the Balkan Region. At the end of 2007 we had investments in 12 operating companies, whose aggregate fair valuation was €391 million. Our investments are spread between Bulgaria, Romania, Serbia and Montenegro.

During the year we invested in six new investments. These are as follows:

•    a 94% stake in Novera, which holds three waste management concessions for Bulgaria's capital city Sofia;

•    a 33.5% indirect stake in Rila Samokov, which owns 1.97 million square metres of land in the Bulgarian mountain resort area Borovets, to the south-east of Sofia; 

•    an effective 56.25% stake in Domo, the second largest retailer of electronic goods in Romania; 

•    a 23% shareholding in the Technomarket operations in Serbia;

•    a 50% shareholding in the Technomarket operations in Montenegro; and

•    a 50% stake in Technomobile Serbia, a chain of stores selling GSM sets, small consumer electronic devices and complimentary services. 

Technomarket, our Bulgarian retailer of consumer electronics and household appliances, has been merged into Domo to create the TechnomarketDomo electronics retail group. The Company continues to progress on the planned listing of the TechnomarketDomo electronics group.

The Board does not propose the payment of a dividend in respect of the year ended 31 December 2007 and will retain all earnings to finance the further growth of the Company.

Since the year-end, we have sought shareholder approval for the reorganisation of the management structure of EIB, amendments to the articles of association and disapplication of pre-emption rights. At the Extraordinary General Meeting held on 25th April 2008, all four resolutions embodying these changes were passed. Implementation of these changes is in progress, but cannot be fully completed until the Company has de-listed from the Irish Stock Exchange, which is necessitated by the abandonment of fund structure. Application for the delisting of the Company's shares from the Irish Stock Exchange was made immediately prior to the release of these results and will take effect from 8.00 a.m. on Tuesday 17 June 2008. Following de-listing the other two partners in the company's existing investment manager, Kari Haataja and George Krumov, will join their colleague Petri Karjalainen on the Board. The Ordinary Shares will continue to be admitted to trading on AIM.

EIB is currently implementing  the internalisation of the management approved by shareholders in April 2008, with the objective of achieving a more focused holding company structure and increased alignment through the replacement of future management fees with the issuance of restricted equity to the management.

John Carrington

Chairman

15th May 2008

Investments Manager's Report

Overview

At the time of EIB's admission to the London AIM market in late 2006 additional equity was raised with the express intention of making new significant investments: namely Novera and Borovets. These transactions were completed in the first half of 2007, followed by a further three transactions later in the year, namely Technomarket Serbia, Technomarket Montenegro and Technomobile Serbia in August, and Domo in September.

Strategy

We continue to manage actively our existing holdings and we seek to exploit new opportunities for further investment for EIB and its investments held in the Balkan region.

Our ongoing focus for the development of the Company's activities and growing shareholder value remains to:

• Actively manage our existing holdings and build cross-selling and other synergies amongst the EIB portfolio companies (eg creation and roll out of the TechnomarketDomo electronics group across the region);

• Consider measures to address the present discount to NAV of the company's shares, such as share buy-backs and/or local listings of the shares;

• Selectively sell certain investments where it is believed that the potential for further gains is limited;

• Broaden the investment focus of EIB and its portfolio companies to the wider Balkan region;

• Concentrate investment activity on established companies in consumer growth areas and select infrastructure opportunities, e.g. Novera, as well as value-enhancing acquisitions for existing companies held;

• Build strategic partnerships with leading global companies; and

• Explore opportunities for IPOs on local and international stock exchanges for listings of portfolio companies. An IPO of TMD is in the final stages of preparation.

The Company may also consider issuing debt at EIB level, if felt appropriate, to finance the growth of its portfolio.

Portfolio Review

As at 31 December 2007 the Company had 12 investments with a fair valuation totaling €391 million. The net assets of the Company amount to €405 million, equivalent to €23.40 per share.

The fair value of the investments shown in the financial statements were derived from independent valuers' reports as at 31 December 2007, adjusted where necessary for the fair value of the assets and liabilities of the respective holding companies; certain marketability discounts were also applied to several of the investments.

RETAIL - TECHNOMARKETDOMO GROUP

75% HOLDING AS AT 31 DECEMBER 2007

TechnomarketDomo Group BV (TMD) is the Dutch parent company for the company's investments in the retail electronics sector in South East Europe. It is expected that the company will be converted into an NV during 2008.

The most significant event during 2007 was the successful acquisition in September of a 75% stake in Domo Retail SA, the second largest retailer of electronics and other household electrical goods in Romania. Together with Technomarket Bulgaria, TMD is now the largest player in the sector in the region with a combined turnover in 2007 of €569m, up 31% over the combined turnover in 2006 of the two separate companies. 

TMD operates a dual brand strategy. Large format stores operate in both Bulgaria and Romania under the Technomarket brand and smaller stores under the Domo brand. During 2007 24 new stores were opened and at the end of the year the TMD network consisted of 167 stores (34 under the Technomarket brand and 133 under the Domo brand). 

In Bulgaria TMD's retail market share amounted to 44% making it the number one retailer of electronics and other household electrical goods in 2007, while market share in Romania was 18%, a clear number two position.  

The major strategic objective for TMD in 2008 is the completion of the integration of the operations of the Technomarket and Domo businesses so as to realise the potential for significant intra group efficiencies within TMD, including taking advantage of the enhanced purchasing power of the group. 

The aggregate of the reported EBITDA of Technomarket and Domo operations for the year ended 31 December 2007 was €37.4 million. TMD's operations are strongly cash generative and able to support the immediate organic growth plans of TMD.

EIB's 75% investment in TMD as at 31 December 2007 has been valued at €128.3million. This has been based on the DCF valuation of the Group undertaken by the independent valuer, adjusted to take account of the acquisition related debt within the holding company structure.

TMD is preparing a future IPO with its investment bank advisers ING and Raiffeisen Bank. 

RETAIL - TECHNOMARKET SERBIA AND MONTENEGRO

23% and 50% HOLDINGS AS AT 31 DECEMBER 2007

In August the company acquired a 23% stake in Technomarket's operations in Serbia and 50% of its operations in Montenegro. In 2007, the aggregate sales in these countries amounted to €73.5m through 29 outlets. The company will increase its stake in the Serbian business to 50% in 2009. The company's investment was held at cost as at 31 December 2007.

RETAIL - TECHNOMOBILE SERBIA

50% HOLDING AS AT 31 DECEMBER 2007

In August 2007, the Company acquired 50% of Technomobile Serbia, a chain of stores selling GSM sets, small consumer electronic devices and complimentary services. Sales in 2007 amounted to €79m through a chain of 57 shops. The company's investment was held at cost as at 31 December 2007.

RETAIL - AVTO UNION

80% HOLDING AS AT 31 DECEMBER 2007

Avto Union is a leading Bulgarian wholesaler and distributor of automotive products and services. The Company had an approximate 7% share of the new car sales market in Bulgaria in 2007, selling the following brands: Fiat, Lancia, Alfa Romeo, Maserati, Mazda, Opel, and Chevrolet. It also sells Piaggio, Vespa and Gilera motorbikes, has the Avis Rent a Car franchise and distributes Castrol and BP lubricants. 

Avto Union is currently one of the fastest growing automotive retailers in Bulgaria, with 39% sales growth in 2007, outperforming the market by 17% (Source: Union of the Importers of Automobiles in Bulgaria (UIAB) ). Castrol and BP lubricants are the market leaders for the 6th consecutive year; while AVIS Rent a Car is ranked first in the rental car market, and Milano Motors the market leader for scooters.

In the year ended 31 December 2007, Avto Union had sales of €53.5 million (up 45%from €36.8 million in 2006) in 2006). 

During 2007, Avto Union continued its expansion, increasing the number of locations to 22. Avto Union owns 46 000 sq m. of land throughout Bulgaria, which will be developed over the next three years for its sales and distribution network. In 2008 the flagship Avto Union building, located near Sofia Airport, will open. The 28 000 sq m building will accommodate show rooms and a workshop for the Italian car brands, a conference centre for 600 people, a restaurant, and 11 000 sq m. of 'A class' office space. The new Mazda centre in Sofia is scheduled too open in late 2009. It will be the main training centre for South East European operations.

EIB's 80% investment in Avto Union as of 31 December 2007 is valued at €32.6 million and is based on the valuations undertaken by the independent valuers of both the operating business and the company's land/property portfolio. 

RETAIL - FAMILIA OVERSEAS

100% HOLDING AS AT 31 DECEMBER 2007

In December 2007, EIB exited the Familia Stores chain of local convenience food stores through two separate transactions. Familia and it's operational business was sold to a local convenience store operator while an international food retailer seeking to expand its network in Bulgaria acquired 6 of the leased retail sites from Familia operated. 

The Company's investment in Familia had been written down to zero in the first half of 2007.

WASTE MANAGEMENT - NOVERA

94% HOLDING AS AT 31 DECEMBER 2007

EIB acquired the three concession holding companies for waste collection and transportation in Sofia through Novera, a wholly owned subsidiary of EIB, in March 2007. At the same time, Novera also acquired other activities related to waste management and infrastructure services that are provided in Bulgaria, and in the future, for the broader Balkan region.  

The companies provide waste collection, street cleaning and snow clearing services to the Municipality of Sofia in Bulgaria. The current infrastructure, which has been built up over the past 10 years of operations of the Companies, consists of more than 350 waste collection trucks and other vehicles, and over 1,800 employees.

The Sofia Municipal council has voted to increase spending for the activities of the three concession companies owned by Novera by more than 26% in 2008. The formal tender procedure for one of the concession contracts (previously 10 year duration) which expired in 2008 has been delayed. Pending the formal tender process for a new contract, the Municipality voted to extend the term of this contract by one more year. This delay provides Novera with more time to prepare for the upcoming tenders and enhance their competitive position. Novera has begun the introduction of modern GPS technology into the truck fleet, which will enable more efficient task scheduling.

The audited consolidated turnover (on a purchase accounting basis) of the three concession holding companies in the year ended 31 December 2007 was €15.4 million with an EBITDA of €7.8 million.  The aggregate operating turnover of the three concession holding companies in the year ended 31 December 2007 and EBITDA were €21.9 million and €8.2 million respectively.

Novera is valued by the independent valuer at €38.6 million taking account of external debt.

FINANCIAL SERVICES - UNIQA BULGARIA

37.72% HOLDING AS AT 31 DECEMBER 2007

Uniqa Bulgaria, which has both life and non-life operations, is the fifth largest insurance company in Bulgaria. Set up as a private company in 1994, it has been built up to more than 100 branches across the country and it is now ranked 3rd in life insurance and 6th in non-life insurance (Source: Bulgarian Financial Supervisory Commission).

UNIQA Insurance, Austria's largest insurance company, obtained operational control of Uniqa Bulgaria in 2006.  In 2007 Uniqa acquired a further 31% of shares from EIB and therefore currently owns 62.17% of the company.  The initial payments totalling €19.5 million for the sale of the 31% was used to pay a dividend of €9.7 million to EIB and to settle loans associated with EIB's investment in the company. UNIQA Insurance will increase its shareholding in Uniqa Bulgaria up to 75% by the year 2010 under pre-agreed arrangements.

2007 was a year of change as the operations were successfully re-branded as Uniqa Bulgaria (previously Vitosha Insurance). Further growth was achieved in both life and non-life business, with premiums growing by 62% and 32%, respectively. Overall, gross premium income was up by 44% to €60.52 million in 2007 (2006: €41.92 million) with reported operating profit of €1.7 million in 2007 (2006: €340,000).

EIB's remaining minority investment in Uniqa Bulgaria as of 31 December 2007 is valued at €43.2 million based on a DCF valuation undertaken by the independent valuer - adjusted to reflect the forward purchase contracts by Uniqa of EIB's shares held in the company, the terms of which are based on the growth in the premium income and profitability of the company.

LAND AND PROPERTY DEVELOPMENT - BOROVETS

33.5% HOLDING AS AT 31 DECEMBER 2007

In June 2007, EIB acquired 33.5% indirect investment in Rila Samokov, which owns 1,977,131 sq m of land for development in the large-scale Borovets mountain resort development project.  EIB invested € 25.9 million in cash, comprising a payment for the equity purchase and a capital contribution into Rila Samokov. 

EIB owns 50% of Borovets Invest BV, a holding company, which in turn owns 67% of Rila Samokov. EIB's partner in Borovets Invest BV is an international institution. The other shareholders in Rila Samokov are the Municipality of Samokov (25% shareholding) and Bulgaria's leading construction company Glavbolgarstroy (8% shareholding).

Since completion of the acquisition, the Board of has engaged EC Harris, a leading international property development consultancy company to recommend External Advisors who will revise the business plan for the development of Rila Samokove's land and also identify and propose potential Development Managers. EC Harris is due to report in late May 2008.

Rila Samokov's development project in Borovets, which is expected to have a gross development cost of €650 million, is one of the largest property development projects in Bulgaria. The project involves, over the next five years, the construction of a total 653,815 square metres of residential apartments, hotels and retail space as well as associated infrastructure, including the creation of an additional 42 km of ski runs to complement the existing skiing area.  

The Rila Samokov 2004 AD project was officially launched in November 2007 and construction of the first station of a new Gondola lift has started. The Project was also awarded a First Class Investor status. On this basis the Bulgarian Investment Agency will provide fast track assistance as well as participate in select infrastructure costs associated with the project which is one of the largest international investments in Bulgaria.

EIB's investment in Borovets project was independently valued as at 31 December 2007 at €68.5 million. EIB's current profit from the land valuation is €47.5 million. CBRE valued the land at €100 per sq m, other valuations in the area range between €80 - €150 per sq m.  

LAND AND PROPERTY DEVELOPMENT - PELICAN

100% HOLDING AS AT 31 DECEMBER 2007

Pelican is a developer and owner of five sites that are to be redeveloped for commercial use and let to tenants upon completion. Four of the sites are located in the centre and densely populated area of Sofia and were used as cinemas prior to introduction on the new market economy in the country, whilst the fifth is a former car factory located by the entrance to Varna, Bulgaria's second city.  

1.  Serdika is a 29,700 sq m mixed office and retail scheme with underground parking for 234 cars adjacent to the Vasil Levski monument in the centre of Sofia. The development is being undertaken jointly between EIB (42% holding) and Equest Balkan Properties plc (58% holding). As long as the further approvals in respect of the historical sensitivity of the location, which have been requested by the authorities in recent months, are received in time, construction is due to start by the Q3 2008. Completion would then be expected during 2010.

2.  Evropa Palace has been let to an Italian fashion retailer who is currently seeking approvals for reconstruction works. The tenant will be responsible for the full refurbishment of the property. Reconstruction is expected to start in mid 2008 and be completed by end 2008. 

3.  Iztok, a disused cinema, is planned to be demolished and reconstructed as a multi-storey retail and office building with appr. 14,000 sq m in build up area (excl. underground parking). Zoning, design works, additional land purchase and permits are ongoing and demolition and site mobilization are scheduled to start in the beginning of 2009.

4.  Reconstruction of Urvich with lettable commercial space of approximately 500 sq m is scheduled to commence by end of 2008. Negotiations with potential tenants / buyers are ongoing. Brokerage agencies have been appointed.

5.  Rodacar, a former factory in Varna with a build up area of 12,300 sq m, is currently being let as general warehouse space. A detailed urban plan allowing the construction of appr. 85,000 sq m. has been approved. Plans are to convert the site into a new build multipurpose development consisting of retail, office, hotel, residential, expo centre. Construction is scheduled to start by end of 2008.

EIB's investment in Pelican as at 31 December 2007 is valued at €30.9m, including property of €27.4m and short term receivables of €2.8 million The property valuation is based on the estimates of the present market values of Pelican's developments, undertaken by the independent valuer CBRE coupled with a discount. The company with its development portfolio is currently debt free.

LAND AND PROPERTY DEVELOPMENT - IMMOFINANCE

100% HOLDING AS AT 31 DECEMBER 2007

Immofinance is a residential property development company focusing on first and second homes in Bulgaria and neighbouring countries. The current portfolio consists of 7 separate residential development projects at various stages of development. 

1.  Embassy Suites is a gated community next to Vitosha Mountain in Sofia. It consists of 80 apartments and 118 underground parking spaces and was completed in November 2006. 75% of the apartments have now been sold and 6% have been reserved; the remaining, are expected to be sold by mid 2008. The total developed area for Immofinance in the project is 26,000 sq m, of which 15,917 sq m is for residential apartments.

2.  Construction of Banya Spa & Wellness Resort, a complex of residential apartments, hotel, spa and sports facilities located in the Bulgarian Pirin Mountains, started in September 2006 and expected to be completed by May 2008. The project is currently in construction and has been launched for sales, with three  completed. The gross floor area for Immofinance in the project is 18,924 sq m of which 12,029 sq m is for residential apartments and 6,895 sq m is for the hotel and spa.

3.  Construction of Banya SPA II, a complex of holiday apartments, houses and a spa center, is due to commence by September 2008. Construction is expected to be completed by March 2010. The gross floor area for Immofinance in the project is projected at 26,510 sq m, of which 19,065 sq m is for residential apartments and 1,000 sq m is for the spa area. Sales and marketing due to commence 2009.

4.  Boyana Park is a modern gated community in Sofia which will consist of functional apartments, sports facilities, community centre and retail premises to be partly sold to an investment partner. 70% of the project was sold in January 2008. Construction will commence in September 2008 and is estimated to be completed by September 2010. The gross floor area is projected at 42,500 sq m, of which 26,438 sq m is for residential apartments and 3,490 sq m is for commercial use.  Sales and marketing due to commence end 2008.

5.  Construction of The Boyana Diplomatic Club, a complex of luxury condominium apartments in Sofia aimed at the high-end residential market, is due to commence in August 2008 and be completed in February 2010. The gross floor area for Immofinance in the project is projected at appr. 5,000 sq m, all of which is for residential apartments.

6.  Sozopolis is a complex of second home properties, a hotel, two restaurants, a spa centre and a supermarket on the Black Sea coast. Construction started in November 2007. The completion date is expected to be mid 2009. The gross floor area for Immofinance in the project is projected at 35,563 sq m, of which 29,962 sq m is for residential apartments and 2,534 sq m is for the spa area. Four units (2,071 sq m) have been sold and a further ten (3,244 sq m) are reserved.  

7.  Construction of the Kavarna Blue Lagoon, a vacation complex for second homebuyers by the Black Sea, is expected to commence in March 2009, with a completion date set for March 2011. Immofinance is a 50% owner of the development. The total area developed for sale is projected at appr. 50,000 sq m. It is expected that the detailed plans for the development will be completed by Q1 2009.

EIB's investment in Immofinance as of 31 December 2007 is valued at €36.9 million. This is based on the estimates of the present market values of Immofinance's various developments, undertaken by the independent valuer CBRE, coupled with a discount to reflect the relatively early stage of the development portfolio.

LAND AND PROPERTY DEVELOPMENT - CITADEL

100% HOLDING AS AT 31 DECEMBER 2007

Citadel is a land holding company which has acquired 124 hectares of agricultural land in the northern outskirts of Bucharest, near the Snagov area some 25 km outside that capital. Citadel is looking to acquire further land in the area with a view to seeking permission to change the use of the land area to a large scale residential property development project.

EIB's investment in Citadel as of 31 December 2007 is valued at €3.40 million, which is the cost value of the investment. The company is currently debt free.  

Equest Capital Management Limited

15th May 2008

INDEPENDENT AUDITOR'S REPORT FOR THE YEAR ENDED 31 DECEMBER 2007

Statement of Net Assets

		2007	2006
	Notes	€000	€000
Assets
Investments at fair value	2	390,952	227,607
Cash & cash equivalents		1,938	76,072
Management fees in advance	3	-	973
Pending investment		-	5,000
Loans receivable	2	31,735	-
Other debtors		911	1,272
		425,536	310,924
Liabilities
Loans payable	2	18,601	-
Agency and administration fees payable	3	37	285
Custodian fees payable	3	75	128
Director fees	3	-	13
Performance fees	3	1,201	29
Other accrued liabilities		179	401
		20,093	856
Net assets attributable to shareholders		405,443	310,068
Number of shares	6	17,324	17,324
Net asset value per share		€23.40	€17.90

The financial statements on pages 14 to 26 were approved by the Board of Directors on the 16th May 2008 and were signed on their behalf by:

John Carrington                                         James Ede-Golightly

Chairman                                                  Director

The accompanying notes are an integral part of these financial statements.

 Schedule of Investments as at 31 December 2007 

Investment description	Cost  €000	Fair value  €000	% of Net Assets
Electronics retail sector
AXIS Retail Holding Ltd	43,615	128,338	31.7%
AXIS S Retail Ltd	5,750	5,750	1.4%
Techno-Mobile Holding Ltd	1,670	1,670	0.4%
AXIS R Retail Holding Ltd	1,050	1,050	0.3%
Automotive retail sector
Avto Union Holding Ltd	16,500	32,632	8.0%
Property sector
Borovets Invest Ltd	21,070	68,533	16.9%
Immofinance Holding Ltd	29,773	36,859	9.1%
Pelican Retail Holding Ltd	21,000	30,960	7.6%
Citadel Financial Holding Ltd	3,395	3,395	0.8%
Financial services sector
Novera Holdings Ltd	36,078	38,593	9.5%
Infrastucture sector
Vitosha Holdings Ltd	17,100	43,172	10.6%
Total investments	208,429	390,952	96.4%
Cash		1,938	0.5%
Other assets and liabilities		12,553	3.1%
Total Net Assets		405,443	100.0%

The accompanying notes are an integral part of these financial statements.

Schedule of Investments as at 31 December 2006 

Investment description	Cost  €000	Fair value  €000	% of Net Assets
Electronics retail sector
AXIS Retail Holding Ltd	41,675	78,300	25.3%
Automotive retail sector
Avto Union Holding Ltd	16,500	27,359	8.8%
Food retail sector
Familia Overseas Holding Ltd	10,128	3,960	1.3%
Property sector
Immofinance Holding Ltd	29,773	35,429	11.4%
Pelican Retail Holding Ltd	21,000	30,734	9.9%
Citadel Financial Holding Ltd	2,460	2,460	0.8%
Financial sector
Vitosha Holdings Ltd	17,100	49,365	15.9%
Total investments	138,636	227,607	73.4%
Cash		76,072	24.5%
Other assets and liabilities		6,389	2.1%
Total Net Assets		310,068	100.0%

The accompanying notes are an integral part of these financial statements.

Statement of Operations

	Notes	2007 €000	2006 €000
Income
Dividend income	2	9,735	-
Investment income		1,038	1,157
Total investment income		10,773	1,157
Expenses
Investment management fees	3	5,747	4,096
Performance fees	3	1,172	3,445
Custodian fees	3	74	126
Amortisation of formation expenses		447	3,192
Audit fees		40	37
Legal fees		137	17
Administrative and agency fees	3	259	365
Director's fees and expenses	3	96	8
Other fees and expenses		975	503
Total expenses		8,947	11,789
Net investment profit/(loss)		1,826	(10,632)
Net realised gain on currency transactions		(3)	608
Net movement in unrealised gain on investments		93,552	35,951
Net Increase in Net Assets Resulting from Operations		95,375	25,927

The accompanying notes are an integral part of these financial statements.

Statement of Changes of Net assets

		2007 €'000	2006 €'000
From operations
Net investment profit /(loss)		1,826	(10,632)
Net movement in realised gain on currency transactions		(3)	608
Net movement in unrealised gain on investments		93,552	35,951
Net increase in net assets resulting from operations		95,375	25,927
From share capital transactions
Proceeds from shares issued		-	125,145
Payments for shares redeemed		-	-
Net increase in net assets from share capital transactions		-	125,145
Net increase in net assets in the year		95,375	151,072
Net assets
Beginning of the year		310,068	158,996
End of year		405,443	310,068

The accompanying notes are an integral part of these financial statements.

Statement of Cashflows

	2007 €000		2006 €000
Cash flows from Operating Activities:
Net increase in net assets resulting from operations	95,375		25,927
Adjustments for:
Net movement in unrealised gain on the financial assets	(93,552)		(35,951)
Net cash flow before changes in financial assets and liabilities at fair value through profit and loss	1,823		(10,024)
Net decrease/(increase) in operating assets and liabilities	6,970		(12,528)
Net cash provided/(used) by operating activities	8,793		(22,552)
Purchase of investments	(69,793)		(62,437)
Net increase in loans receivable	(31,735)		-
Net increase in loans payable	18,601		-
Net cash used by investment activities	(82,927)		(62,437)
Cash Flows from Share Capital Transactions
Shares issued	-		125,145
Shares redeemed	-		-
Net increase in net assets from share capital transactions	-		125,145
Net (decrease)/increase in cash during the year	(74,134)		40,156
Cash and cash equivalents, beginning of year	76,072		35,916
Cash and cash equivalents, end of year	1,938		76,072
Supplementary Cash Flow Information:
Dividends received	9,735		-

The accompanying notes are an integral part of these financial statements

Statement of Accounting Policies

________________________________________________________________________________________

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  

These financial statements are prepared in Euro. The following are the significant accounting policies adopted by the Company:

Investment valuation. Investments have been valued by the directors at their fair value in compliance with the principles of the European Venture Capital Association guidelines which have been adopted by the Company. Under the terms of the guidelines unquoted investments are stated at amounts considered by the Directors to be reasonable assessment of their fair value, subject to the requirement to apply a degree of caution in making the necessary estimates.  Fair value is the amount at which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.

Investments are valued at cost for a limited period after the date of acquisitions. The carrying value assigned to the investments are based on available information and do not necessarily represent amounts that might ultimately be realised since such amounts depend on future circumstances and cannot be determined with certainty until the individual investments are disposed of, and such differences could be material. 

Independent third party agents are appointed by the Company to assist with semi-annual independent valuations of the Company's assets. The valuers applied the following methodology:

• for investments in established businesses with an identifiable stream of continuing earnings the independent expert assists in the assessment of the market value of the capital. The valuations are prepared in accordance with the International Valuation Standards. Any assumptions made by the valuer are reviewed by the Board and the Investment Manager for reasonableness. 

• Where an investment's value is derived mainly from the underlying value of its property assets CB Richard Ellis assists in the assessment of the fair values of the property portfolio.  The total property portfolio is re-valued on a semi-annual basis by appropriately qualified, independent valuers.  The valuations are prepared in accordance with the Royal Institute of Chartered Surveyors Appraisal and Valuation Standards.  Any assumptions made by the valuer are reviewed by the Board and the Investment Manager for reasonableness.

Where there has been a subsequent recent investment by a third party that is deemed to be at arms length, this may be used as the basis of valuation.  In cases where an exit is actively being sought, any offers from potential purchases would be relevant in assessing the valuation of an investment and are taken into account in arriving at the valuation.

Where appropriate, a marketability discount may be applied to the investment valuation, based on the likely timing of an exit, the influence over that exit, the risk of achieving condition precedent to that exit and general market conditions. In arriving at the value of an investment, the percentage ownership is calculated after taking into account any dilution through outstanding warrants, options and performance related mechanisms.

The company held no quoted investments at the year end.

Income and Expenses Recognition

Investment transactions are recorded on the trade date. Interest income is recognised on the accrual basis. 

Translation of foreign currencies. 

The books and records are maintained in Euros. Assets and liabilities denominated in foreign currencies are translated at the rates of exchange in effect at the year end, and any adjustments, other than those relating to investments and forward foreign currency contracts, are charged or credited to the Statement of Operations as 'net realised loss on foreign currency translation'. Investment transactions (purchases, sales and income) denominated in foreign currencies are translated at rates of exchange in effect at the time of each transaction and market values at the year end are translated at exchange rates at that date.  Income and expenses are translated at the rates of exchange in effect at the time of the transaction.

Realised and unrealised gains and losses.

Realised and unrealised changes in fair values of financial instruments are included in realised and unrealised gains and losses in the Statement of Operations in the period in which the changes occur.

New accounting pronouncments.

At the date of authorisation of these financial statements, certain new Standards, amendments and interpretations of existing standards have been published. The new Standards, amendments and interpretations that have been applied or are expected to be relevant to the Company's financial statements and their impact are as follows: 

Adopted

In June 2006 the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN impact are as follows:

• FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. 

• FIN 48 clarifies the accounting for uncertainty in income taxes recognised in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income 

• Taxes. FIN 48 prescribes a comprehensive model for recognising, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. 

Published but not yet effective

In September 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standard No. 157, Fair Value Measurement (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity specific measurement and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after 15 November 2007, and interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have a material impact on the company's financial statements.

Notes to the Financial Statements

_________________________________________________________________________________________

Note 1 - General information

Equest Investment Balkans Ltd (formerly known as Equest Investments Bulgaria Ltd) (the 'Company') was incorporated on 10 December 2003, as an International Business Company under the laws of the British Virgin Islands. The Company commenced operations on 14 April, 2004. The shares of the Company were first listed on the Irish Stock Exchange on 19 April 2004. On 20 December, 2006 the shares of the Company were listed on the AIM  Market of the London Stock Exchange ('AIM').

The Company changed its name to Equest Investments Balkans Limited on 20 December, 2006.

The Company's investment objective is to provide shareholders with long term capital growth. The Company will seek to achieve its investment objective by investing directly in equity or equity related investments in developing enterprises organised or operating in Bulgaria, Romania, Albania, Croatia, Macedonia, Kosovo, the Republic of Montenegro, the Republic of Serbia, Bosnia and Herzegovina, Slovenia, Ukraine and Turkey.

Note 2 - Investments

In accordance with accounting principles generally accepted in the United States of America the holdings have not been consolidated.  Significant subsidiaries and associates held by the company are as follows:

Name of significance subsidiary or associate	% of ordinary share capital and voting rights held 2007	% of ordinary share capital and voting rights held 2006	Country of incorporation
Automotive retail sector
Avto Union AD	80%	80%	Bulgaria
Star Motors EOOD	80%	80%	Bulgaria
Motobul EOOD	80%	80%	Bulgaria
Auto Italia EAD	80%	80%	Bulgaria
Ita Leasing EOOD	80%	80%	Bulgaria
Bulvaria Holding EAD	80%	80%	Bulgaria
Bulvaria Rent a Car EOOD	80%	80%	Bulgaria
Milano Motors EOOD	80%	80%	Bulgaria
Gransport Auto EOOD	80%	80%	Bulgaria
Electronics retail sector
KK Electronics EOOD	75%	75%	Bulgaria
Balkan Soft EOOD	75%	75%	Bulgaria
K & K Service EOOD	75%	-	Bulgaria
Mondea Top Video EOOD	75%	-	Bulgaria
Biz Air OOD	38%	-	Bulgaria
El Eco Tech AD	23%	-	Bulgaria
IBN Electronics SRO	49%	-	Slovakia
K&K Electronic SRL	75%	75%	Romania
Domo Retail SA	56%	-	Romania
Domo Retail EOOD	75%	-	Bulgaria
Domo Distribution Group SRL	56%	-	Romania
Covalim SA	19%	-	Romania
Techno-mobile DOO	50%	50%	Serbia
K&K Electronics DOO	23%	-	Serbia
K&K Electronics DOO	50%	-	Montenegro
Property sector
Castle Golf Properties SRL	100%	100%	Romania
St George Resort and Spa	100%	100%	Bulgaria
First Liquid Private House OOD	100%	100%	Bulgaria
Atia Holiday EAD	100%	100%	Bulgaria
Banya Holidays AD	100%	100%	Bulgaria
Boyana Residence EOOD	100%	100%	Bulgaria
Pelican Retail EAD	100%	100%	Bulgaria
Lexington EAD	100%	100%	Bulgaria
Rodacar AD	100%	100%	Bulgaria
Borovets Invest EAD	50%	50%	Bulgaria
Rila Samokov 2004	34%	34%	Bulgaria
Infrastructure sector
Novera EAD	94%	-	Bulgaria
Chistota-Sofia AD	94%	-	Bulgaria
Ditz AD	94%	-	Bulgaria
Wolf 96 OOD	94%	-	Bulgaria
Financial sector
UNIQA Bulgaria AD	38%	68%	Bulgaria
ZK Unica Life AD	38%	68%	Bulgaria
Vitosha Auto OOD	38%	68%	Bulgaria

The above significant investment in subsidiaries are not directly held by the Company but via intermediate holding companies. 

During the year the company received a dividend of €9.7m from Vitosha Holdings Ltd.

The Company enters into loans with its direct subsidiaries. At 31 December 2007 loans and receivables due from subsidiaries was €13,135,000 (2006: €nil), interest free. During the year the Company lent €31,735,500 (2006: €nil) and was outstanding €18,600,500 (2006: €nil) on the loans due from subsidiary undertakings. All loans to subsidiaries are unsecured with no set repayment. The Company does not intend to seek repayment of these loans or the accrued interest within 12 months of the balance sheet date.

Note 3 - Investment Performance and Advisory Incentive fees, Agency and Administration and Supervisory Custodian Fees

Investment Management fees

Under the Investment Management Agreement dated 5 March 2004 as amended by an agreement dated 11 December 2006, between the Company and Equest Capital Management Limited (the 'Investment Manager'), the Investment Manager receives, at the end of each calendar half year end, a investment management fee of 2.5% of the committed capital per annum. The investment management fee is payable semi-annually in advance. Investment management fee's earned during the year ended 31 December 2007 amounted to €5,746,505 (2006: €4,096,564). Investment management fees prepaid at the year ended 31 December 2007 amounted to €nil (2006: €973,000). 

Upon final implementation of the reorganisation of the Company's management (as more particularly described in note 9 to the financial statements), the annual investment management fee will cease to be payable from 26 February 2008 and will be replaced by new compensation arrangements for senior management.

Performance fees

From 20 December 2006, the Investment Manager is entitled to receive a performance fee to be determined during successive periods of twenty four months. The performance fee is equal to 20% of the excess of the closing Net Asset Value per share at the end of each performance period over the higher of:

(i) The Euro equivalent of the placing price increased by 8% per annum on a compounding basis up to the relevant performance period; 

(ii) The closing Net Asset Value per Ordinary Share at the end of the immediately preceding performance period;

(iii) A high watermark which is the highest closing Net Asset Value per Ordinary Share at the end of any previous performance period in respect of which a performance fee was last earned; multiplied by the time weighted average of the number of Ordinary shares in the performance period.

Prior to 20 December 2006 performance fees were calculated through the Company's holding of Class B Shares. The Investment Manager was entitled to receive a carried interest of 20% of all distributions once the Company had returned to shareholders the entire amount invested by them in the Company plus a hurdle return of 8% per annum thereon. 

A performance fee crystallised on 20 December 2006, the date the Company was admitted to AIM. The performance fee payable at that date in the sum of €11,458,924 was taken in the form of shares. Shares totaling 641,510 were issued at the AIM float price of €17.8624. 

The performance fee earned in during the year ended 31 December 2007, amounted to €1,172,000 (2006: €3,445,000). The performance fee payable at 31 December 2007, was £1,201,000 (2006: €29,000)

As more particularly described in the Company's circular to shareholders dated 28 March 2008, upon final implementation of the reorganisation of the Company's management, the current performance fee arrangements will be terminated with effect from 31 December 2007 and replaced with a new long-term incentive plan which would become effective from 1 January 2008 and which is aimed at incentivising the Company's management. The Investment Manager will not receive any separate payment of any performance fee to 31 December 2007.

Agency and administration fees

Under the Agency and Administrative Agreement dated 20 February 2004 between the Company and Olympia Capital (Ireland) Limited ('Olympia'), which was amended on 11 December 2006. Olympia received a fee, payable quarterly in arrears at an annualised rate of 0.15% for Net Assets up to €200m and 0.10% for Net Assets above €200m for the period 1 January 2007 to 30 June 2007. On the 1 July 2007 the fees were amended to a fixed fee of €150,000 per annum. The Agency and Administration fees for the year ended 31 December 2007 amounted to €259,046, (2006: €365,000). Agency and Administration fees payable at 31 December 2007, amounted to €37,500 (2006: €285,000).

Custodian fees

Under the Custodian Agreement dated 20 February 2004, between the Company and Northern Trust Fiduciary Services (Ireland) Limited ('Northern Trust'), which was amended with effect from 1 January  2007 Northern Trust receives a fixed fee of €75,000 per annum.  The custodian fees for the year ended 31 December 2007 amounted to €74,211, (2006: €126,000). The custodian fees payable at the year ended 31 December 2007, were €75,000, (2006: €128,000).

Director's fees

Director's fees for the year ended 31 December 2007, amounted to €96,361 (2006: €8,000). The Director's fees payable at the year ended 31 December 2007, were €nil, (2006: €13,000). Mr Petri Karjalainen has waived his director's fees.

Note 4 - Income Taxes 

Under current British Virgin Islands legislation, there is no income tax, capital gains or withholding tax, estate duty or inheritance tax payable by the Company. The Company has been advised by its United States Counsel that, provided it does not engage in business in the United States, which it does not intend to do, it should not be subject to United States federal income or withholding taxes on gains realised by it from trading in investments in the United States other than the 30% withholding tax on United States-sourced dividends. As the Company is not subject to taxation in the British Virgin Islands and it has been advised that its proposed method of operations should not result in it being subject to United States income taxes, no provision for taxes has been made in the financial statements.

Note 5 - Distributions to Shareholders

The Board of Directors may declare distributions out of such sources and at such times as it from time to time may determine at its sole discretion. The Company does not currently intend to distribute its income or net realised capital gains. For the year ended 31 December 2007 no distributions were declared. The Board of Directors will periodically review its distribution policy in light of the Company's ongoing needs and operations.

Note 6 - Share Capital

The authorised share capital of the Company is 50,000,000 Ordinary shares of no par value. Prior to the listing on AIM the authorised share capital of the Company was 20,000,000 Class A shares of €0.01 each and 4 Class B shares of €100 par value each. All A Class shares were converted into Ordinary Shares on a one for one basis. The four Class B shares were repurchased and cancelled. In December 2006, a performance fee crystallized and shares totaling 641,510 were issued to the Investment Manager in lieu of this fee. 

Transactions in Common Shares of the Company were as follows:

For the year ended 31 December 2007	Shares	Amount €000
Opening Balance at 1 January, 2007	17,324,350	242,145,073
Proceeds from shares issued	-	-
Payments from shares redeemed	-	-
Closing Balance at 31 December 2007	17,324,350	242,145,073

Note 7 - Financial Instruments with Market, Currency, Liquidity, Interest, Credit and Off-Balance Sheet Risk

The Company's financial instruments are held at market value, which approximates fair value as outlined in the statement of accounting policies. The most appropriate indication of fair market value is likely to be an independent third party transaction within the valuation period. In the absence of this all unquoted investments are valued at cost at the year end by the administrator using the conservative value methodology.

Market Risk

Market Risk arises from uncertainty about future prices of financial investments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements.

Currency Risk

The Company holds assets denominated in currencies other than the Euro, the functional currency. The Company is therefore exposed to currency risk, as the value of the investments denominated in other currencies will fluctuate due to changes in exchange rates. The Company's policy is not to enter into any currency hedging transactions. As at 31 December 2007 all of the Company's assets were held in Euro.

Liquidity Risk

A significant period of time may pass before the Company has completed its investments in portfolio companies. Such investments may typically take from three to five years from the date of initial investment to reach a state of maturity when realisation of the investment can be achieved. Transaction structures typically will not provide for earlier liquidity of the Company's investments. It is likely that no significant return from the disposition of the Company's investments will occur for a substantial period of time from the settlement date and this may impact the Company's overall liquidity.

Interest Rate Risk

The majority of the Company's financial assets and liabilities are non-interest bearing; as a result, the Company is not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. Any excess cash and cash equivalents are invested at short-term market interest rates.

The Company is exposed to risks associated with the effects of fluctuations in the level of market interest rates on its financial position and cash flows.

The Company earned interest of €1,038,000 during the year ended 31 December 2007.

Credit and Off-Balance Sheet Risk

All investment transactions are cleared through and held in custody primarily by one major international institution, namely Barings (Ireland) Limited. The assets of the Company are segregated along with other Barings (Ireland) Limited client assets from Northern Trust (Ireland) Limited own assets. The Company is subject to credit risk to the extent that this institution may be unable to fulfill its obligations either to return the Company's investments or repay amounts owed. For these financial instruments, the maximum credit risk amount as at 31 December 2007 is represented by the amount at which they are included in the statement of assets and liabilities. In the normal course of the business the Company does not require collateral for financial instruments with credit risk.

Note 8 - Related Party Transactions 

Mr. John Walley, who was a Director of the Company until 1 May 2007, is a Director of Olympia Capital (Ireland) Limited, the administrator to the Company. All fees in relation to the Agency and Administration Agreement are disclosed in note 4 of the financial statements.

Mr Petri Karjalainen, a director of the Company is a director and shareholder of the Investment Manager and Investment Advisor. As at 31 December 2007 Mr Karjalainen held 73,700 Ordinary shares in the Company. All fees paid to the Investment Manger are disclosed in note 4.

Mr John Carrington a director of the Company held 43,000 shares at 31 December 2007. No further material contracts for provisions of services existed during the year under review to which the Company is a party and in which any director was interested.

Mr James Ede Go-Lightly a director of the Company held 1,000 shares at 31 December 2007. No further material contracts for provisions of services existed during the year under review to which the Company is a party and in which any director was interested.

Mr Kari Haataja, a managing partner of the Investment Advisor. As at 31 December 2007 Mr Haataja held 11,402 Ordinary shares in the Company. 

Mr George Krumov, also a managing partner of the Investment Advisor. As at 31 December 2007 Mr Krumov held 50,000 Ordinary shares in the Company. 

Other than the investment management agreement and investment advisory agreement in relation to Mr Karjalainen and the administration agreement in relation to Mr Walley there are no contracts entered into by the Company in which the directors have a material interest.

Note 9 - Post Year End Events 

On 25 April 2008, the Company's shareholders approved the Company's entry into arrangements with respect to the proposed management reorganisation of the Company. These arrangements will become effective on the date of de-listing of the Company's ordinary shares from the Irish Stock Exchange and include:

• termination of the current Investment Management Agreement between the Company and the Investment Manager and of the Investment Advisory Agreement between the Company, the Investment Manager and the Investment Adviser in consideration for the issue by the Company to ECL of (i) 941,540 ordinary shares in the Company (the 'Consideration Shares') and (ii) warrants entitling ECL to purchase 564,925 ordinary shares in the Company (the 'Warrants').

The Warrants will be exercisable at any time after 1 January 2009 on condition, inter alia, that the net asset value per ordinary share reported immediately prior to the exercise of the Warrants is not less than the audited net asset value per ordinary share as at 31 December 2007. 

The Consideration Shares, the 641,510 ordinary shares issued by the Company to the Investment Manager following the crystallisation of the performance fee on 20 December 2006 (as more particularly described in note 3 of the financial statements) and any ordinary shares issued on exercise of the Warrants shall be subject to certain lock-up arrangements until 31 December 2011.

• entry by the Company into a services agreement (the 'Services Agreement') with ECL and Messrs. Haataja, Karjalainen and Krumov (the 'Key Individuals'). Pursuant to the Services Agreement, ECL will procure that the Key Individuals and other senior managers are made available to the Company to perform such services as the Company may reasonably request and that the Key Individuals shall devote substantially all of their professional time and attention to the affairs of the Company for an initial term of four years, which shall renew automatically for successive one year terms unless either party gives to the other written notice of termination at least six months prior to the end of each anniversary. In addition to entering into the Services Agreement, the Key Individuals shall also be available for appointment to the Board of the Company for the duration of the Services Agreement.

The Key Individuals will be subject to certain non-compete and non-solicitation covenants. In addition, ECL and the Key Individuals will be obliged to present any new business opportunities they identify in the target region and which are within the remit of Company's investment objective and strategy to the Company on a pre-emptive basis. However, the obligations of the Key Individuals under the Services Agreement shall not preclude the Key Individuals (and their affiliates) from discharging their existing obligations to Equest Balkan Properties PLC.

The total compensation payable to ECL under the Services Agreement shall be €2.4 million per annum. Such compensation shall be reviewed by the Company's remuneration committee on an annual basis and may be increased at the discretion of the remuneration committee. In the event that the services of any two of the Key Individuals are no longer procured by ECL, the total compensation payable under the Services Agreement shall be reduced by 25 per cent. until such time as ECL procures the services of a suitable replacement for at least one of such Key Individuals.

• entry by the Company into a technical support agreement with ECL (the 'Technical Support Agreement') for an initial term of one year, renewable on an annual basis thereafter. Pursuant to the Technical Support Agreement, ECL shall provide or procure the provision of back office technical support and other services necessary for the Company's day to day operations such as office premises in various locations, IT, administrative and finance services. The Board envisages that such back office functions will gradually be brought in-house and the Company will have the right to terminate or scale back certain services under the Technical Support Agreement. The consideration payable to ECL under the Technical Support Agreement shall represent ECL's actual cost of providing the services (without any profit or mark up in favour of ECL) and is not expected to exceed €480,000 in the first year of the agreement.

• entry by the Company into a long term incentive plan with ECL ('LTIP') intended to provide transparent alignment of interests between the Key Individuals and other senior managers, and the shareholders. Pursuant to the LTIP, ECL shall be entitled to an incentive fee (the 'Incentive Fee') in certain circumstances, more particularly described below. 

The first period for calculating an Incentive Fee would begin on 1 January 2008 and end on 31 December 2008; each subsequent incentive period would be a period of twelve months ending on 31 December (an 'Incentive Period'). The LTIP shall be in place for an initial term of four years and thereafter shall remain in operation until termination of the Services Agreement. The payment of any Incentive Fee by the Company under the LTIP will be subject to:

(i) the achievement of a performance hurdle condition: the Closing Combined Value per Ordinary Share at the end of the relevant Incentive Period must exceed an amount equal to the NAV per Ordinary Share as at 31 December 2007 increased by the Margin on an annual compounding basis up to the end of the relevant Incentive Period (the 'Incentive Hurdle'); and

(ii) the achievement of a high water mark: the Closing Combined Value per Ordinary Share at the end of the relevant Incentive Period must be higher than the highest Closing Combined Value per Ordinary Share at the end of an Incentive Period in respect of which an Incentive Fee, if any, was last earned (the 'Incentive High Water Mark').

The Closing Combined Value per Ordinary Share shall be calculated as the sum of A and B where:

A = 50% of the Net Asset Value per Ordinary Share at the end of the relevant Incentive Period (before making an accrual for the relevant Incentive Fee); and

B = 50% of the volume weighted average price per Ordinary Share calculated for the 3 months immediately prior to the end of the relevant Incentive Period (as quoted by Bloomberg) converted to Euro at the Euro/Sterling exchange rate prevailing at the end of the relevant Incentive Period.

The Margin shall be the average of:

(i) the annual rate of interest on 5-year government bonds issued by the Republic of Bulgaria; and

(ii) the annual rate of interest on 5-year government bonds issued by the Republic of Romania, as at the end of the relevant Incentive Period.

In respect of the first Incentive Period, if the Incentive Hurdle is met, the Incentive Fee will be an amount equal to 20 per cent. of the excess of the Closing Combined Value per Ordinary Share at 31 December 2008 over the Incentive Hurdle.

In respect of subsequent Incentive Periods, if the Incentive Hurdle is met and the Incentive High Water Mark is exceeded, the Incentive Fee will be an amount equal to 20 per cent. of the excess of the Closing Combined Value per Ordinary Share at the end of the relevant Incentive Period over the higher of:

(i) the Incentive Hurdle;

(ii) the Closing Combined Value per Ordinary Share at the end of the immediately preceding Incentive Period (after adjusting for any Incentive Fee paid in respect of that Incentive Period); and

(iii) the Incentive High Water Mark.

The terms of the LTIP shall be adjusted as is appropriate in the event that there is a further issue of ordinary shares, a repurchase of ordinary shares or other capital reorganisation of the Company. 

The Company shall pay the Incentive Fee in ordinary shares (together with an amount equal to VAT, if any, thereon). The Company shall issue ordinary shares to ECL ('LTIP Shares') based on the following formula:

Number of Ordinary Shares issued =	Amount of Incentive Fee for the relevant Incentive Period ________________________________________________________
	The Closing Combined Value per Ordinary Share at the end of the relevant Incentive Period

The Company may, at its absolute discretion, make market purchases of ordinary shares for the purpose of paying the Incentive Fee to ECL.

LTIP Shares will be issued within 90 days of the end of each annual Incentive Period and shall be subject to certain lock-up arrangements. The Company shall have the right, at its absolute discretion, to pay the Incentive Fee in cash instead of in LTIP Shares.

• making the following amendments to the articles of association of the Company:

(i) removal of all limitations on the continued existence of the Company under the articles of association. Currently, the articles of association require that, at the Company's annual general meeting to be held in 2011, the Board must propose a resolution to the effect that the Company ceases to continue as then constituted. If shareholders resolve by simple majority that the Company shall cease to continue as then constituted, the Board will be required to formulate proposals to be put to the shareholders in respect of the reorganisation, unitisation, reconstruction or winding up of the Compan;

(ii) amendments to the Board's authority to issue shares by replacing the current provisions (which give the Board authority to issue shares on such terms as they deem fit unless at a discount to Net Asset Value per ordinary share, in which case such allotment must be authorised by a shareholders' resolution or must be offered to the then current shareholders on a pro-rata basis) with provisions that will require all new shares of the Company to be offered to the then current Shareholders on a pro rata basis to their shareholding in the Company, with the exception of (i) shares to be allotted and issued pursuant to the LTIP and any employees' share schemes (if any), (ii) preference shares or other shares with limited rights to participate in a distribution of income or (iii) any shares which are to be allotted and issued pursuant to an offer or an agreement that has been made/entered into prior to the amendment to the articles of association, unless the shareholders determine otherwise by passing an ordinary resolution; and

(iii) disapplication of pre-emption rights over 1,826,589 ordinary shares (being 10% of the total number of currently issued ordinary shares together with the Consideration Shares) until the 2008 Annual General Meeting of the Company when the Board intends to seek a renewal of such authority.

• removal of restrictions on the Company's investing strategy that require that (i) not more than 20 per cent. of the Company's gross assets will be exposed to the creditworthiness or solvency of a single counterparty, (ii) the Company will not loan or invest more than 20 per cent. of the value of its gross assets in the securities of any one issuer, (iii) the Company will not invest directly in physical commodities and (iv) no more than 10 per cent., in aggregate of the value of the gross assets of the Company may be invested directly in real property. Also, allowing the Company to take management control over the entities owning the underlying investments of the Company and to become more closely involved in the daily operations of its investments, should it wish to do so.

In addition to the above arrangements, on 25 April 2008, the Company's shareholders approved a number of amendments to the articles of association of the Company which are not conditional on de-listing of the Company's ordinary shares from the Irish Stock Exchange and the implementation of which is currently underway. These amendments are as follows:

• making the required quorum for a meeting of shareholders, two shareholders entitled to vote on resolution(s) to be considered at the meeting and attending the meeting in person or by proxy i.e. removing the requirement that such shareholders together hold no less than 25 per cent. of the votes of the ordinary shares entitled to vote on the resolution(s) to be considered at the meeting; and

• minor amendments to the articles in connection with the procedure for convening an adjourned meeting of shareholders.

Note 10 - Financial Highlights

The financial highlights for the Company for the year ended 31 December 2007 are as follows:

Basic earnings per share for the year ended 31 December 2007 was €0.05, (2006: (€0.75)). Basic earnings per share is based on the net investment profit/(loss) in the statement of operations and the average number of shares in issue during the year 

Per share operating performance in Euros (for a share of capital stock outstanding throughout the year)		€	€
		2007	2006
Net Asset Value, beginning of year		17.90	15.9
Income from operations
Net investment gain/(loss)		0.11	(0.75)
Net unrealised gain on investment		5.39	2.75
Net Asset Value, end of year		23.40	17.90
Total return		30.73%	12.58%
Ratio of investment income to average net assets (annualised)		2.97%	0.49%
Ratio of expenses to average net assets (annualised)		(2.47%)	(4.98%)
Ratio of unrealized gain on currency and investments to average net assets (annualised)		25.80%	15.42%
Ratio of net investment income to average net assets		26.30%	10.93%

 

END

 

 

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