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Arco Vara AS Interim Report (unaudited) for II quarter and 6 months 2014

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INTERIM REPORT FOR THE

                          SECOND QUARTER AND SIX MONTHS

                               ENDED 30 JUNE 2014

                                  (UNAUDITED)





                                                   Company name:   Arco Vara AS

                                                  Registry number:   10261718

                                                              Address:   Jõe
2b, 10151 Tallinn, Republic of Estonia 

                                                           Telephone:   +372 6
144 630 

                                                                     Fax:  
+372 6 144 631 

                                                                 E-mail:  
[email protected] 

                                                Corporate website:  
www.arcorealestate.com 

                                                      Core activities:  
Renting and operating of real estate (EMTAK 6820) 

                                                                             
Activities of real estate agencies (EMTAK 6831) 

                                                                             
Real estate management (EMTAK 6832) 

                                                      Financial year:   1
January 2014 – 31 December 2014 

                                                  Reporting period:   1 January
2014 – 30 June 2014 

                                               Supervisory board:  
Hillar-Peeter Luitsalu, Toomas Tool, Aivar Pilv, 

Stephan David Balkin, Arvo Nõges, Rain Lõhmus,

Allar Niinepuu

                                                    Chief executive:   Tarmo
Sild 

                                                                Auditor:   AS
PricewaterhouseCoopers 







CONTENTS



Directors’ report. 4

Group Chief Executive’s review.. 8

Condensed consolidated interim financial statements. 16

Consolidated statement of comprehensive income. 16

Consolidated statement of financial position.. 17

Consolidated statement of cash flows. 18

Consolidated statement of changes in equity. 19

Notes to the condensed consolidated interim financial statements. 20

1. Significant accounting policies. 20

2. Segment information. 20

3. Revenue. 21

4. Cost of sales. 21

5. Marketing and distribution expenses. 21

6. Administrative expenses. 22

7. Finance income and costs. 22

8. Earnings per share. 22

9. Receivables and prepayments. 22

10. Inventories. 23

11. Investment property. 23

12. Loans and borrowings. 24

13. Payables and deferred income. 24

14. Sale of a subsidiary. 24

15. Related party disclosures. 25

16. Events after the reporting date. 27

Statement by the chief executive/member of the management board.. 28





Directors’ report



ARCO VARA GROUP


Arco Vara AS (hereafter also ‘the parent company’ or ‘the Company’) and other
entities of Arco Vara group (hereafter together ‘the group’) are engaged in
real estate development and services related to real estate. Until the end of
year 2013, the group’s three business lines – services, development and
construction had been organised into corresponding divisions. Since year 2014,
the group has two continuing business lines: Service division and Development
division. The group has no plans on independent construction activities in next
few years. 

The Service division is engaged in real estate brokerage, valuation, management
and consulting as well as in short-term investment in residential real estate.
The Service division offers to the group additional value by generating
analytical data on market demand and supply, also behaviour of potential
clients. Analytical data allows to make better decisions on purchase of land
plots, planning and designing, also on timing the start of construction. 

The Development division develops complete living environments and commercial
real estate. Fully developed housing solutions are sold to the end-consumer. In
some cases the group is developing also commercial properties until they start
generating cash flow for two possible purposes: for the support of the groups’
cash flows or for resale. The group is currently holding completed commercial
properties that generate rental income. 

The Construction division provided general construction and environmental
engineering services, operating as a general contractor and construction
manager as well as a subcontractor. In 2013, the provision of construction
services was finished and in February 2014, the group sold its construction
company Arco Ehitus OÜ. Arco Vara is still responsible for completing possible
warranty works, together with Arco Ehitus. 

As at 30 June 2014, the group comprised 21 companies (31 December 2013: 23). At
30 June 2014, the group had interests in one joint venture (31 December 2013:
1) and one associate (31 December 2013: 1). 

The group regards Estonia, Latvia and Bulgaria as its home markets.



The goal and core values

Common goal for all Arco Vara companies is:

1)    to provide clients with trustworthy real estate services which are based
on quality information and integrated real estate products of high value in
use, being innovative in the same time; 

2)    to gain stable and high return on equity for the shareholders, which
beats the competiton in real estate business and justifies investing and
holding Arco Vara shares; 

3)    to create the best conditions for self-realization in real estate
industry for the people working for the group. 



Arco Vara’s core values include:

                Partnership – our client is our partner

                Reliability – we are reliable, open and honest

                Professionalism – we deliver quality

                Consideration – we value our clients as individuals

                Responsibility – we keep our promises


GROUP STRUCTURE

As at 30 June 2014





CHANGES IN GROUP STRUCTURE DURING 6 MONTHS 2014



On 14 February 2014, Arco Vara AS divested its 100% share in Arco Ehitus OÜ to
the company Stratcorp OÜ. The sale price of the share included two parts: 

1) 10 thousand euros paid on transfer of the share;

2) 30% out of the amount, that Arco Ehitus OÜ will gain from actions brought by
Arco Ehitus OÜ through Ministry of Education and Research and OÜ Loksa
Haljastus. Income tax is deducted from proceeds. 

The group’s gain on the transaction amounted to 652 thousand euros not
considering the impact of sale price. As a result of the divestment, the
group’s liabilities decreased by 1,020 thousand euros and its assets declined
by 368 thousand euros. 

On 19 March 2014, the chariman of the management board of Arco Real Estate SIA
realised his option to gain additional ownership share in the company. As a
result, the group’s ownership interest in Arco Real Estate SIA declined from
78.5% to 70.6% and non-controlling interest in the group’s equity increased by
5 thousand euros. 

On 24 April 2014, Arco Real Estate AS divested its 100% share in Bulgarian
subsidiary Arco Imoti EOOD to the group’s parent company Arco Vara AS. 

On 25 April 2014, Arco Investeeringute AS divested its 100% share in Bulgarian
subsidiary Arco Projects EOOD to the group’s parent company Arco Vara AS. 

On 25 April 2014, Arco Invest EOOD divested its 100% share in Bulgarian
subsidiary Arco Projects EOOD to the group’s parent company Arco Vara AS. 

In May 2014, the group’s management adopted a decision to start liquidation of
the group’s subsidiary Fineprojekti OÜ. 




KEY PERFORMANCE INDICATORS



·                     In 6 months 2014, revenue from continuing operations was
2.2 million euros, which was 3 million euros lower compared to the same period
of previous year. Revenue of Service division increased by 19% and revenue of
Development division declined by 80%. In Q2 2014, total revenue was 1.1 million
euros (in Q2 2013: 3.5 million euros). Decline of revenue in Q2 was also
related to Development division, where decrease of revenue amounted to 2.4
million euros compared to the same period of previous year. The main reason for
revenue decrease is because the group’s development projects are in such stage,
where revenue is not accrued yet. Increase of revenue from Development division
is expected in second half of 2014. 

·                     Operating loss for Q2 2014 from continuing operations was
0.1 million euros, compared to the operating profit of 1.7 million euros in the
same period of previous year. The group’s net loss amounted to 0.4 million
euros in Q2 2014. In Q2 2013, the net profit was 1.5 million euros. In 6 months
2014, the group’s operating profit amounted to 0.5 million euros and net profit
of 0.03 million euros. In previous year the corresponding profit figures were
2.0 million euros and 1.5 million euros. Profit figures are worse mainly due to
the temporary drop in revenue from development division and non-recurrent
events (sale of subsidiaries in Q1 2013 and Q1 2014, also revsersal of
provisions in Q2 2013) 

·                     Equity to assets ratio has decreased slightly compared to
the year end 2013. As at 30 June 2014, it was 26% (31 December 2013: 27.2%).
The reason is increase of the group’s assets during construction activities,
which have been financed by loan capital. 

·                     The group net loans have increased by 2.2 million euros
in 6 months 2014 due to financing development activities through bank loans. As
at 30 June 2014, the average annual interest rate of loans is 5.9%, a decrease
by 0.1 procentage point since the end of year 2013. 

·                     During first 6 months 2014, were sold 3 apartments in
projects developed in the group (in 6 months 2013 was sold 35 apartments and 2
plots), that includes one apartment in Q2 2014 (21 apartments and one plot in
Q2 2013). 

                                         6 months  6 months 2013      Q2      Q2
                                             2014                   2014    2013
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Revenue from continuing operations            2.2            5.2     1.1     3.5
--------------------------------------------------------------------------------
Operating profit/loss from                    0.5            2.0    -0.1     1.7
 continuing operations                                                          
--------------------------------------------------------------------------------
Net profit/loss from continuing               0.0            1.5    -0.4     1.5
 operations                                                                     
--------------------------------------------------------------------------------
Net profit/loss from discontinued             0.0            0.1     0.0     0.0
 operations                                                                     
--------------------------------------------------------------------------------
Net profit/loss for the period                0.0            1.5    -0.4     1.5
--------------------------------------------------------------------------------
EPS (in euros)                               0.00           0.32   -0.08    0.32
--------------------------------------------------------------------------------
                                                                                
-----------------------------------------------------------------               
ROIC (rolling, four quarters)                8.5%            neg                
-----------------------------------------------------------------               
ROE (rolling, four quarters)                29.0%            neg                
ROA (rolling, four quarters)                 7.4%            neg                
-----------------------------------------------------------------               
                                                                                
-----------------------------------------------------------------               
                                          30 June    31 December                
                                             2014           2013                
-----------------------------------------------------------------               
In millions of euros                                                            
-----------------------------------------------------------------               
Total assets at period-end                   26.4           25.2                
-----------------------------------------------------------------               
Invested capital at period-end               23.8           21.7                
-----------------------------------------------------------------               
Net loans at period-end                      16.3           14.1                
-----------------------------------------------------------------               
Eguity at period-end                          6.9            6.9                
-----------------------------------------------------------------               
                                                                                
-----------------------------------------------------------------               
Average loan term (in years, at               2.7            0.3                
 period-end)                                                                    
-----------------------------------------------------------------               
Average interest rate of loans (per          5.9%           6.0%                
 year,                                                                          
at period-end)                                                                  
-----------------------------------------------------------------               
                                                                                
-----------------------------------------------------------------               
Number of staff at period-end                 186            178                
-----------------------------------------------------------------               



FORMULAS USED

Earnings per share (EPS) = net profit attributable to owners of the parent /
(weighted average number of ordinary shares outstanding during the period – own
shares) 

Invested capital = current interest-bearing liabilities + non-current
liabilities + equity (at end of period) 

Net loans = current interest-bearing liabilities + non-current liabilities –
cash and cash equivalents – short-term investments in securities (at end of
period) 

Return on invested capital (ROIC) = past four quarters’ net profit / average
invested capital 

Return on equity (ROE) = past four quarters’ net profit / average equity

Return on assets (ROA) = past four quarters’ net profit / average total assets

Number of staff at period-end = number of people working fot the group under
employment or authorization (service) contracts 




CONTINUING OPERATIONS

Statement of comprehensive                                                      
 income                                                                         
                                 ------------------------------                 
                                  6 months 2014  6 months 2013  Q2 2014  Q2 2013
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Revenue                                                                         
--------------------------------------------------------------------------------
Development                                 0.8            4.0      0.4      2.8
--------------------------------------------------------------------------------
Service                                     1.6            1.4      0.8      0.8
--------------------------------------------------------------------------------
Eliminations                               -0.2           -0.2     -0.1     -0.1
--------------------------------------------------------------------------------
Total revenue                               2.2            5.2      1.1      3.5
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Operating profit                                                                
--------------------------------------------------------------------------------
Development                                 0.1            2.2      0.0      1.9
--------------------------------------------------------------------------------
Service                                     0.1            0.1      0.1      0.0
--------------------------------------------------------------------------------
Eliminations                                0.4           -0.1     -0.1      0.0
--------------------------------------------------------------------------------
Unallocated items                          -0.1           -0.2     -0.1     -0.2
--------------------------------------------------------------------------------
Total operating profit                      0.5            2.0     -0.1      1.7
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and expenses, net           -0.5           -0.5     -0.3     -0.2
--------------------------------------------------------------------------------
Net profit                                  0.0            1.5     -0.4      1.5
--------------------------------------------------------------------------------





Cash flows

                                          6 months      6 months      Q2      Q2
                                              2014          2013    2014    2013
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Cash flows from/used in operating             -1.9          -0.4    -0.8    -0.5
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in investing              0.1           1.4     0.1     0.0
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in financing              1.6          -2.0     0.5    -0.1
 activities                                                                     
--------------------------------------------------------------------------------
Net cash flows                                -0.2          -1.0    -0.2    -0.6
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                   0.8           1.8     0.8     1.4
 beginning of period                                                            
--------------------------------------------------------------------------------
Cash and cash equivalents at end of            0.6           0.8     0.6     0.8
 period                                                                         
--------------------------------------------------------------------------------





Group Chief Executive’s review



Introduction

The sales result and net loss of Q2 2014 meet the expectations of the group’s
management. The majority of sales revenue, over 85%, came from sale of services
and income from rent. The sale of development products is becoming more active
and the development division will start turning a profit again in the third
quarter due to completing the construction of apartments in the Bisumuisa
project in Riga and delivering the apartments sold in advance, and will speed
up in the fourth quarter due to completing the second stage of Manastirski in
Sofia and starting to deliver apartments to buyers. 

The service division and developments in real estate markets

The service division has positive cash flow and is profitable, consisting of
three companies primarily involved in mediating and assessing real estate in
Estonia, Latvia and Bulgaria (Arco Real Estate AS, Arco Real Estate SIA, Arco
Imoti EOOD), two companies involved in real estate management in Estonia and
Bulgaria (Arco Vara Haldus OÜ and Arco Facility Management EOOD) and a company
involved in managing rental apartments at Madrid Blvd (Arco Projects EOOD). The
service division does not include Arco Invest EOOD, the owner of the Madrid
Blvd building. The operating volume and profit of the service division as a
whole remained stable compared both to the same period of the previous quarter
and the previous year. The sale of mediating branches in Latvia and Bulgaria
increased, the sale of the Estonian branch decreased. 

Based on transaction information received from various branches of the service
division, the following trends concerning residential space in big cities can
be generalized: 

In Sofia, the demand for cheaper real estate suitable for investment has
increased this year as replacement for bank deposits due to the recent
instability of two savings banks of Bulgaria. The number of transactions on the
market has increased by 20% in the second quarter compared to the first
quarter, and this fluctuation cannot be explained with other short- or
long-term factors. The increase of transaction activity has notably increased
the income of the Bulgarian mediation branch. In Sofia, a total of 5,617 real
estate transactions were made in the second quarter, approximately over 75% of
which are transactions with residential space. 

The activity of the market in Riga remains unchanged. A total of 2,714 real
estate transactions were made in the first quarter and 2,713 transactions in
the second quarter, approximately over 75% of which are transactions with
residential space. The demand is stimulated by the increased concentration of
the population and by slight economic growth, but is hindered by the low
willingness of banks to finance purchase transactions, relatively low
purchasing power, and the stricter requirements to investments by citizens of
the CIS in regards to obtaining real estate with a residential permit adopted
in second quarter. Compared to Tallinn, transactions made with new real estate
have a relatively large proportion, exceeding 12%. 

In Tallinn, the supply of developers has increased the demand in price levels
of the start of 2014. A total of 2,810 transactions were made in the first
quarter, whereas 2,673 transactions were made in the second quarter. The
factors promoting the continued increase of supply (number of construction
permits issued, number of new developments started and amount of unsold
supplies) are a majority compared to factors supporting the increase of demand.
Also, we do not foresee the alleviation of the financing conditions of banks or
the increase of income of the consumers. This explains the decrease of
transaction activity of the real estate market of the second quarter, including
residential spaces. The group predicts an adjustment of prices. In the same
time, the prices of the quality real estate property in very good location may
continue to rise. The pressure of consumers to increase the quality of offered
products as well as the increase of volume on the rental market as the
continuation of this trend. The above trends also affect the decisions of the
development division of the group in selecting future projects. 

The Development division

The construction works of second stage of Manastirski in Sofia (blocks AB) went
according to plan. The speed of advance sales exceeds our expectations: by the
end of the 2nd quarter, over 55% of total volume to be sold are covered with
contracts for advance sale. Put briefly, the advance sales have now ensured
sales revenue for the group which is sufficient for completely repaying the
obligations taken or to be taken to finance Manastirski AB. The revenue from
apartments sold in the future – approximately 45% of the project volume – is
cash flow for the group. The goal is to sell out all products of Manastirski AB
by the end of 2015 at the latest. 

The building of Madrid Blvd in Sofia continues to earn income from rent for the
group, forming over 22% of the group’s revenue of the first half of the year
2014. If the equity capital is successfully increased, the plan is to decrease
the loan liability of the building by 1.2 million euros and thereby achieve the
extension of the term for repaying the remaining principal amount of loan until
December 2017 and the continued earning of rental income. 

In Riga, the more extensive construction works of apartments at Bisumuisa ended
in the second quarter, the authorisations for use of apartments and delivery of
apartments sold in advance to clients must take place in third quarter. By the
time of publishing the intermediate report, 6 apartments remain without a
contract for advance sale. The goal is to sell all products of the project by
the end of 2015 at the latest. 

In Tallinn, the proceedings for the detailed plan of the project at Paldiski
mnt 70c continued, the goal is to have the plan enter into force during 2014.
The plan has been approved by Tallinn city government. The detailed plans of
Liimi 1b and Lehiku tee 21-23 are also developing, the group hopes to get these
plans entered into force by the end of 2015 at the latest. 

The group concluded a contract for designing a product with approx. 30
apartments in Harku, Instituudi tee 7,9. Construction and advance sales are
predicted to begin in the third quarter of 2015. 

The activity volumes and profit of the development division largely depend on
increasing the equity capital of the group, which will take place in August
this year. The involved funds will be necessary to extend the loan contract of
the building at Madrid Blvd and to continue earning income from rent, as well
as to invest equity capital necessary for developing Paldiski mnt 70c in
Estonia. 

Summary

The year has continued according to plan. The first quarter was profitable
thanks to the sale of Arco Ehitus, the second quarter generated a loss of 0.4
million euros as predicted. The volumes of the service division are increasing
and profitable, but insufficient to cover the lack of sales revenue from
development products in the first and second quarter and the group’s overhead
costs. Sales revenue from the development will only be generated in the third
quarter and will exceed the level required for overall profit of the company in
the fourth quarter. The management board is not changing the supply prediction
of 9 million euros and profit prediction of 0.5 million euros for the year
2014. The management board finds the most important goal for the third quarter
to be the successful increase of the equity capital and involving 3.5 million
euros for the group in this way. 




SERVICE DIVISION

In Q2 2014, revenue of service division was 765 thousand euros, that included
intra-group revenue of 101 thousand euros (Q2 2013: 760 thousand and 75
thousand euros, respectively). In 6 months, revenue is increased by 19%
compared to the same period of previous year and amounted to 1,610 thousand
euros (includes intra-group revenue of 228 thousand euros). Sales growth came
primarily from Latvia and Bulgaria, there 6 months revenue from main activities
of real estate agencies, brokerage and valuation of real estate, increased by
23% and 90%, respectively. 6 months revenue of Estonian real estate agency is
decreased by 5% compared to the same period of previous year. If we compare
second quarters of 2013 and 2014, then the decline is even 21%. 

Revenue of real estate agencies from brokerage activities

              6m 2014  6m 2013  change  Q2 2014  Q2 2013  change
----------------------------------------------------------------
In thousands of euros                                           
----------------------------------------------------------------
Estonia           634      667     -5%      300      382    -21%
-----------           -----------------         ----------------
           -----------                 ---------                
Latvia            567      460     23%      274      257      7%
-----------           -----------------         ----------------
Bulgaria          264      139     90%      118       76     55%
----------------------------------------------------------------
Total           1,465    1,266     16%      692      715     -3%
----------------------------------------------------------------

The revenue growth of Latvian and Bulgarian agencies was caused both by general
increased activity on the market and strongly seizing the market by increasing
the number of employees. In Latvia, the growth is actually slowed down in
second quarter. The reason behind the decline in revenue of Estonian real
estate agency is rapid price rise in real estate market during last two years,
and this has led to the decline in the number of transactions during last few
months. 



All three real estate agencies ended up 6 months 2014 with a net profit:
Estonian agency’s net profit was 14 thousand euros (6 months 2013: 77 thousand
euros), Latvian agency’s net profit was 26 thousand euros (6 months 2013: 30
thousand euros) and Bulgarian agency’s net profit was 67 thousand euros (6
months 2013: 10 thousand euros). 

In addition to brokerage and valuation services, the service division also
provides real estate management service in Estonia and Bulgaria, as well as
accommodation service in Bulgaria. Separate real estate management company Arco
Vara Haldus OÜ started its activities in Estonia since the beginning of year
2014. The revenue from real estate management was 90 thousand euros in 6 months
2014, but only 27 thousand of which was external revenue (6 months 2013: 65
thousand and 16 thousand, repectively). Revenue from accommodation services
amounted to 35 thousand euros in 6 months 2014. In the first half of 2013, the
accommodation services were not provided yet. 

The number of staff in service division has been increased to 172 employees as
at 30 June 2014, growing by 11 people during 6 months. 





DEVELOPMENT DIVISION

In Q2 2014, revenue of Development division totalled 405 thousand euros (Q2
2013: 2,805 thousand euros) and 802 thousand euros in 6 months (4,016 thousand
euros in 6 months 2013). The decrease of Development division revenue was due
to the dropped sale of properties developed in-group. In Q2 2014, was sold only
one apartment in Bisumuisa-1 project and revenue from sale of real estate
properties was 135 thousand euros. Comparable results of Q2 2013 were 21 sold
apartments and 1 plot with corresponding revenue of 2,540 thousand euros.
Operating profit of Development division was 64 thousand euros in 6 months 2014
(6 months 2013: 2,259 thousnad euros). The decrease of operating profit is
caused by significantly dropped revenue. In Q2 2013, had been gained also from
reversal of provision in amount of 1,000 thousand euros. 

Most of other revenue of Development division consisted of rental income from
commercial and office space of Madrid Blvd building in Sofia in amount of 484
thousand euros in 6 months 2014 (6 months 2013: 474 thousand euros). 

In Q2 2014, was continued construction on II stage of Manastriksi Livadi
project. At the same time with the start of construction, in Novemebr 2013, was
started presale of apartments. And it is turned out to be successful, because
more than 55% of apartments are already covered with pre-agreements. 

At the end of Q2 2014, were practically finished with the works for finalizing
construction of the last 14-apartment building (GSA of 960 m2) in Bisumuisa-1
project in Latvia. The authorisations for use of apartments and delivery of
apartments sold in advance to clients must take place in third quarter. At the
date of publication of interim report, 9 apartments out of 14 were covered with
pre-agreements. The last apartment of previous stage in the same project are
unsold yet, with selleable area of 105 m2. 

As at the end Q2 2014, 2 apartments and 31 parking spaces have not been sold in
the apartment building of Manastirski Livadi C-block (also named as Manastirski
I stage) in Bulgaria. Madrid complex contains 34 unsold apartments and 120
parking spaces. 11 apartments and all parking spaces, out of all unsold Madrid
properties, are rented out. 

In February 2014, the group acquired as an additon to the land bank, two land
plots with building right for 2 apartment buildings (30 apartments with
estimated GSA of 2,100 m2) near Tallinn, at Instituudi tee 7 and 9 in Harku. 

In Bulgaria, the group has a land bank in the form of Manastirski Livadi
D-block (also named as Manastirski III stage), which enables to build an
apartment building with approximately 70 apartments (GSA of 6,600 m2). The
group’s long-term goal is to create a land bank for all three countries which
enables the development of at least 1,000 apartments. At present, the group has
a land bank suitable for constructing about 500 apartments. 

As at 30 June 2014, 5 people were employed in the development division.

Find out more about the projects at: www.arcorealestate.com/arendus.





SUMMARY TABLE OF ARCO VARA’S PROJECTS AS AT 30 JUNE 2014



Project    Address    Product  Stage  Area of        GSA / GLA       No of units
 name                  main           plot(s)    (above grade)     (above grade)
                       type              (m2)     available or      available or
                                               <future target>   <future target>
--------------------------------------------------------------------------------
Manastirs  Manastirs  Apartme  S4/S5    4,445           12,500               145
ki A/B     ki, Sofia  nts                                                       
--------------------------------------------------------------------------------
Manastirs  Manastirs  Apartme  S5           -              204                 2
ki C       ki, Sofia  nts                                                       
--------------------------------------------------------------------------------
Manastirs  Manastirs  Apartme  S3       2,223            6,600                78
ki D       ki, Sofia  nts                                                       
--------------------------------------------------------------------------------
Madrid     Madrid     Lease:   S5/S6        -            7,350                16
 Blvd       Blvd,      Retail                                                   
            Sofia     /Office                                                   
--------------------------------------------------------------------------------
Madrid     Madrid     Apartme  S5/S6        -            3,800                34
 Blvd       Blvd,     nts                                                       
            Sofia                                                               
--------------------------------------------------------------------------------
Bisumuiza  Kometas    Apartme  S5           -              105                 1
-1          2, Riga   nts                                                       
--------------------------------------------------------------------------------
Bisumuiza  Kometas    Apartme  S4/S5    2,118              960                14
-1          4, Riga   nts                                                       
--------------------------------------------------------------------------------
Marsili    Marsili,   Residen  S5           -           37,238                17
 resident   near      tial                                                      
ial plots   Riga       plots                                                    
--------------------------------------------------------------------------------
Marsili    Marsili,   Residen  S2     120,220        <120,220>              <68>
 resident   near      tial                                                      
ial plots   Riga       plots                                                    
--------------------------------------------------------------------------------
Instituud  Instituud  Apartme  S3       5,003            2,100                30
i 7, 9     i tee 7,9  nts                                                       
            Harku                                                               
--------------------------------------------------------------------------------
PM 70C     Paldiski   Apartme  S2      28,498          <27500>             <345>
            mnt 70C,  nts                                                       
            Tallinn                                                             
--------------------------------------------------------------------------------
Lehiku     Lehiku     Apartme  S2       5,915           <1100>               <5>
 carpet     21,23     nts                                                       
 building   Tallinn                                                             
--------------------------------------------------------------------------------
Liimi      Liimi 1b,  Lease:   S2       2,463           <6500>               <1>
            Tallinn    Office                                                   
--------------------------------------------------------------------------------
Viimsiran  Haabneeme  Office/  S3      14,174              500                 1
na         , Viimsi   Mix                                                       
            vald                                                                
--------------------------------------------------------------------------------

Note: Value presented inbetween < > means future target value as the project is
in early (S1, S2) development stage and the building rights or the design have
not been finished yet. The table does not reflect sellable or letteble volumes
below grade including parking spaces and storages. 

Description of stages

S1: Landplot acquired

S2: Building Rights Procedure

S3: Design and Preparation Works

S4: Construction

S5: Marketing and Sale

S6: Facility Management and/or Lease




PEOPLE

As at 30 June 2014, the group employed 186 people compared with 178 at the end
of 2013. Employee remuneration expenses for 6 months 2014 amounted to 1.2
million euros (in 6 months 2013: 1.2 million euros). 

The remuneration of the member of the management board/chief executive and the
members of the supervisory board of the group’s parent company including social
security charges for the first 6 months of 2014 amounted to 54 thousand euros
compared with 121 thousand euros for 6 months 2013. 

The management board of Arco Vara AS has one member. Since 22 October 2012, the
member of the management board and chief executive of Arco Vara AS has been
Tarmo Sild. 





SHARE AND SHAREHOLDERS

Arco Vara AS has issued a total of 4,741,707 shares. As at 30 June 2014, the
company had 1,708 shareholders and the share price closed at 1.15 euros, a
17.86% decrease within six months. 

The following charts reflect movements in the price and daily turnover of the
Arco Vara share in the first 6 months of 2014 


In euros (EUR)





Changes in share price compared with the benchmark index OMX Tallinn in first 6
months of 2014. 



Indeks/equity
1 Jan 2014
30 June 2014
+/-%


             
OMX Tallinn    817.72    802.26   -1.89
---------------------------------------
ARC1T        1.40 EUR  1.15 EUR  -17.86
---------------------------------------





Major shareholders at 30 June 2014          No of shares  Interest %
AS Baltplast                                     897,999       18.9%
Gamma Holding Investment OÜ                      500,585       10.6%
HM Investeeringud OÜ                             450,000        9.5%
Alarmo Kapital OÜ                                374,188        7.9%
AS Lõhmus Holdings                               312,378        6.6%
LHV PENSIONIFOND L                               310,000        6.5%
OÜ Rimonne Baltic                                255,500        5.4%
FIREBIRD REPUBLICS FUND LTD                      205,064        4.3%
Central Securities Depository of Lithuania       147,419        3.1%
LHV PENSIONIFOND XL                              110,445        2.3%
Other shareholders                             1,178,129       24.8%
--------------------------------------------------------------------
Total                                          4,741,707      100.0%







Holdings of members of the       Position                          No of  Intere
 management                                                       shares    st %
and supervisory boards at 30                                                    
 June 2014                                                                      
Toomas Tool (AS Baltplast)       member of supervisory board     897,999   18.9%
Arvo Nõges (Gamma Holding OÜ)    member of supervisory board     500,585   10.6%
Hillar-Peeter Luitsalu (HM       chairman of supervisory         459,507    9.7%
 Investeeringud OÜ, connetced     board                                         
 persons)                                                                       
Tarmo Sild ja Allar Niinepuu     member of management board/     374,188    7.9%
 (Alarmo Kapital OÜ)              member of supervisory board                   
Rain Lõhmus (AS Lõhmus           member of supervisory board     312,378    6.6%
 Holdings)                                                                      
Stephan David Balkin             member of supervisory board           -       -
Aivar Pilv                       member of supervisory board           -       -
--------------------------------------------------------------------------------
Total                                                          2,544,657   53.7%






DESCRIPTION OF THE MAIN RISKS



Liquidity risk

The group’s free funds are placed on current accounts or short-term deposits
with the banks operating in Estonia, Latvia and Bulgaria. Owing to high
refinancing risk, cash flow management is critical. The group’s cash and cash
equivalents balance is constantly smaller than the balance of loans that
require refinancing in the next 12 months. At 30 June 2014, the weighted
average duration of interest-bearing liabilities was 2.7 years. At the end of
Q2 2014, the group’s cash and cash equivalents totalled 0.6 million euros and
term deposits with maturities up to 2 years totalled 0.1 million euros. Out of
the cash and cash equivalents balance 0.2 million euros was in accounts with
restricted withdrawal opportunities (mostly accounts of designated purpose
where withdrawals require the banks’ consent). Liquidity and refinancing risks
continue to be the most significant risks for the group. 

Interest rate risk

The base currency of most of the group’s loan agreements is the euro and the
base interest rate is 3 or 6 months EURIBOR. As a result, the group is exposed
to developments in international capital markets. At the moment, the group does
not use hedging instruments to mitigate its long-term interest rate risk. In 6
months 2014, the group’s interest-bearing liabilities increased by 2 million
euros and amounted to 16.9 million euros at 30 June 2014. In 6 months 2014,
interest payments on interest-bearing liabilities totalled 0.4 million euros.
The group’s weighted average loan interest rate is 5.9%. This is a decrease by
0.1 percentage point in 6 months 2014. 

Currency risk

Purchase and sales contracts are mostly signed in local currencies: euros
(EUR), and Bulgarian levs (BGN). Real estate sales are mostly nominated in
euros, as a result of which the group’s assets and liabilities structure does
not denote a significant currency risk. The group is not protected against
currency devaluations. Most liquid funds are held in short-term deposits
denominated in euros. Devalution risk decreased since the beginning of year
2014 because Republic of Latvia transferred to euro. 

The chief executive/member of the management board confirms that the directors’
report of Arco Vara AS for the second quarter and six months ended 30 June 2014
provides a true and fair view of the development, financial performance and
financial position of the group as well as a description of the main risks and
uncertainties. 



Tarmo Sild
Chief Executive and Member of the Management Board of Arco Vara AS

7 August 2014





Condensed consolidated interim financial statementsConsolidated statement of
comprehensive income 


                                    Note    6 months    6 months      Q2      Q2
                                                2014        2013    2014    2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Continuing operations                                                           
--------------------------------------------------------------------------------
Revenue from rendering of services             1,908       1,805     923     953
--------------------------------------------------------------------------------
Revenue from sale of own real                    263       3,422     135   2,540
 estate                                                                         
--------------------------------------------------------------------------------
Total revenue                       2, 3       2,171       5,227   1,058   3,493
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cost of sales                        4        -1,249      -3,597    -631  -2,493
--------------------------------------------------------------------------------
Gross profit                                     922       1,630     427   1,000
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                      19         185       3     171
--------------------------------------------------------------------------------
Marketing and distribution           5          -174        -126     -74     -62
 expenses                                                                       
--------------------------------------------------------------------------------
Administrative expenses              6          -915        -792    -462    -379
--------------------------------------------------------------------------------
Other expenses                                   -37         -25     -29     -14
--------------------------------------------------------------------------------
Gain on transactions involving                     0       1,000       0   1,000
 joint ventures                                                                 
--------------------------------------------------------------------------------
Gain on sale of subsidiaries         14          662          98       0       0
                                   ---------------------------------------------
Operating profit/loss                            477       1,970    -135   1,716
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and costs             7          -435        -481    -228    -235
--------------------------------------------------------------------------------
Net profit/loss from continuing                   42       1,489    -363   1,481
 operations                                                                     
-----------------------------------                  ------------        -------
                                   ------------------            --------       
                                                                                
-----------------------------------                                             
                                   ---------------------------------------------
Discontinued operations                                                         
-----------------------------------                                             
                                   ------------------------------               
Profit/loss from discontinued        14          -13          58       0      27
 operations                                                                     
                                                                 ---------------
                                   ------------------------------               
                                                                                
-----------------------------------                                             
Net profit/loss for the period                    29       1,547    -363   1,508
--------------------------------------------------------------------------------
-----------------------------------------                                       
attributable to owners of the                     22       1,541    -365   1,503
 parent                                                                         
                                         ---------------------------------------
attributable to non-controlling                    7           6       2       5
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Total comprehensive income/expense                29       1,547    -363   1,508
 for the period                                                                 
--------------------------------------------------------------------------------
-----------------------------------------                                       
attributable to owners of the                     22       1,541    -365   1,503
 parent                                                                         
                                         ---------------------------------------
attributable to non-controlling                    7           6       2       5
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Earnings per share (in euros)        8                                          
--------------------------------------------------------------------------------
- basic                                         0.00        0.32   -0.08    0.32
--------------------------------------------------------------------------------
- diluted                                       0.00        0.32   -0.07    0.32
--------------------------------------------------------------------------------





Consolidated statement of financial position



                                              Note      30 June      31 December
                                                           2014             2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Cash and cash equivalents                                   640              818
--------------------------------------------------------------------------------
Receivables and prepayments                    9            583              656
--------------------------------------------------------------------------------
Inventories                                    10        13,255           10,780
--------------------------------------------------------------------------------
Assets belonging to sales group                14             0              847
--------------------------------------------------------------------------------
Total current assets                                     14,478           13,101
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Investments in equity-accounted investees                     1                1
                                             -----------------------------------
Receivables and prepayments                    9            145              252
--------------------------------------------------------------------------------
Investment property                            11        11,336           11,331
                                             -----------------------------------
Property, plant and equipment                               455              459
--------------------------------------------------------------------------------
Intangible assets                                            12               13
--------------------------------------------------------------------------------
Total non-current assets                                 11,949           12,056
--------------------------------------------------------------------------------
TOTAL ASSETS                                             26,427           25,157
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                           12         1,761           12,589
--------------------------------------------------------------------------------
Payables and deferred income                   13         2,390            1,746
--------------------------------------------------------------------------------
Provisions                                                  222              172
--------------------------------------------------------------------------------
Liabilities belonging to sales group           14             0            1,488
--------------------------------------------------------------------------------
Total current liabilities                                 4,373           15,995
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                           12        15,171            2,308
--------------------------------------------------------------------------------
Total non-current liabilities                            15,171            2,308
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                        19,544           18,303
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Share capital                                             3,319            3,319
--------------------------------------------------------------------------------
Statutory capital reserve                                 2,011            2,011
                                             -----------------------------------
Other reserves                                               60               60
--------------------------------------------------------------------------------
Retained earnings                                         1,469            1,452
--------------------------------------------------------------------------------
Total equity attributable to owners of the                6,859            6,842
 parent                                                                         
--------------------------------------------------------------------------------
Equity attributable to non-controlling                       24               12
 interests                                                                      
--------------------------------------------------------------------------------
TOTAL EQUITY                                              6,883            6,854
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                             26,427           25,157
--------------------------------------------------------------------------------





Consolidated statement of cash flows



                                      Note   6 months   6 months      Q2      Q2
                                                 2014       2013    2014    2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Cash receipts from customers                    3,259      5,526   1,568   3,161
--------------------------------------------------------------------------------
Cash paid to suppliers                         -4,483     -4,197  -2,079  -2,812
--------------------------------------------------------------------------------
Taxes paid                                       -536       -967    -251    -594
--------------------------------------------------------------------------------
Taxes recovered                                   349        135     227      82
--------------------------------------------------------------------------------
Cash paid to employees                           -427       -428    -203    -229
                                     -------------------------------------------
Other cash payments and receipts                  -46        -73     -32     -22
 related to operating activities                                                
--------------------------------------------------------------------------------
Net cash flow of discontinued                       0       -379       0        
 operations                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN OPERATING                -1,884       -383    -770    -528
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Purchase of property, plant and                   -15         -9      -7      -9
 equipment                                                                      
--------------------------------------------------------------------------------
Proceeds from sale of property,                     0          2       0       0
 plant and equipment                                                            
--------------------------------------------------------------------------------
Proceeds from sale of investment                    0         20       0       0
 property                                                                       
--------------------------------------------------------------------------------
Proceeds from sale of a subsidiary     14          10      1,610       0       0
--------------------------------------------------------------------------------
Loans provided                                     -3         -8       0      -8
--------------------------------------------------------------------------------
Placement of security deposits                   -327       -263     -69       0
--------------------------------------------------------------------------------
Release of security deposits                      452          0     189       0
--------------------------------------------------------------------------------
Interest received                                   2          4       1       0
--------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES                119      1,356     114     -17
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Proceeds from loans received           12       2,581      1,420   1,236   1,327
--------------------------------------------------------------------------------
Settlement of loans and finance        12        -545     -2,926    -474  -1,260
 lease liabilities                                                              
--------------------------------------------------------------------------------
Interest paid                                    -426       -457    -212    -209
--------------------------------------------------------------------------------
Other payments related to financing               -23         -9     -18      -7
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN FINANCING                 1,587     -1,972     532    -149
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
NET CASH FLOW                                    -178       -999    -124    -694
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                      818      1,775     764   1,433
 beginning of period                                                            
--------------------------------------------------------------------------------
Decrease in cash and cash                        -178       -999    -124    -694
 equivalents                                                                    
--------------------------------------------------------------------------------
Decrease in cash and cash equivalents               0        -37       0       0
 through sale of a subsidiary                                                   
--------------------------------------------------------------------------------
Cash and cash equivalents at end of               640        739     640     739
 period                                                                         
--------------------------------------------------------------------------------





Consolidated statement of changes in equity


-----------------                                                               
                  Equity attributable to owners of the parent  Non-contr   Total
                                                                  olling  equity
                                                               interests        
                 ---------------------------------------------------------------
                   Share   Statutory   Other  Retained  Total             
                  capita     capital  reserv  earnings                    
                       l     reserve      es                              
--------------------------------------------------------------           
In thousands of                                                                 
 euros                                                                          
--------------------------------------------------------------------------------
Balance as at 31   3,319       2,011       0    -1,958  3,372         -5   3,367
 December 2012                                                                  
--------------------------------------------------------------------------------
Total                  0           0       0     1,541  1,541          6   1,547
 comprehensive                                                                  
 income for the                                                                 
 period                                                                         
                 ---------------------------------------------------------------
Balance as at 30   3,319       2,011       0      -417  4,913          1   4,914
 June 2013                                                                      
--------------------------------------------------------------------------------
                                                                                
                 ---------------------------------------------------------------
Balance as at 31   3,319       2,011      60     1,452  6,842         12   6,854
 December 2013                                                                  
--------------------------------------------------------------------------------
Total                  0           0       0        22     22          7      29
 comprehensive                                                                  
 income for the                                                                 
 period                                                                         
--------------------------------------------------------------------------------
Change in              0           0       0        -5     -5          5       0
 non-controlling                                                                
 interests                                                                      
--------------------------------------------------------------------------------
Balance as at 30   3,319       2,011      60     1,469  6,859         24   6,883
 June 2014                                                                      
--------------------------------------------------------------------------------





Notes to the condensed consolidated interim financial statements1. Significant
accounting policies 

The unaudited condensed consolidated interim financial statements of Arco Vara
AS for the second quarter and six months ended 30 June 2014 have been prepared
in accordance with IAS 34 Interim Financial Reporting. The condensed
consolidated interim financial statements should be read in conjunction with
the consolidated annual financial statements for the year ended 31 December
2013, which have been prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union. 

All amounts in the financial statements are presented in thousands of euros
unless indicated otherwise. 


2. Segment information


The group has the following reportable operating segments:

Development  - development of residential and commercial real estate
environments and long-term investment in real estate; 

Service - real estate services: real estate brokerage, valuation, management
and short-term investment in real estate; 


Revenue and operating profit by operating segment


Segmen   Development       Service       Unallocated     Eliminations   
Consolidated 
t                                            items 
--------------------------------------------------------------------------------
------ 
        6m      6m      6m      6m      6m      6m      6m      6m      6m     
6m 
         2014    2014    2014    2014    2014    2014    2014    2014    2014  
 2014 
--------------------------------------------------------------------------------
------ 
In 
 thous 
ands 
 of 
 euros 
Extern     787   4,006   1,382   1,220       2       1                   2,171 
 5,227 
al 
 reven 
ue 
--------------------------------------------------------------------------------
------ 
Annual    -80%      5%     13%      7%                                    -58% 
    5% 
 chang 
e 
--------------------------------------------------------------------------------
------ 
Inter-      15      10     228     137                    -243    -147       0 
     0 
segmen 
t 
 reven 
ues 
--------------------------------------------------------------------------------
------ 
Total      802   4,016   1,610   1,357       2       1    -243    -147   2,171 
 5,227 
 reven 
ue 
--------------------------------------------------------------------------------
------ 
--------------------------------------------------------------------------------
------ 
Operat      64   2,259     132      68     359    -126     -78    -231     477 
 1,970 
ing 
 profi 
t/loss 
--------------------------------------------------------------------------------
------ 
Of           0      98       0       0     662       0                     662 
    98 
 which 
 gain 
 on 
 sale 
 of 
 subid 
iaries 
--------------------------------------------------------------------------------
------ 





Segmen   Development       Service       Unallocated     Eliminations   
Consolidated 
t                                            items 
--------------------------------------------------------------------------------
------ 
          Q2      Q2      Q2      Q2      Q2      Q2      Q2      Q2      Q2   
  Q2 
         2014    2013    2014    2013    2014    2013    2014    2013    2014  
 2013 
--------------------------------------------------------------------------------
------ 
In 
 thous 
ands 
 of 
 euros 
Extern     393   2,807     664     685       1       1                   1,058 
 3,493 
al 
 reven 
ue 
--------------------------------------------------------------------------------
------ 
Annual    -86%     -8%     -3%      8%                                    -70% 
   -5% 
 chang 
e 
--------------------------------------------------------------------------------
------ 
Inter-      12       4     101      75                    -113     -79       0 
     0 
segmen 
t 
 reven 
ues 
--------------------------------------------------------------------------------
------ 
Total      405   2,811     765     760       1       1    -113     -79   1,058 
 3,493 
 reven 
ue 
--------------------------------------------------------------------------------
------ 
--------------------------------------------------------------------------------
------ 
Operat      20   1,880      57      22    -134      44     -78    -230    -135 
 1,716 
ing 
 profi 
t/loss 
--------------------------------------------------------------------------------
------ 





Assets and liabilities by operating segment


Segmen   Development       Service      Construction ¹   Unallocated    
Consolidated 
t                                                            items 
--------------------------------------------------------------------------------
------ 
          30    31 Dec    30    31 Dec    30    31 Dec    30    31 Dec    30   
31 Dec 
         June    2013    June    2013    June    2013    June    2013    June  
 2013 
         2014            2014            2014            2014            2014 
--------------------------------------------------------------------------------
------ 
--------------- 
In thousands 
 of euros 
Assets  25,664  23,456     600     557       0     847     163     297  26,427 
25,157 
--------------------------------------------------------------------------------
------ 
Liabil  17,845  15,324     536     557       0   1,488   1,163     934  19,544 
18,303 
ities 
--------------------------------------------------------------------------------
------ 

¹ - As at 31 December 2013, presented in statement of financial position as
sales group assets and liabilities 





3. Revenue

                                   6 months 2014      6 months  Q2 2014  Q2 2013
                                                          2013                  
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
                                  ---------------                               
Sale of own real estate                      263         3,422      135    2,540
----------------------------------               --------------         --------
                                  ---------------              ---------        
Real estate brokerage and                  1,285         1,181      615      669
 valuation                                                                      
----------------------------------               --------------         --------
Rental of real estate                        485           519      239      238
--------------------------------------------------------------------------------
Property management services                  66            53       33       24
----------------------------------               --------------         --------
Other revenue                                 72            52       36       22
--------------------------------------------------------------------------------
Total revenue                              2,171         5,227    1,058    3,493
--------------------------------------------------------------------------------



4. Cost of sales

                                           6 months     6 months      Q2      Q2
                                               2014         2013    2014    2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Cost of real estate sold                       -237       -2,625    -119  -1,957
                                                    -------------        -------
                                                                 --------       
Personnel expenses                             -795         -734    -381    -418
-----------------------------------------------------------------        -------
                                                                 --------       
Property management costs                      -149         -187     -93     -90
-----------------------------------------------------------------        -------
                                                                 --------       
Vehicle expenses                                 -9          -11      -4      -6
-----------------------------------------------------------------        -------
                                                                 --------       
Depreciation, amortisation and                   -6           -5      -3      -2
 impairment losses                                                              
-----------------------------------------------------------------        -------
                                                                 --------       
Inventory write-down                              0           -3       0      -3
-----------------------------------------------------------------        -------
Other costs                                     -53          -32     -31     -17
--------------------------------------------------------------------------------
Total cost of sales                          -1,249       -3,597    -631  -2,493
--------------------------------------------------------------------------------



5. Marketing and distribution expenses



                                         6 months     6 months  Q2 2014  Q2 2013
                                             2014         2013                  
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Advertising expenses                          -93          -80      -41      -36
--------------------------------------------------------------------------------
Personnel expenses                            -34          -16       -9       -8
------------------------------------              -------------         --------
                                    --------------             ---------        
Market research                                -6           -3       -1       -1
------------------------------------              -------------         --------
Brokerage fees                                 -1           -4        0       -3
--------------------------------------------------------------------------------
Other marketing and distribution              -40          -23      -23      -14
 expenses                                                                       
--------------------------------------------------------------------------------
Total marketing and distribution             -174         -126      -74      -62
 expenses                                                                       
--------------------------------------------------------------------------------



6. Administrative expenses



                                           6 months     6 months      Q2      Q2
                                               2014         2013    2014    2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
                                       -------------             --------       
Personnel expenses                             -369         -402    -177    -208
---------------------------------------             -------------        -------
                                       -------------             --------       
Services purchased                             -182          -79     -90     -22
---------------------------------------             -------------        -------
                                       -------------             --------       
Office expenses                                -177         -181     -95     -94
---------------------------------------             -------------        -------
                                       -------------             --------       
IT expenses                                     -79          -40     -41     -17
---------------------------------------             -------------        -------
                                       -------------             --------       
Legal service fees                              -62          -39     -37     -12
---------------------------------------             -------------        -------
                                       -------------             --------       
Vehicle expenses                                -20          -18      -9      -9
---------------------------------------             -------------        -------
                                       -------------             --------       
Depreciation, amortisation and                  -16          -12      -8      -6
 impairment losses                                                              
---------------------------------------             -------------        -------
Other expenses                                  -10          -21      -5     -11
--------------------------------------------------------------------------------
Total administrative expenses                  -915         -792    -462    -379
--------------------------------------------------------------------------------



7. Finance income and costs



                                6 months 2014  6 months 2013  Q2 2014  Q2 2013
------------------------------------------------------------------------------
In thousands of euros                                                         
------------------------------------------------------------------------------
Interest expense                         -419           -429     -219     -204
------------------------------------------------------------------------------
Interest income                             2             19        1        7
------------------------------------------------------------------------------
Other finance income and costs            -18            -71      -10      -38
-------------------------------               ---------------         --------
Total finance income and costs           -435           -481     -228     -235
------------------------------------------------------------------------------



8. Earnings per share

Basic earnings per share are calculated by dividing profit or loss for the
period attributable to ordinary equity holders of the parent by the weighted
average number of ordinary shares outstanding during the period. Diluted
earnings per share are calculated by taking into account the effects of all
dilutive potential ordinary shares. 

                                      6 months    6 months    Q2 2014    Q2 2013
                                          2014        2013                      
--------------------------------------------------------------------------------
Weighted average number of           4,741,707   4,741,707  4,741,707  4,741,707
 ordinary shares outstanding                                                    
during the period                                                               
--------------------------------------------------------------------------------
Number of ordinary shares              390,000           0    390,000          0
 potentially to be issued                                                       
--------------------------------------------------------------------------------
Net profit/loss attributable to             22       1,541       -365      1,503
 owners of the parent (in                                                       
 thousands of euros)                                                            
--------------------------------------------------------------------------------
Earnings per share (in euros)             0.00        0.32      -0.08       0.32
--------------------------------------------------------------------------------
Diluted earnings per share (in            0.00        0.32      -0.07       0.32
 euros)                                                                         
--------------------------------------------------------------------------------

According to the decision of the annual general shareholders’ meeting of Arco
Vara AS, held on 1 July 2013, one convertible bond was issued with the nominal
value of 1,000 euros. The convertible bond will give to the chief executive of
the group’s parent company the right to subscribe up to 390 thousand ordinary
shares of Arco Vara AS for 0.7 euros per share during the year 2016. As at 31
December 2013, an equity reserve was created in amount of 60 thousand euros for
the option associated with the bond. 



9. Receivables and prepayments


Short-term receivables and prepayments                                          
                                                  30 June 2014  31 December 2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Trade receivables                                                               
--------------------------------------------------------------------------------
Receivables from customers                                  69               164
--------------------------------------------------------------------------------
Allowance for doubtful trade receivables                   -22               -22
--------------------------------------------------------------------------------
Total trade receivables                                     47               142
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other receivables                                                               
--------------------------------------------------------------------------------
Loans provided                                              36                33
--------------------------------------------------------------------------------
Term deposits (with maturities from 3 to 12                  0                23
 months)                                                                        
--------------------------------------------------------------------------------
Miscellaneous receivables                                  162               163
                                                 -------------------------------
Total other receivables                                    198               219
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Accrued income                                                                  
--------------------------------------------------------------------------------
Prepaid and recoverable taxes                              147               127
--------------------------------------------------------------------------------
Other accrued income                                         9                 9
--------------------------------------------------------------------------------
Total accrued income                                       156               136
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Prepayments                                                182               159
                                                 -------------------------------
Total short-term receivables and prepayments               583               656
--------------------------------------------------------------------------------
                                                                                
Long-term receivables                                                           
                                                  30 June 2014  31 December 2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Term deposits (with maturities more than 1 year)           138               240
--------------------------------------------------------------------------------
Prepayments                                                  7                12
--------------------------------------------------------------------------------
Total long-term receivables and prepayments                145               252
--------------------------------------------------------------------------------



10. Inventories


                                                  30 June 2014  31 December 2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Properties purchased and being developed for            13,230            10,762
 resale                                                                         
--------------------------------------------------------------------------------
Materials and finished goods                                 9                 5
-------------------------------------------------              -----------------
Prepayments for inventories                                 16                13
--------------------------------------------------------------------------------
Total inventories                                       13,255            10,780
--------------------------------------------------------------------------------



Properties purchased and being developed for resale
In thousands of euros                              
---------------------------------------------------
Balance at 31 December 2013                  10,762
---------------------------------------------------
Properties purchased for development            120
---------------------------------------------------
Construction costs of apartment buildings     2,430
---------------------------------------------------
Capitalized borrowing costs                     110
---------------------------------------------------
Other capitalized costs                          34
---------------------------------------------------
Cost of sold properties                        -226
---------------------------------------------------
Balance at 30 June 2014                      13,230
---------------------------------------------------



 11. Investment property


In thousands of euros                
-------------------------------------
Balance at 31 December 2013    11,331
-------------------------------------
Capitalised development costs       5
-------------------------------------
Balance at 30 June 2014        11,336
-------------------------------------



12. Loans and borrowings


                    As at 30 June 2014               As at 31 December 2013     
--------------------------------------------------------------------------------
              Total      of which     of which   Total     of which     of which
                          current  non-current              current  non-current
                          portion      portion              portion      portion
--------------------------------------------------------------------------------
In                                                                              
 thousands                                                                      
 of euros                                                                       
--------------------------------------------------------------------------------
Bank loans   16,002         1,749       14,253  14,121       12,576        1,545
--------------------------------------------------------------------------------
Bonds           911             0          911     751            0          751
--------------------------------------------------------------------------------
Finance          19            12            7      25           13           12
 lease                                                                          
 liabilitie                                                                     
s                                                                               
--------------------------------------------------------------------------------
Total        16,932         1,761       15,171  14,897       12,589        2,308
--------------------------------------------------------------------------------



In 6 months 2014, the group settled loans and borrowings of 545 thousand euros
(in 6 months 2013: 2,926 thousand euros) through cash transactions and raised
new loans of 2,581 thousand euros (in 6 months 2013: 1,420 thousand euros). 

Balance of loans and borrowings is increased in first 6 months 2014 mainly due
to loan used for financing the construction of Manastirski Livadi project II
stage in Bulgaria. The open limit of the loan was used in amount of 2,007
thousand euros in 6 months 2014. There was also made repayments of the same
loan in total amount of 252 thousnad euros. 

On 21 March 2013, Arco Vara AS issued bonds as targeted issue in total amount
of 160 thousand euros. The bonds maturity date is 20 June 2015 and annual
interest rate is 9.8%. See also note 15. 

In June 2014, the group agreed with Piraeus bank the changes in terms of the
bank loan raised by the group’s Bulgarian subsidiary. As a result, 1,200
thousand euros will be payable in year 2014 and the repayment term of the
remaining loan amount of 10,954 thousand euros was prolonged up to December
2017. 



13. Payables and deferred income


                                               30 June 2014  31 December 2013
-----------------------------------------------------------------------------
In thousands of euros                                                        
-----------------------------------------------------------------------------
Trade payables                                          503               464
-----------------------------------------------------------------------------
Miscellaneous payables                                  319                15
-----------------------------------------------------------------------------
                                                                             
-----------------------------------------------------------------------------
Taxes payable                                                                
-----------------------------------------------------------------------------
Value added tax                                         106               172
-----------------------------------------------------------------------------
Corporate income tax                                     56                11
-----------------------------------------------------------------------------
Personal income tax                                      18                20
-----------------------------------------------------------------------------
Social security tax                                      33                41
-----------------------------------------------------------------------------
Other taxes                                             273               270
-----------------------------------------------------------------------------
Total taxes payable                                     486               514
-----------------------------------------------------------------------------
                                                                             
-----------------------------------------------------------------------------
Accrued expenses                                                             
-----------------------------------------------------------------------------
Interest payable                                         89                 8
-----------------------------------------------------------------------------
Payables to employees                                   126               132
-----------------------------------------------------------------------------
Other accrued expenses                                   12                38
-----------------------------------------------------------------------------
Total accrued expenses                                  227               178
-----------------------------------------------------------------------------
                                                                             
-----------------------------------------------------------------------------
Deferred income                                                              
-----------------------------------------------------------------------------
Prepayments received on sale of real estate             855               575
-----------------------------------------------------------------------------
Total deferred income                                   855               575
-----------------------------------------------------------------------------
                                                                             
-----------------------------------------------------------------------------
Total short-term payables and deferred income         2,390             1,746
-----------------------------------------------------------------------------



14. Sale of a subsidiary



On 14 February 2014, Arco Vara AS divested its 100% share in Arco Ehitus OÜ to
the company Stratcorp OÜ. The sale price of the share included two parts: 

1) 10 thousand euros paid on transfer of the share;

2) 30% out of the amount, that Arco Ehitus OÜ will gain from actions brought by
Arco Ehitus OÜ through Ministry of Education and Research and OÜ Loksa
Haljastus. Income tax is deducted from proceeds. 

The group’s gain on the transaction amounted to 652 thousand euros not
considering the impact of sale price. As a result of the divestment, the
group’s liabilities decreased by 1,020 thousand euros and its assets declined
by 368 thousand euros. 

Effect of subsidiary’s sale on the group’s statement of financial position
---------------------------------------------------------------------------
In thousands of euros                                                     
--------------------------------------------------------------------------
Decrease in cash                                                       -18
--------------------------------------------------------------            
                                                              ------------
Decrease in receivables                                               -300
--------------------------------------------------------------            
                                                              ------------
Decrease in inventory and property, plant and equipment                -50
--------------------------------------------------------------            
Decrease in liabilities and prepayments collected                    1,020
--------------------------------------------------------------------------
Total effect on the group’s net assets                                 652
--------------------------------------------------------------------------

Through the sale of Arco Ehitus OÜ, the group completed the exit from
construction activities. That was one of the targets for the group during 2013.
Therefore, construction business line income and expenses are presented as
discontinued operations, and construction business line assets and liabilities
are presented as sales group assets and liabilities. 



Components of net profit/loss from discontinued                                 
 operations                                                                     
                                          6 months      6 months      Q2      Q2
                                              2014          2013    2014    2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Revenue                                          0         2,435       0   1,348
--------------------------------------------------------------------------------
Cost of sales                                    0        -2,202       0  -1,226
-------------------------------------              --------------        -------
Aministrative expenses                         -13          -174       0     -96
--------------------------------------------------------------------------------
Other operating income and expenses              0            -1       0       1
-------------------------------------              --------------        -------
Net profit/loss from discontinued              -13            58       0      27
 operations                                                                     
--------------------------------------------------------------------------------



Sales group assets and liabilities                                   
                                                     31 Decemebr 2013
---------------------------------------------------------------------
In thousands of euros                                                
---------------------------------------------------------------------
Cash and cash equivalents                                          80
---------------------------------------------------------------------
Receivables and prepayments                                       717
----------------------------------------------------                 
                                                    -----------------
Inventories                                                        44
----------------------------------------------------                 
                                                    -----------------
Property, plant and equipment and intangible assets                 6
----------------------------------------------------                 
Total sales group assets                                          847
---------------------------------------------------------------------
Liabilities and prepayments                                     1,488
---------------------------------------------------------------------
Total sales group liabilities                                   1,488
---------------------------------------------------------------------



15. Related party disclosures



The group has conducted transactions or has balances with the following related
parties: 

1)     the group’s joint ventures and associates;

2)     companies under the control of the chief executive and the members of
the supervisory board of Arco Vara AS that have a significant interest in the
group’s parent company; 

3)     other related parties – the chief executive and the members of the
supervisory board of Arco Vara AS and companies under their control (excluding
companies that have a significant interest in the group’s parent company). 

Transactions with related parties                                               
                                                           6 months     6 months
                                                               2014         2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Joint ventures and associate                                                    
--------------------------------------------------------------------------------
Revenue                                                           0            1
--------------------------------------------------------------------------------
Services purchased                                               12            0
--------------------------------------------------------------------------------
Provision of loans                                                3            8
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Companies that have a significant interest in the                               
 group’s parent company                                                         
                                                       -------------------------
Services purchased                                               12            0
--------------------------------------------------------------------------------
Bonds issued                                                    150            0
--------------------------------------------------------------------------------
Paid interest                                                    39            0
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other related parties                                                           
--------------------------------------------------------------------------------
Services sold                                                     2            0
--------------------------------------------------------------------------------
Services purchased                                                2           19
--------------------------------------------------------------------------------
Paid interest                                                    18            0
--------------------------------------------------------------------------------



                                                                                
Balances with related parties                                                   
                                                          30 June    31 December
                                                             2014           2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Joint ventures and associate                                                    
--------------------------------------------------------------------------------
Trade payables                                                  2              0
--------------------------------------------------------------------------------
Short-term loan receivables                                    36             33
--------------------------------------------------------------------------------
Short-term interest receivables                                 1              1
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Companies that have a significant interest in the                               
 group’s parent company                                                         
                                                      --------------------------
Trade payables                                                  6              3
--------------------------------------------------------------------------------
Bonds issued                                                  650            500
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other related parties                                                           
--------------------------------------------------------------------------------
Trade receivables                                               0              0
--------------------------------------------------------------------------------
Trade payables                                                  0              7
--------------------------------------------------------------------------------
Bonds issued                                                  251            251
--------------------------------------------------------------------------------

On 21 March 2014, Arco Vara AS issued bonds as targeted issue in total amount
of 160 thousand euros. 150 thousand euros out of the total issued bonds were
subscribed by the companies that have significant interest in the group’s
parent company. The bonds maturity date is 20 June 2015 and annual interest
rate is 9.8%. The issued bonds are guaranteed with mortgage on property that
belongs to the subsidiary of Arco Vara AS. See also note 12. 

In 6 months 2014, the remuneration provided to the group’s key management
personnel, i.e. the chief executive/member of the management board and the
members of the supervisory board of the group’s parent company, including
social security charges, amounted to 54 thousand euros (in 6 months 2013: 121
thousand euros). The remuneration provided to the chief executive/member of the
management board is based on his service contract. The termination benefits
agreed with Tarmo Sild, who was appointed chief executive officer/member of the
management board of Arco Vara AS in October 2012, amount to up to five months’
basic board member remuneration. The basis for the remuneration provided to the
members of the supervisory board was changed since July 2013. According to the
resolution of the general meeting of Arco Vara AS, the members of the
supervisory board will get paid 500 euros (net amount) for every participated
meeting but not more than 1,000 euros (net amount) per month. The payment of
the renumeration is made dependent on the signing of the minutes of the
meetings of the supervisory board. The group’s key management personnel was not
provided or paid any other remuneration or benefits (bonuses, termination
benefits, etc) in first 6 months 2014. 

In favor of chief executive/member of management board is issued convertible
bond, which gives him the right to subscribe up to 390,000 ordinary shares of
Arco Vara AS for 0.7 euros per share during the year 2016. 



16. Events after the reporting date



The extraordinary general meeting of shareholders of Arco Vara AS held on 4
July 2014 adopted the decision to approve the issuance of 3.5 million new
shares with the nominal value of 0.7 euros per share and the issuance price of
1 euro per share, therefore the amount of share premium will be 0.3 euros per
share. The subscription period will be from 8 August until 29 August 2014 and
pre-emptive right of subscription have shareholders who are in the list of Arco
Vara AS shareholders as at 7 August 2014. 

The share capital would increase by 2,450 thousand euros and new share capital
amounts to 5,769 thousand euros if share issue succeeds in planned volume. The
increased share capital will consist of 8 241 707 shares with the nominal value
of 0.7 euros per share. The owners’ equity of the group would increase by 3.5
million euros as a result of full-scale share issue. 



Statement by the chief executive/member of the management board



The chief executive/member of the management board of Arco Vara AS has prepared
Arco Vara AS’s condensed consolidated interim financial statements for the
second quarter and six months ended 30 June 2014. 

The condensed consolidated interim financial statements have been prepared in
accordance with IAS 34 Interim Financial Reporting and they give a true and
fair view of the financial position, financial performance and cash flows of
Arco Vara AS. Arco Vara AS is a going concern. 



Tarmo Sild

Chief Executive and Member of the Management Board of Arco Vara AS

+3726144630

[email protected]



7 August 2014