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Arco Vara AS Audited Consolidated Annual Report 2014

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KEY PERFORMANCE INDICATORS

The group’s revenue for 2014 from continuing operations was 9.2 million euros,
declined by 1.5 million euros (14.6%) compared to year 2013. Revenue of Service
division increased 6% on yearly basis up to 3.1 million euros. Revenue of
Development division was 6.5 million euros in 2014 (in 2013: 8.1 million
euros), having decreased by 19.4%. The main reason for decrease of revenue in
Development division is because the group’s development projects are in such a
stage, where revenue is not yet accrued. Most of Development division revenue
in 2014 was accrued in the last quarter of the year when sale of apartments to
clients amounted to 4.9 million euros. 

In 2014, the group earned operating profit from continuing operations of 2.3
million euros and net profit from continuing operations of 1.1 million euros.
In previous year, the corresponding figures were 4.5 million euros and 3.5
million euros respectively. Better profit figures in 2013 were due to the
reversal of provisions and revaluation of assets and liabilities in total
amount of 3.3 million euros (in 2014: 0.5 million euros). The group ended year
2014 with net profit of 0.8 million euros (in 2013: 3.4 million euros). 

Equity to assets ratio has been recovered compared to the year end 2013,
achieving 33.5% as at 31 December 2014. As at 31 December 2013, the ratio was
27.2%. In addition to the profitable operating activities reason contributing
to growth was also the share issue conducted in Q3 2014 which raised 1.3
million euros in equity. 

The balance of the group’s total assets is increased by 1.8 million euros in
2014. Main reason is increase of inventory through construction of Manastirski
Livadi II stage apartment building in Sofia. 

The group’s loan burden (net loans) have decreased by 0.8 million euros in
2014. As at 31 December 2014, the weighted average annual interest rate of
loans is 5.8%. This is a decrease by 0.2 percentage point since the end of year
2013 mainly due to very low Euribor rates in second half of 2014. 

In 2014, the group sold 77 apartments and commercial areas and 4 residental
plots (in 2013: 78 apartments and commercial areas and 5 residental plots) in
its own development projects. 

Group chief executive’s review

In 2014, focus was on restarting Arco Vara development activities. By the end
of year, development in Sofia with 135 apartments and smaller commercial spaces
- second stage of Manastirski Livadi, which construction started in November
2013, was finalised. Moreover, through adoption of detail plan we got building
right for up to 330 apartments for Paldiski road 70C property in Tallinn. The
plot was acquired in June 2013. 

Business activities remained profitable and at the same time were oriented to
growth. In 2013, profit was resulted mainly from successful release of the
group from liabilities and risks beyond the reach of the group and clearing the
balance sheet. But in 2014, significant role in profit had the group’s main
activities: sale of development products and provision of real estate services. 

The group achieved the targets set for year 2014: revenue exceeded 9 million
euros (targeted was 9 million euros), net profit was 0.8 million euros (target
was 0.5 million euros) and yield from selling development products exceeded
20%. The group’s return on equity did not exceed 20% yet, because about one
quarter of balance sheet consisted of assets not suitable for development.
Predominantly, this includes ‘land bank’ acquired in previous years in Latvian
and Estonian regions with low demand. The management is continuously working on
‘land bank’ to bring it to active development, to sell it or exchange it
against property more suitable to our goal: to be an active developer. 

Forecast and objectives for 2015

The management is predicting for the group at least 11 million euros as revenue
and at least 1 million euros as net profit in 2015. In addition to changes of
the general economic environment, the achievement of the forecast in 2015 and
the results of the group in 2015 – 2017 also depend on the following critical
intermediate results. 

(i) Final stabilisation of the Madrid Blvd loan and extension of important rent
contracts. By the reporting date, the group has made the repayment of the
principal in amount of 950 thousand euros, after which the loan balance dropped
below 11 million euros and the loan agreement is prolonged until December 2017.
The main tasks for the next couple of years will be: 1) to keep stable rental
income in amount of approx. 1 million euros and 2) sale of remaining apartments
in Madrid Blvd building (as at 31 December 2014 the sellable area is 3,762 m2)
at amount of approx. 1 million euros per year or letting out with annual yield
at least 6%. 

(ii) Sell out of apartments in Manastirski AB block by the end of the year.

(iii) Finishing the construction of Manastirski D-block (final stage of the
development project) in December 2015 and delivery and sale to the final
customers in 2016. 

(iv) Buying a new plot suitable for development in Sofia, with gross sellable
area (GSA) of at least 7,000 m2, on which to build in 2016 and sell to
customers in 2017. 

(v) The completion of the construction project for Paldiski road 70c first
stage and beginning construction in the fourth quarter 2015. The sellable
volume of first stage is predicted to exceed 120 apartments and the gross
sellable area (GSA) of apartments will be 8,000 m2. 

The sales of remaining completed products in Latvia also influences the results
to an extent, but the management board is not particularly optimistic about the
outlook of new developments in Latvia. The management board is the most
optimistic about the real estate market in Sofia, which is indicating the
strongest absolute demand, the increase of demand and the margins of the
developer. In Tallinn, the key issue is entering the market with a product
which would exceed the customers’ expectations by its properties, the developed
and added quality for apartment supply, and bring the using apartment usage
costs lower. Arco Vara does not need to bring more trees into the forest. 

Moreover, Arco Vara needs to strengthen its ability to gather and analyse
information about customers’ preferences and needs not fulfilled yet. It means,
that the work on development of service division data processing capabilities
will continue and second generation of Arco Vara information system (AVIS 2)
will be launched during the year. 

SERVICE DIVISION

In 2014, the sales revenue of the service division increased by 6% compared to
the previous year, up to 3,139 thousand euros (includes 451 thousand euros of
intra-group revenue). Sales revenue increased in Latvia and Bulgaria where
revenue from main activities of real estate agencies, brokerage and valuation
of real estate, increased by 17% in Latvia and very good 61% in Bulgaria. The
turnover of the Estonian real estate agency has decreased by 17% compared to
previous year mainly due to drop in revenue from valuation services in 2014 by
25%. 

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. But growth in Latvian remains mainly to the first half
of 2014 and is slowed down in second half of the year. It would not be a big
surprise to see further slow-down in 2015 due to adverse effect of recent
changes in laws that directly influencing real estate sales. In 2014, brokerage
of the group’s own development projects had 44% of Bulgarian agency’s revenue,
providing significant part of turnover of Bulgarian agency. 

All three real estate agencies finished the year 2014 with net profit: the net
profit of the Estonian agency was 48 thousand euros (in 2013: 156 thousand
euros), the net profit of the Latvian agency was 65 thousand euros (in 2013: 81
thousand euros) and the net profit of the Bulgarian agency was 90 thousand
euros (in 2013: 25 thousand euros). 

In addition to brokerage and valuation services, the service division also
provides real estate management and accommodation services in Bulgaria. The
revenue from real estate management was 148 thousand euros in 2014, including
105 thousand euros of which was intra-group revenue (in 2013: 135 thousand and
103 thousand euros, respectively). Revenue from accommodation services amounted
to 74 thousand euros in 2014 (in 2013: 24 thousand euros). The accommodation
services have been provided since July 2013. 

The number of staff in service division has been increased to 176 employees as
at 31 December 2014, growing by 15 people within a year. 

DEVELOPMENT DIVISION

In 2014, revenue of development division totalled 6,466 thousand euros, dropped
by 20% compared to previous year (in 2013: 8,049 thousand euros). Most of 2014
revenue from development activities accrued in fourth quarter due to getting
permit of use for two apartment buildings In November: for Manastirski Livadi
second stage building (with 135 apartments and smaller commercial spaces in
total) and for last stage building (with 14 apartments) in Bisumuiza-1 project
in Riga. In Q4 2014, 72 apartments were sold in these two projects. Information
on sold real estate properties in the group’s own development projects is
presented in following table. 

Most of other revenue of development division consisted of rental income from
commercial and office space in Madrid Blvd building in Sofia, amounted to 953
thousand euros in 2014 (in 2013: 956 thousand euros). 

In 2014, operating profit of development division was 1,942 thousand euros (in
2013: 5,100 thousand euros). In 2013, the impact of extraordinary items to the
profit amounted to 3,332 thousand euros and 521 thousand euros in 2014. 

As at 31.12.2014, the group had in stock 113 apartments and smaller commercial
spaces ready for sale, of which 109 in Bulgaria and 4 in Riga. Pre-sale
agreements were concluded to 48 apartments and commercial spaces in stock,
revenue from final sales will be accrued in first quarter of 2015. 

In fourth quarter 2014, after a year break, the sale of free apartments in
Madrid Blvd building restarted. In December, the first sale transaction was
concluded and as at the annual report date two more apartments have been
presold. 15 apartments and all parking places, out of all Madrid Blvd unsold
assets, are rented out. In Q4 2014, four more apartments were prepared for
letting out. 

In Bulgaria, the group will be coming to the end with preparations for the
construction of Manastirski Livadi D-block (also named as Manastirski III
stage). Construction will start in Q1 2015. The building will have 87
apartments and commercial areas with saleable area of nearly 6,900 m2 and
construction will be finished by the end of 2015. 

In the most important Estonian development project for the group, Paldiski road
70C, has been reached to the final stage of concluding first stage design
contract. The construction works of the apartment building (at least 120
apartments and 4-5 smaller commercial spaces) should start in fourth quarter of
2015. 

In February 2014, the group acquired as an addition to the land bank, two land
plots with building right for 2 apartment buildings (30 apartments with GSA of
2,100 m2) near Tallinn, at Instituudi tee 7 and 9 in Harku. In Q3 2014, the
development of the project was suspended due to the need to use the group’s
finances for carrying out best yielded projects (Paldiski road 70c foremost).
The sale of the development project could also be an option. 

As at 31 December 2014, 5 people were employed in development division, one
employee hired during a year. 

PEOPLE

As at 31 December 2014, 189 people worked for the group under employment or
authorization contract (178 at 31 December 2013). Employee remuneration
expenses in 2014 amounted to 2.5 million euros (in 2013: 2.5 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 taxes in 2014 amounted to 102 thousand euros (in 2013: 174 thousand
euros). 

The management board

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

The members of supervisory board

At the time of publishing the annual report, supervisory board of Arco Vara AS
consist of 5 members. As at 31.12.2014, the supervisory board had 7 members.
After the reporting date, extraordinary shareholders meeting held on 10
February 2015, previous supervisory board was recalled and new supervisory
board with 5 members was elected. Hillar-Peeter Luitsalu, Allar Niinepuu and
Rain Lõhmus, remained from the previous supervisory board and two new members
are Steven Yaroslav Gorelik and Kert Keskpaik. The members of previous
supervisory board Toomas Tool, Arvo Nõges, Aivar Pilv and Stephan David Balikn
will not continue in new board. 

SOCIAL RESPONSIBILITY

Main business lines of Arco Vara are real estate development, real estate
brokerage and valuation services. In our work, we follow principles which are
environmentally friendly and sustainable. 

We plan real estate developments which have excellent energy class and are
environmentally friendly and buildings fit well into surrounding. We turn
attention to construction quality of our buildings, because we would like to
create living environments, which will last for generations. 

Services we provide have noticeable weight in society. Customers invest to real
estate each year tens of millions of euros through our mediation and make
credit decision in almost the same volume based on our professional valuation.
It is important to achieve and to maintain operating real estate market which
is balanced informatively, making it also more sustainable. Each and every
client, out of thousands who purchase real estate mediated by us, has to make
balanced and informative decision and broker has to help client in getting the
right and timed information about object properties, merits and demerits and
alternatives. Each credit in form of real estate collateral should be supported
by objective expertise. Our brokers and valuators are aware of social
responsibility when providing services. 

In 2014, Arco Vara turned special attention to well-being of its employees and
improvement of working conditions – we replaced computers, renewed offices and
office furniture, organised joint events. In our everyday work we are following
sustainability principles by using digital possibilities – digital signature,
digital archiving and intra-office data processing without physical data
carriers. 

We inspire and encourage our people to participate voluntarily in charity
projects and contribute to environmental initiatives. Our people are
participating in support of orphanage children and activities for the benefit
of community. 

SHARE AND SHAREHOLDERS

Arco Vara AS has issued a total of 6,117,012 ordinary shares (as at 31 December
2013: 4,741,707 shares) with nominal value of 0.7 euros per share. The shares
are freely traded on NASDAQ OMX Tallinn stock exchange. In September 2014,
share capital was raised by issuing 1,375,305 new shares. As at 31 December
2014, the company had 1,668 shareholders and the share price closed at 0,828
euros, a decrease by 40.86% within 2014. During the year, the highest price per
share was 1.55 euros and the lowest price 0.821 euros. As at 31 December 2014,
market capitalization of shares amounted to 5,065 thousand euros (as at 31
December 2013: 6,638 thousand euros) and P/E ratio of the share was 5.5 (as at
31 December 2013: 1.9). 

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 31 December 2014, the weighted
average duration of interest-bearing liabilities was 2.3 years. At the end of
2014, the group’s cash and cash equivalents totalled 1.7 million euros (at the
end of 2013: 0.8 million euros). 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 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. The group does not use hedging
instruments to mitigate its long-term interest rate risk. In 2014, the group’s
interest-bearing liabilities has increased by 0.1 million euros and amounted to
15.0 million euros at 31 December 2014. In 2014, interest payments on
interest-bearing liabilities totalled 1.1 million euros (in 2013: 1.0 million
euros). The group’s weighted average loan interest rate is 5.8%. This is a
decrease by 0.2 percentage point within year 2014 mainly due to decreased
EURIBOR rates. 

Currency risk

Purchase and sales contracts are mostly signed in local currencies: euros (EUR)
or Bulgarian lev (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. Devaluation risk has decreased since the beginning of year 2014 because
Republic of Latvia transferred to euro. 

Corporate governance report

The shares of Arco Vara AS were listed in the main list of the Tallinn Stock
Exchange on 21 June 2007. As a listed company, Arco Vara AS (hereinafter also
“Company”) observes the laws and regulations that are effective in Estonia, the
rules and recommendations of NASDAQ OMX Tallinn Stock Exchange, and its own
core values. 

Together with the annual report the Company discloses its corporate governance
report in which the Management confirms the Company’s compliance with the
Corporate Governance Recommendations (‘the CGR’). Any instances of
non-compliance with the CGR are disclosed and the reasons for non-compliance
are explained. 

The annual report has been prepared in accordance with the guidance of the CGR.
The current corporate governance report is a separate section of the directors’
report, which is part of the Company’s annual report. 

I General meeting

The Company’s highest governing body is the general meeting of its
shareholders. The competence of the general meeting and the procedure for
convening general meetings and passing resolutions are set out in the Company’s
articles of association. 

In 2013, one annual general meeting and one extraordinary general meeting took
place. 

Annual general meeting

The annual general meeting was held on 5 June 2014 from 10:04 a.m. until 10:46
a.m. in Tallinn at Viru Square 4, in Bolero meeting room of Sokos Hotel Viru. 

Notice of the annual general meeting was given in the information system of the
Tallinn Stock Exchange and on the Company’s website on 14 May 2014. The notice
was published in the national daily newspaper Postimees on 14 May 2014. The
notice included information on where materials concerning the general meeting
had been made available, where shareholders could submit their questions and a
direct link to information on the agenda and relevant documents on the
Company’s website. The information was published in Estonian and in English. 

The proposals of the Supervisory Board were published in the notice of the
annual general meeting. On the agenda of the annual general meeting was the
following: 

·         approval of the annual report for 2013 and distribution of profit;

·         raising share capital;

·         appointment of Auditor.

The following decisions were adopted at the annual general meeting:

·         To approve the year 2013 annual report of Arco Vara AS and allocate
the net profit for the year ended on 31 December 2014 in the amount of 3 427
thousand euros to retained earnings. 

·         To appoint an auditor for one year (until the next annual general
meeting of shareholders) and appoint AS PricewaterhouseCoopers as the auditor.
To pay the auditor for auditing the 2014 annual report according to an
agreement to be signed between Arco Vara AS and AS PricewaterhouseCoopers. 

The meeting was chaired by Hannes Vallikivi, who is neither the chairman of the
Company’s Supervisory Board nor a member of the Company’s Management Board. The
meeting was attended by 52 shareholders whose votes represented 81.51% of total
voting power. The meeting was conducted in Estonian and the chairman of the
meeting made sure it was conducted smoothly. The meeting was also attended by
the member of the Management Board of the Company, Tarmo Sild, who gave an
overview of the company’s performance in 2013. 

Extraordinary general meetings

The annual general meeting was held on 4 July 2014 from 10:08 a.m. until 10:36
a.m. in Tallinn at Viru Square 4, in Bolero meeting room of Sokos Hotel Viru. 

Notice of the annual general meeting was given in the information system of the
Tallinn Stock Exchange and on the Company’s website on 11 June 2014. The notice
was published in the national daily newspaper Postimees on 12 June 2014. The
notice included information on where materials concerning the general meeting
had been made available, where shareholders could submit their questions and a
direct link to information on the agenda and relevant documents on the
Company’s website. The information was published in Estonian and in English. 

The extraordinary general meeting was convened at the request of shareholders
and their proposals were published in the notice of the extraordinary general
meeting. On the agenda of the annual general meeting was the following: 

·         raising share capital;

·         recall of the Supervisory Board;

·         Election of members of the Supervisory Board.

The decision to raise the share capital of the Company on the terms disclosed
in the notice was adopted at the extraordinary general meeting. 

The meeting was chaired by Hannes Vallikivi, who is neither the chairman of the
Company’s Supervisory Board nor a member of the Company’s Management Board. The
meeting was attended by 205 shareholders whose votes represented 89.93% of
total voting power. The meeting was conducted in Estonian and the chairman of
the meeting made sure it was conducted smoothly. 

The resolutions, minutes and materials of all general meetings held in 2014
were made available on the Company’s website. Information on the agenda items
of all annual and extraordinary general meetings as well as questions submitted
by the shareholders before the meetings and answers to those questions are
available online at least until the information on the next general meeting is
published on the Company’s website. 

II Management Board

Since 4 September 2009 the Management Board of the Company has had one member.
Since 22 October 2012, the CEO (and only member of the Management Board) of the
Company is Tarmo Sild. 

On assignment, three-year service contact was concluded with the member of the
Management Board. The member of the Management Board was not concurrently a
member of the Management Board or Supervisory Board of any other listed
company. 

When the member of the Management Board assumed office, service contract was
signed which sets forth the powers, obligations and responsibilities of the
member of the Management Board and also regulates the disbursement of his basic
remuneration. Remuneration was agreed taking into account the Management Board
member’s duties and activities and the Company’s current financial performance
and future prospects. Under the service contract, Tarmo Sild is entitled to
termination benefits equal to his five months’ basic board member remuneration
in case the contract is terminated without a good reason. The Management Board
member has an incentive scheme that is linked to the Company’s securities in
connection to which the shareholders decided on the annual general meeting on 1
July 2013 to increase the share capital of the Company conditionally by issuing
one convertible bond with the nominal value of 1,000 euros. The convertible
bond enables Tarmo Sild to subscribe for 390 thousand ordinary shares of the
Company in 2016 for 0.7 euros per share. 

In 2014, the remuneration of member of the Management Board member Tarmo Sild
(for the period 1 January 2014 to 31 December 2014) amounted to 88 thousand
euros (includes social security tax). In 2014, the member of the Management
Board was not paid any bonuses. 

The member of the Management Board has notified the Company of his interests
and involvement in the governing bodies of the companies which are not part of
the group. Holding certain ownership interests and being involved in the
governing bodies of other companies does not constitute breach of the
prohibition on competition. Under the service contract, the member of the
Management Board has agreed not to breach the prohibition on competition. In
addition, the Company’s internal regulations provide that no member of the
Management Board or staff may demand or accept for personal gain money or any
other benefits from third parties in connection with their work and may not
grant unlawful or unjustified benefits or discounts to third parties. 

III Supervisory Board

The Supervisory Board is responsible for planning and organising the operation
of the Company and overseeing the activities of the Management Board. Members
of the Supervisory Board of the Company are elected by the general meeting. 

Under the CGR, half of the members of the Supervisory Board of a listed company
have to be independent. In the event of an odd number of members in the
Supervisory Board, the number of independent members may be smaller by one.
Company’s Supervisory Board meets the CGR’s requirement regarding independent
members of the Supervisory Board. 

In 2014, there were no changes in the composition of the Company’s Supervisory
Board. During 2014, the composition of the Company’s Supervisory Board was the
following: Allar Niinepuu, Aivar Pilv, Arvo Nõges, Hillar-Peeter Luitsalu, Rain
Lõhmus, Stephan David Balkin, Toomas Tool. 

Members of the Supervisory Board elect the chairman of the Supervisory Board
from among themselves. Since 10 June 2013, the chairman of the Supervisory
Board is Hillar-Peeter Luitsalu. 

Since 1 July 2013, the members of the Supervisory Board are paid remuneration
in the amount of 500 euros (net amount) for each participated meeting but not
more than 1000 euros (net amount) per month. The payment of the remuneration is
dependent on the signing of the minutes of the meetings of the Supervisory
Board. The travel and living expenses of the members of the Supervisory Board
are not compensated. 

In 2014, the Supervisory Board had 4 meetings. Members of the Supervisory Board
attended the meetings as follows: 

·         Allar Niinepuu, Arvo Nõges and Hillar-Peeter Luitsalu - 4 meetings;

·         Rain Lõhmus - 3 meetings;

·         Aivar Pilv - 2 meetings;

·         Toomas Tool - 1 meeting;

·         Stephan David Balkin did not attend any of the meetings.

IV Cooperation of the Management and Supervisory Boards

In line with the Company’s articles of association and historical practice, the
Management and Supervisory Board cooperate closely. The Management and the
Supervisory Board hold joint meetings for discussing matters related to the
Company’s strategy and exchange information about the Company’s strategic
development on an ongoing basis. At the meetings, the member of the Management
Board informs the Supervisory Board about any deviations from the Company’s
plans and objectives and the reasons for those deviations. During the period
under review the member of the Management Board attended all meetings of the
Supervisory Board. 

The members of the Supervisory Board do not take part in everyday management of
the Company but the manager updates the Supervisory Board on regular basis of
important issues regarding planning the operations of the Company and business
activities. In addition the Supervisory Board is able to turn to the manager at
any time with additional questions and/or inquiries. In information exchange,
all parties observe the rules approved by the Supervisory Board for keeping and
disclosing inside information, making transactions with Company’s shares and
segregating the functions of the Management and Supervisory Board. It has
become customary that at the meetings of the Supervisory Board the manager
provides the members of the Supervisory Board an overview of important issues
and developments related to the Company. 

V Disclosure of information

Since the Company’s shares were listed in the Tallinn Stock Exchange, the
Company has disclosed information in accordance with the rules of the Tallinn
Stock Exchange, the laws of the Republic of Estonia and the principle that all
shareholders should be treated equally. 

The Company discloses information in the information system of the Tallinn
Stock Exchange and on its website at www.arcorealestate.com in Estonian and in
English. On the website, the information intended for shareholders is in the
“Investor Relations” menu. The Company discloses on its website all facts,
forecasts and estimates that have been disclosed to financial analysts or other
parties. Disclosed information includes inter alia information connected to the
general meetings and general information about the Company. General and more
specific information about the Company can be found in different menus of the
corporate website. The information is logically structured and easy to find. 

On the website the Company has posted its financial calendar until March 2016.

The Company’s website does not include information on shareholder agreements on
concerted exercise of shareholder rights because the Company is not aware that
such agreements have been concluded. 

The Company has not organised presentations to investors and analysts directly
before the release of a financial report and has never disclosed inside
information or unreleased financial data at meetings with analysts or
investors. 

VI Financial reporting and auditing

The consolidated financial statements of the Company are prepared in accordance
with International Financial Reporting Standards as adopted by the European
Union. Quarterly financial statements are prepared in accordance with IAS 34
Interim Financial Reporting and are designed to be read in conjunction with the
Company’s most recent consolidated annual financial statements. Quarterly
financial statements are not audited. 

The consolidated financial statements of the Company are audited. During recent
years it has become customary to appoint the groups auditor for the period of 3
years. But at the same time at yearly shareholders’ meeting the auditor is
appointed for the next financial year. At the shareholders’ meeting on 5 June
2014 AS PricewaterhouseCoopers was appointed as Company’s auditor for the next
financial year the third time in a row. While choosing the auditor the Company
considers the ratio of the auditing price and quality and also professionalism
to be important. In addition it is important for the Company that the auditor
is familiar with the group’s three main home markets – prerequisite for that is
the existence of the auditor company’s subsidiary in a country that is of great
importance to the group. 

For better risk assessment and management, the group entities that have active
financial activiry prepare a budget for the next financial year. The group’s
consolidated budget is approved by the Supervisory Board of the Company.
Execution of and adherence to approved budgets is monitored by the Company’s
CFO. 

To ensure high-quality financial reporting and to counteract the risks related
to financial reporting, the Company has created the position of a CFO. The CFO
participates actively in the preparation of the consolidated annual and
quarterly reports. The consolidated financial statements are prepared using
uniform group-wide cross-border financial accounting and reporting software.
Consolidation procedures have largely been automated and are performed monthly.
Monthly reporting is presented to the managements of relevant entities and
monthly consolidated reporting is presented to the group’s management. 

Consolidated financial statements

Consolidated statement of comprehensive income



                                                Note     2014    2013
In thousands of euros                                                
Continuing operations                                                
Revenue from rendering of services                      3,744   3,791
Revenue from sale of own real estate                    5,414   6,937
Total revenue                                   5, 7    9,158  10,728
                                                                     
Cost of sales                                     8    -5,902  -7,749
Gross profit                                            3,256   2,979
                                                                     
Other income                                      9        37     404
Marketing and distribution expenses              10      -324    -278
Administrative expenses                          11    -1,811  -1,676
Other expenses                                    9       -82    -196
Gain on reversal of inventory write-down         19       572     299
Gain on transactions involving joint ventures    12       -27   2,897
Gain on sale of subsidiaries                   12, 31     662      98
Operating profit                                        2,283   4,527
                                                                     
Finance income and costs                           13  -1,062    -972
Profit before tax                                       1,221   3,555
Income tax                                         14     -75       0
Net profit from continuing operations                   1,146   3,555
                                                                     
Discontinued operations                                              
Loss from discontinued operations                31      -324    -128
                                                                     
Net profit for the period                                 822   3,427
attributable to owners of the parent                      803   3,410
attributable to non-controlling interests                  19      17
                                                                     
Total comprehensive income for the period                 822   3,427
attributable to owners of the parent                      803   3,410
attributable to non-controlling interests                  19      17
                                                                     
Earnings per share (in euros)                    15                  
- basic                                                  0.15    0.72
- diluted                                                0.14    0.66



Consolidated statement of financial position


As at 31 December                                  Note    2014    2013
In thousands of euros                                                  
Cash and cash equivalents                           17    1,691     818
Receivables and prepayments                         18    1,205     656
Inventories                                         19   11,970  10,780
Assets belonging to sales group                     31        0     847
Total current assets                                     14,866  13,101
                                                                       
Investments in equity-accounted investees                     0       1
Receivables and prepayments                         18        5     252
Investment property                                 20   11,585  11,331
Property, plant and equipment                       21      434     459
Intangible assets                                   21      113      13
Total non-current assets                                 12,137  12,056
TOTAL ASSETS                                             27,003  25,157
                                                                       
Loans and borrowings                                22    3,194  12,589
Payables and deferred income                        23    2,659   1,746
Provisions                                          24      274     172
Liabilities belonging to sales group                31        0   1,488
Total current liabilities                                 6,127  15,995
                                                                       
Loans and borrowings                                22   11,826   2,308
Total non-current liabilities                            11,826   2,308
TOTAL LIABILITIES                                        17,953  18,303
                                                                       
Share capital                                       25    4,282   3,319
Share premium                                       25      292       0
Statutory capital reserve                           25    2,011   2,011
Other reserves                                      15      179      60
Retained earnings                                         2,250   1,452
Total equity attributable to owners of the parent         9,014   6,842
Equity attributable to non-controlling interests             36      12
TOTAL EQUITY                                              9,050   6,854
TOTAL LIABILITIES AND EQUITY                             27,003  25,157



Consolidated statement of cash flows


                                                            Note    2014    2013
In thousands of euros                                                           
Cash receipts from customers                                      10,812  10,516
Cash paid to suppliers                                            -8,945  -7,058
Taxes paid                                                        -1,150  -1,976
Taxes recovered                                                      805     189
Cash paid to employees                                              -866    -846
Other cash payments and receipts related to operating                -41    -218
 activities                                                                     
Net cash flow of discontinued operations                            -250    -317
NET CASH FROM OPERATING ACTIVITIES                                   365     290
                                                                                
Purchase of property, plant and equipment                            -71     -34
Proceeds from sale of property, plant and equipment                    0     118
Proceeds from sale of investment property                              0      80
Proceeds from sale of a subsidiary                           6        10   1,610
Proceeds from sale of an associate                                     1       0
Loans provided                                                        -3     -48
Placement of security deposits                                      -438    -263
Release of security deposits                                         701     258
Interest received                                                      5       7
Net cash flow of discontinued operations                               0     -56
NET CASH FROM INVESTING ACTIVITIES                                   205   1,672
                                                                                
Proceeds from loans received                                 22    4,885   3,046
Settlement of loans and finance lease liabilities            22   -4,800  -4,809
Interest paid                                                     -1,091    -964
Proceeds from share capital issue                            25    1,375       0
Other payments related to financing activities                       -76     -75
NET CASH FROM/USED IN FINANCING ACTIVITIES                           293  -2,802
                                                                                
NET CASH FLOW                                                        863    -840
                                                                                
Cash and cash equivalents at beginning of period             17      818   1,775
Decrease in cash and cash equivalents                                863    -840
Change in cash through purchase/sale of a subsidiaries       6        10     -37
Cash and cash equivalents reclassified to sales group        31        0     -80
 assets                                                                         
Cash and cash equivalents at end of period                   17    1,691     818



Consolidated statement of changes in equity



                 Equity attributable to owners of the parent    Non-cont   Total
                                                                 rolling  equity
                                                                interest        
                                                                       s        
               Share   Share  Statutory   Other  Retain  Total                  
              capita  premiu    capital  reserv      ed                         
                   l       m    reserve      es  earnin                         
                                                     gs                         
In thousands                                                                    
 of euros                                                                       
Balance as     3,319       0      2,011       0  -1,958  3,372        -5   3,367
 at 31                                                                          
 December                                                                       
 2012                                                                           
Formation of       0       0          0      60       0     60         0      60
 equity                                                                         
 reserve                                                                        
 (note 15)                                                                      
Total              0       0          0       0   3,410  3,410        17   3,427
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
Balance as     3,319       0      2,011      60   1,452  6,842        12   6,854
 at 31                                                                          
 December                                                                       
 2013                                                                           
                                                                                
Balance as     3,319       0      2,011      60   1,452  6,842        12   6,854
 at 31                                                                          
 December                                                                       
 2013                                                                           
Total              0       0          0       0     803    803        19     822
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
Increase of      963     292          0       0       0  1,255         0   1,255
 share                                                                          
 capital                                                                        
 (note 25)                                                                      
Formation of       0       0          0     119       0    119         0     119
 equity                                                                         
 reserve                                                                        
 (note 15)                                                                      
Change in          0       0          0       0      -5     -5         5       0
 non-control                                                                    
ling                                                                            
 interests                                                                      
Balance as     4,282     292      2,011     179   2,250  9,014        36   9,050
 at 31                                                                          
 December                                                                       
 2014                                                                           



Full text of Arco Vara's Annual Report 2014 is published on Arco Vara corporate
website http://www.arcorealestate.com 




         Marek Pontus
         CFO
         Arco Vara AS
         Tel: +372 614 4662
         [email protected]
         http://www.arcorealestate.com