EURO-FINANCE LTD. FINANCIAL STATEMENTS

Transcription

1 FINANCIAL STATEMENTS

2 CONTENTS PAGE STATEMENT OF THE BOARD OF DIRECTORS FOR THE ACTIVITY IN INCOME STATEMENT 20 BALANCE SHEET 21 CASH FLOW STATEMENT 23 EQUITY STATEMENT 24 NOTES TO THE FINANCIAL STATEMENTS 25 AUDITORS REPORT 40 ADDITIONAL INFORMATION 43 FINANCIAL STATEMENTS 1

3 ANNUAL REPORT OF THE BOARD OF DIRECTORS OF EURO-FINANCE AD FOR THE YEAR ENDING DECEMBER 31 ST, 2007 І. KEY INDICATORS Indicator Measure Year Net income from fees and commissions BGN 000 1,666 1, Net income from transactions on own account BGN Administrative expenses BGN 000 (1,117) (858) (714) Net profit BGN 000 1, Equity BGN ,143 2,606 2,310 Fixed capital BGN ,100 1,500 1,500 Return on equity % Clients assets under management BGN , ,892 67,380 ІІ. GLOBAL ECONOMIC ENVIRONMENT The year 2007 will be remembered for the large-scale credit crisis caused by the problems in the risk segment of the US mortgage market. While the financial sector in the USA and many countries of the OECD was experiencing problems, the world economy continued its growth at a steady pace 5.2% based on purchasing power parity according to estimates of the IMF. The high economic growth in emerging market countries was able to compensate for the continuing slowdown in eurozone economy (2.5% estimated GDP in 2007 as compared to 2.8% in 2006), US (1.9% estimated GDP in 2007 as compared to 2.9% in 2006) and Japan (2.0% estimated GDP in 2007 as compared to 2.2% in 2006). China and India remained the main drivers of the global economy (estimated GDP in % and 8.9% respectively) and together with Russia, they contributed to nearly one half of the world GDP growth in the previous year. While the single priority of the monetary authorities in 2006 was to combat inflation, they faced an essentially new challenge in 2007 they had to balance between the monetary stimulus to boost the economy and the goal of anchoring inflation. During the year, the Fed lowered its federal funds rate by 100 basic points from 5.25% to 4.25%. According to the majority of the market analyses, the US would continue to pursue loose monetary policy and the estimated level of interest rates in US in the end of 2008 would vary from 3.50% to 3.25%. The European Central Bank (ECB) was forced to halt its tightening cycle for an indefinite period of time, thus increasing the interest rates in the Euro-zone by merely 50 basic points from 3.50% to 4.00%. The downward trend of the US dollar remained intact due to many cyclic and structural factors, including the comparative equalization of the economic growth rates across countries and the narrowing of the interest rate differential between the US and the remaining countries, as well as the undermined confidence in the stability of the US financial sector after the bursting of the US mortgage subprime bubble. Diversification of foreign exchange reserves on the part of many central banks was another factor that undermined the confidence in the US currency. Last but not least, the US administration obviously welcomed the US currency depreciation as means of stimulating the economy, thus giving the green light to the US dollar devaluation. The single European currency rose by approximately 10% compared to the US dollar in the period from 01 January 2007 to 31 December FINANCIAL STATEMENTS 2

4 EUR/USD exchange rate and oil price movements in 2007 Source: Reuters In 2008, the world economy will continue to grow at a steady, though slower, rate of approximately 4.8% based on purchasing power parity according to estimates of the IMF. The leading emerging markets will continue to play the role of the main engine for global growth. The US economy will probably avoid recession but its growth rate will hardly exceed 2%. The main risk factor for the world economy during the year will be the high inflation. The rapid development of the Chinese and Indian economies, as well as the African economies has been the reason for the sharp increase in oil consumption worldwide. The serious imbalance between the demand and supply of the raw material made the oil price hit record highs of 100$/barrel. ІІІ. ECONOMIC ENVIRONMENT IN OUR COUNTRY Macroeconomic Indicators Indicator measure Year Real GDP growth % Inflation % Unemployment % Current account % of GDP Direct investment % of GDP Gross external debt, including: % of GDP public and publicly secured external debt % of GDP private unsecured external debt % of GDP according to estimates of the NSI for the nine months of with gross domestic product in 2006 \estimates of the NSI) amounting to EUR 25,099.6 million 3 as of November Source: Employment Agency. FINANCIAL STATEMENTS 3

5 4 as of November Source: BNG. With gross domestic product in 2006 (estimates of the NSI) amounting to EUR 25,099.6 million and 2007 estimate EUR million. 5 as of October Source: BNB. With gross domestic product in 2006 (estimates of the NSI) amounting to EUR 25,099.6 million and 2007 estimate EUR 28,583 million. Bulgaria has witnessed a high and stable economic growth since This positive trend remained unchanged in According to estimates of the National Statistical Institute (NSI), real GDP for the nine months of 2007 grew 5.7% compared to the first nine months of Catching up with income levels within the EU continues as well and according to estimates of Eurostat, GDP based on PPP per capita GDP in Bulgaria in 2007 was 38.7% of its level in the EU (EU 27), compared to 26.5% in According to the total business climate indicator calculated by the NSI in December 2007, the economic environment in the country remained favorable and the expectations about the business situation in the next twelve months were optimistic. The total business climate indicator was 24.6 points above its long-term average. The government s forecasts are that GDP will rise by 6.4% in 2008 and 2009, while EBRD estimates agdp growth rate of 6% for the same period. According to data of the Employment Agency, the unemployment in the country in November 2007 was 6.62%, a decrease of 2.07% compared to the same month of Increasingly, the shortage of labour force is mentioned as one of the main problems in the business environment. Over the whole year, more and more sources persistently defined the Bulgarian economy as overheating. The increasing current account deficit and rising rates of inflation were mentioned as the main signs of overheating. The excess domestic demand and high food prices caused an increase in the accumulated inflation up to 12.5% in A double-digit year inflation rate was last registered in 2000 when consumer prices rose 11.4%. In the three-year Convergence Program of the Republic of Bulgaria prepared and submitted to Brussels as part of the country s preparation for accession to the EMU, the government forecasts that the harmonized index of consumer prices will decrease to 4.5% by the end of 2008 in spite of the expected increases in gas prices, heat prices and prices of cigarettes. The benchmark level of the harmonized index of consumer prices in the end of 2010 is fixed at 3.6%. The increase of employment, surge in wages and high rates of credit expansion have contributed to the consumption boom, which, in turn, is one of the main factors for the increase in the trade gap. The high production and investment activity of local companies, together with the import of raw materials and supplies, of machinery and other investment goods necessary for the increase of the production capacity, mechanization and automation, the introduction of new technologies and replacement of old equipment also contribute to the deficit s increase. In order to prevent further deterioration in the current account deficit and to curb inflation, the Bulgarian government and BNB maintain a budget surplus and take measures to restrict the credit growth rate. At the end of November the budget surplus reached 7.2% of GDP expected for the year The government plans to tighten further the fiscal policy in order to secure that the budget surplus specified in the three-year Convergence Program amounts to 3% of GDP for the years 2008 and 2009 and 2.9% of GDP for the year The government and government-guaranteed debt at the end of November 2007 decreased by 7.78% compared to the beginning of the year and amounted to BGN 11,245.2 million or 22% of GDP far below the admissible level of 60% according to the Maastricht level. Global bonds and Eurobonds have the largest relative share in the debt structure by creditor types followed by the internal debt and debt to the World Bank. At the same time, the private unsecured external debt increased by more than 38% to EUR 21,550.8 million. ІV. FINANCIAL MARKETS IN BULGARIA AND THE OPERATIONS OF EURO-FINANCE AD The year 2007 was exceptionally successful and dynamic for the non-banking financial sector. All sectors of non-banking financial services registered considerable growth and demonstrated their potential for further development. FINANCIAL STATEMENTS 4

6 Banking activity retains its leading role in the sphere of financial intermediation but at the same time, there is a steady tendency for the activity in the field of non-banking services to increase. According to data of the FSC, all indices characterizing the depth of non-banking financial intermediation recorded considerable growth. During the year the stock market capitalization exceeded 50% of GDP. Depth of the Financial Intermediation, per Cent of GDP * Market capitalization of BSE Sofia Insurance and health insurance premiums 3.72% 4.25% 7.91% 10.55% 20.11% 31.20% 51.04% 1.61% 1.91% 1.94% 2.51 % 3.03% 2.59% 2.75% Net assets of the pension funds 0.63% 1.03% 1.48% 2.07% 2.65% 3.09% 4.37% Source: FSC * Estimated GDP amounting to BGN 54,864 million (source: Convergence Program of the Republic of Bulgaria). Market capitalization of BSE Sofia as of 19 December Estimates of FSC for net assets of the pension funds and premium income from insurers and health insurance companies. Under the new conditions, flexibility and individual approach aimed at achieving maximum satisfaction of the client will remain the main advantages of EURO-FINANCE AD will still be. To this end, a key role plays the ongoing successful development of the operations of EURO- FINANCE AD in three main directions 1) securities transactions on the financial markets; 2) individual portfolio management, and 3) investment banking. 1. SECURITIES TRANSACTIONS ON THE FINANCIAL MARKETS Money Markets and Debt Securities Markets The risk of recession for the European economy manifested itself in the flattening of the yield curve (narrowing of the spread between 2- and 10-year European government treasury bonds). The leading central banks took series of measures, including coordinated ones, to increase the liquidity of the money market, resulting in a decrease in short-term interest rates on the inter-bank market and normalization of the yield curve. The spread between the 10- and 2-year benchmark bonds increased to basis points at the end of the year (for comparison, this spread was close to 0 basis points in the mid-year). Yields of 2-year and 10-year Eurobenchmark bonds in Source: Reuters FINANCIAL STATEMENTS 5

7 Under the currency board, interest rates on the inter-bank money market in Bulgaria followed the European money market trends. The global financial crisis have not impeded the ongoing credit expansion in the country. A clear example of this fact was the increase in the minimum reserve requirements from 8% to 12% effective as of 1 September This measure was aimed at draining liquidity from domestic demand. The substantial increase in the supply of internal debt and the central bank restriction aimed at draining short-term liquidity caused an upward shift in the domestic yield curve. This step has considerably normalized the distorted situation of 2006 when as a result of zero net issuance of internal debt and considerable demand from end buyers (pension funds and insurance companies), the yield of Bulgarian government securities almost caught up with the yield of Eurobenchmark bonds whose credit rating was much higher. The pursuance of higher yield and the significant lowering of the federal funds rate in the US (from 5.25% to 4.25%) caused global investors to show stronger interest in emerging markets debt. The risk premium of emerging market debt fell to an all-time low against the US treasury bonds, thus reflecting the improved economic situation in many developing countries. Prices of Bulgarian Eurobonds in 2007 Eurobonds 2013 EUR Source: Bloomberg Eurobonds 2015 USD Money Market Deposits were once again the most widely used instrument on the money market in the country and the volume of over-night deposit operations represented more than 90% of the volume of all deposits traded over the year. The existing opportunities for flexible management of the company s cash flow led to a significant increase in the number and volume of deposits traded in the country and their relative share of the total number of granted deposits was 81.7% in In the previous year, the number of concluded deposit operations increased by 54% as compared to At the same time, triggered by the increase in the interest rates in the Eurozone (in Bulgaria respectively), the average deposit term fell down to 1.6 days in 2007 (2.9 days in 2006 and 5.2 in 2005). Total traded deposits Number of deposits Par Number of deposits Par Total for the period, including: 787 2,202,936,128* 511 1,120,107,072* denominated in BGN ,705, ,840,000 denominated in EUR ,335, ,832,400 denominated in US dollars ,873, ,595,935 *in BGN according to the fixing rate of BNB as of 31 December 2007 FINANCIAL STATEMENTS 6

8 In 2007, EURO-FINANCE AD continued to invest in shares of CF Sentinel-Rapid as an eligible alternative to bank deposits and repo-transactions in securities on the money market. The net asset value of CF Sentinel-Rapid exceeded BGN 2.1 million by the end of Primary Market of Government Securities under Regulation No. 5 of BNB and MF The main objective of the government debt management policy pursued by the MF in 2007 was to secure the functioning of a more efficient primary market and more liquid secondary market of internal debt. In pursuance of these objectives, the total amount of internal debt increased by approximately BGN 300 million while the share and the amount of medium-term and long-term securities registered an increase in terms of maturity structure and issue volumes of government securities. The average annual yield achieved on auctions organized during the year was increasing gradually, following the direct ratio between the yield on Bulgarian government bonds and the yield on euro benchmark debt. The increase the benchmark refi rate in the Euro-zone related to the anti-inflationary policy pursued by the European Central Bank had a negative impact on the demand for government securities, which, in turn, led to lower debt-to-equity ratios as compared to The yield on long-term and medium-term government securities increased by basis points compared to The implementation of the new European regulations in the field of securities and financial instruments markets called for significant changes in the legal framework governing the primary and secondary market of government securities. New Criteria for selection of primary dealers of government securities were approved, aiming at heightening the minimum requirements for a market share on the primary market of government securities and establishing such requirements for the secondary market. Participation of EURO-FINANCE AD on the primary market of government securities under Regulation No. 5 of BNB and MF BGN Total par placed by MF 640, , , ,129 Total par of filed orders 21,600 17,650 27,594 26,282 Total par of approved orders 7,739 7,664 7,808 10,517 Secondary Markets of Debt Securities The quick development of the market in corporate bonds in the country, increased competition in this market segment, the general upward movement of interest rates in the Eurozone and the effect of the global credit crisis caused the yield on corporate debt to get ahead of the yield on government securities of equal maturity. Other significant advantages of corporate bonds over government securities are the better liquidity and the considerable diversity in terms of interest, currency and maturity structure. The aim of EURO-FINANCE AD to optimize client portfolio yields made it necessary to further re-allocate the investments from the sector of government securities to the market segment of mortgage and corporate bonds issued by local entities. Once again, the Company s investments in this market segment grew both in terms of turnover (+14%) and in terms of total number of concluded transactions (+22%). Taking into account the ongoing devaluation of the US currency (-10% on annual basis compared to BGN), EURO-FINANCE AD did not invest in foreign government and corporate debt securities denominated in US dollars during the year. Transactions in foreign bonds denominated in euro were reduced considerably due to the unfavorable dynamics of the European debt markets. The free funds were redirected to the local stock and bond market where the investment options were relatively better. FINANCIAL STATEMENTS 7

9 Debt securities transactions on a secondary market BGN 000 Government securities transactions under Regulation No. 5, including: Number of transactio ns Par Number of transactio ns Par , ,809 transactions with primary dealers 22 28, ,331 transactions with clients , ,478 Transactions in debt securities issued by local banks and companies, including: , ,907 on the floor of BSE Sofia AD , ,459 on OTC market , ,746 Capital Market The Bulgarian Stock Exchange (BSE) entered a new phase of development. The indexes hit record highs while the volumes exceeded considerably the levels from the previous year. An impressive number of initial public offerings were concluded through the stock exchange, amounting to more than BGN 800 million in terms of raised capital. The market capitalization of BSE reached nearly BGN 29 billion, representing 55.46% of the country s estimated GDP according to data from BNB. In comparison, the market capitalization of BSE equaled 31.20% of GDP in The registered volume of the exchange marked a record increase of %, reaching the value of BGN 9.95 billion. The indexes demonstrated considerable ascending trends in the end of the year. The wide-scope BG40 closed the year with the highest growth of %. The value of the SOFIX index increased 44.42%. Besides the new record highs of the indexes, the year 2007 was also characterized by a considerable volatility in the second half. After active ascending movements in the summer and autumn, the indexes reached all-time records in October. On 30 October, the blue chip index SOFIX registered its highest level of 1, points, the broader BG40 index hit a new record high at the level of points, followed by probably the deepest correction in its history, which led it to a level below 500 points. On 20 November 2007, the broad-based BG40 index marked a single-day decline of 4.80% to points, a record daily decline in its history. The registered trade volume on the stock exchange hit a record high of %. On 03 September 2007, BSE introduced two new indexes: BGTR30 based on the price performance of the shares with the greatest market capitalization, included in the index portfolio, as each issue has equal weight, and BGREIT tracking the movement of the shares of SPVs intended for securitization of real property or land. The number of newly-listed issues on BSE was record in the last year 102 issues, of which: initial public offering (IPO) 9, secondary public offerings (SPO) 9, SPVs 20, bonds 30, shares of mutual funds 13, and capital increases new public companies were listed for trade while the shares of twenty-three companies were delisted during Thus, by the end of December, the public companies amounted to 373, of which 54 were bond issuers. According to the official statistics of the stock exchange, all market segments for trade in shares marked a considerable growth during the preceding year while a negative change was noticed on the segments of trade in compensatory instruments, the unofficial market of other securities, as well as the centralized public auctions. FINANCIAL STATEMENTS 8

10 SOFIX BG 40 BG REIT BG TR Change 1, , % Change % Change N/A N/A Change 1, N/A N/A Source: Reuters BSE Change Turnover (BGN) 9,945,805,785 3,384,155, % Transactions 490, , % Lot volume 1,110,739, ,378,340 45% Market capitalization 28,986,859,813 15,314,018,541 89% In view of the general dynamics of the capital market, EURO-FINANCE AD was an active participant on all market segments. In the annual rankings of investment intermediaries EURO-FINANCE AD was ranked 8th among the non-banking financial institutions in terms of turnover, with concluded transactions with a total value of BGN 270,974,647.02, and 12 th in terms of number of transactions, with total of 24,909 registered transactions on BSE. EURO-FINANCE AD Change Transactions 24,909 9, % Turnover (BGN) 270,974,647 97,773, % Lots 65,776,890 29,306, % The number of orders placed through EURO-FINANCE AD increased considerably in Of total 33,461 orders, 26,546 were orders for trading in shares on BSE, of which 19,970 orders were submitted via the electronic platform EFOCS (Euro-Finance On-line Customer Service). In comparison with 2006, the number of orders placed on BSE and generated through EFOCS increased four times. For the transactions in shares listed on BSE, EURO- FINANCE AD concluded 24,280 transactions, of which 14,421 transactions by orders submitted by the clients via EFOCS. FINANCIAL STATEMENTS 9

11 Derivative Market / Financial Engineering EURO-FINANCE LTD. In response to the increased interest on the part of its clients, EURO-FINANCE AD opened a margin account for trade in derivatives on precious metals and oil. The product called Contract for Differences retained its position in the product portfolio of EURO-FINANCE AD. The option to access the service via the company s electronic platform EFOCS increased the turnovers and facilitated the flexible management of individual portfolios with an aggressive profile. Foreign Exchange Market In 2007, the Bulgarian lev rose nearly 10% against the US dollar and the fixed exchange rate of BNB hovered between (12 January) and (27 November), reflecting the changes in the exchange rate of the euro vs the US dollar on the international forex markets. The average exchange rate for the year was The total volumes traded on the inter-bank forex market in the country continued to grow at an impressive rate, reaching the record 255 billion (according to data of BNB), which represented a growth of more than 220% compared to 2006 when the annual turnover amounted to merely 78.6 billion. The underlying cause of the growth was the activation of trading in the euro after Bulgaria s accession to the EU since its share in the foreign exchange trade of the country exceeded 95%. Many foreign trade companies switched over to settlements in euro due to the ongoing devaluation of the US currency and the lack of welldeveloped local market for currency risk hedging. A clear indication of this fact is that the US dollar buy/sale transactions in the end of the year were hardly 1.5% of the total foreign exchange turnover compared to 6.4% in the beginning of 2006 and 15% in In 2007, EURO-FINANCE AD continued to cover the whole range of foreign exchange transactions, including cash transactions, account transactions, margin FX via its own electronic platform EFOCS, forward and swap transactions. The total turnover of foreign currency transactions increased nearly 4 times due to the activation of margin trade through the EFOCS system. As a result of the larger traded volumes, the foreign exchange gains and revaluations increased by 87.7%. The total number of contracted foreign exchange transactions (including account transactions and cash transactions at single value exceeding BGN 15 thousand) increased by 11% compared to the previous year. The table below shows numerical indicators compared to the same indicators for CHANGE IN % Amount of currency bought (in BGN 000) 142, , % Exchange difference 62, , ,7% * In the table above the amount of foreign currency bought is denoted in BGN based on bid prices for the respective currencies. The percentage increase in the total transactions volume in original currencies is actually larger than the one shown in the table owing to the depriciation of the US dollar. 2. INDIVIDUAL PORTFOLIO MANAGEMENT Individual portfolio management is still one of the accents in the wide range of investment services offered by EURO-FINANCE AD. On the one hand this product is the ideal barometer of clients assessment of our professional work as it involves unreserved confidence in the company. On the other hand, by this product, we put into practice our idea of individual approach to every client by getting acquainted with their financial attitudes and modeling the most suitable individual solutions. A typical feature of the last year was the change in clients attitudes towards a riskier profile of the portfolios. Due to the more frequent selection of a balanced and aggressive portfolio on account of the conservative type, the weight of balanced portfolios increased more than three times, the average weight of aggressive portfolios climbed nearly 11 times while the share of conservative portfolios decreased more than twice in the end of FINANCIAL STATEMENTS 10

12 Another typical feature of the year 2007 was the establishment of portfolios for a longer period 2 years, 3 years. We consider this fact very positive and evidence of the improved investment culture of our clients. Relative share of risk profiles according to the assets' volume as of December 31, % 1.17% Relative share of risk profiles according to the assets' volume as of December 31, % 29.07% Conservative Balanced Aggressive 81.05% 58.20% Conservative Balanced Aggressive By the end of 2007, EURO-FINANCE AD managed assets in the form of individual portfolios amounting to more than BGN 31 million and their number increased by more than 30% - from 69 at the beginning of the year to 90 in the end of the year. Also, the average number of portfolios per client increased (1.30 at the beginning of the year and 1.36 in the end of the year) this indicator reveals the fact that an increasing number of clients possess more than one portfolio with a different profile or with different duration. Ultimately, these positive trends in the individual portfolio management in 2007 were the result of the good performance of EURO-FINANCE AD. The company achieved very good results with all the three risk profiles conservative, balanced and aggressive. The yield achieved in 2007 was higher than the yield in 2006 and was considerably higher than the yield of the relevant benchmarks in 2007, with balanced portfolios exceeding the reference yield by more than three times and aggressive portfolios recording sixteen times higher yield. Comparison between the average annual yield of conservative portfolios and the reference yield Comparison between the average annual yield of balanced portfolios and the reference yield % 3.37% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 8.88% 6.92% 11.05% 3.27% г 2007г 0.00% 2006г 2007г. Conservative portfolio Balanced portfolio Reference yield* Reference yield* 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Comparison between the average annual yield of aggressive portfolios and the reference yield 28.29% 12.29% 2006г 2007г. Aggressive portfolio Reference yield* 51.28% 3.16% * The EuroMTS Government Bond Index (1-3) and S&P500 index serve as benchmarks. Reference yields are as follows: for a conservative portfolio 90% of the yield of EuroMTS Government Broad Index (1-3); for a balanced portfolio 45% of the yield of EuroMTS Government Broad Index (1-3) and 45% of the yield of S&P500; for an aggressive portfolio 90% of the yield of the S&P500 index. FINANCIAL STATEMENTS 11

13 3. INVESTMENT BANKING 2007 was another successful year for the investment banking business of EURO-FINANCE AD. Many investment projects and consulting services were implemented and delivered in the field of corporate management, investments in securities, corporate finance and restructuring. The main group of projects in this sphere was related to the provision of various investment services to companies from the group of EUROHOLD BULGARIA AD, a part of which is EURO-FINANCE AD. A priority project in the beginning of 2007 was the listing of the shares of EUROHOLD BULGARIA AD /EUBG/ on the BSE-Sofia AD and the formation of a 30% free float. In the mid-february 2007, the shares were introduced for trading on the stock exchange, which was preceded by the statutory tender offer prepared and completed by EURO-FINANCE AD on behalf of the majority owner. Orders totalling BGN 62 million were submitted to the organized auctions. The Holding s good growth prospects and the high liquidity of the stock made EUBG s shares one of the most preferred exchange investments. Subsequently, in April 2007, the Financial Supervision Commission /FSC/ approved the prospectus prepared by EURO-FINANCE AD for public offering of shares of EUROHOLD BULGARIA AD through capital increase. Shares worth BGN 41.9 million were subscribed and paid in the process of offering. The funds raised were used for the development of the financial companies within the holding and for new acquisitions in accordance with the investment plans announced by the holding. The shares of EUBG grew more than 100% in the second half of 2007 and were included in the stock exchange indexes of BG 40 and BG TR30. In November 2007, the shares of ETROPAL PLC, part of the holding s manufacturing division, were registered for trading on BSE-Sofia AD after the FSC had approved the prospectus for admission to trading on a regulated market prepared by EURO-FINANCE AD. 21.3% of the company was sold at the auction. EUROHOLD BULGARIA AD said it will use the funds accumulated from the sale of the shares, amounting to BGN 8 million, for development of the companies within the group. In 2007, EURO-FINANCE AD continued its cooperation with the insurance company within the group, IC EUROINS AD by implementing technical procedures related to capital increase through capitalization of the accumulated earnings and allocation of additional shares to the shareholders. Over the whole year, EURO-FINANCE AD carried out several projects for financing of the main activities of the companies within the group of EUROHOLD BULGARIA AD. The second bond issue of the leasing company EUROLEASE AUTO AD was structured and placed in April. The issue amounting to EUR 5 million was placed under the condition of private offering. It was the first time the Bulgarian capital market evaluated positively a bond issue of a leasing company with risk spread less than 300 basis points. The spread achieved by the issue 275 basis points above EURIBOR was indicative of the next three new issues of the company, which provided the company with a fresh financial resource at an exceptionally competitive price. Subsequently, in October 2007, the FSC approved the prospectus prepared by EURO-FINANCE AD and the bonds were admitted to trading on BSE-Sofia AD with the exchange code BELA2. In August 2007, ETROPAL PLC issued a second debenture loan in the amount of EUR 2 million. The issue was placed by EURO-FINANCE AD AND PIRAEUS BANK BULGARIA AD, which assumed the functions of a trust bank of the debenture holders. It is expected that the debentures will be admitted to trading on BSE-Sofia AD in the beginning of ETROPAL AD used the funds raised for the development of a wide-scope investment program as with the first debenture loan realized again by EURO-FINANCE AD in EURO-FINANCE AD continued its partnership with the leading bank institutions in the country. In October 2007, the company, together with RAIFFEISENBANK BULGARIA AD structured and placed the first debenture loan of EUROHOLD BULGARIA AD in the amount of EUR 10 million. EURO-FINANCE AD prepared a prospectus for admission of the FINANCIAL STATEMENTS 12

14 securities to trading on a regulated market. In the end of December, the debentures were registered on BSE-SOFIA AD with an exchange code BEUBG. The trustee for the noteholders is RAIFFEISENBANK BULGARIA EAD. In 2007, EURO-FINANCE AD prepared two tender offers to minority shareholders in public companies. In July 2007, the FSC approved a tender offer on behalf of Petrurgia PLC to the shareholders of Sever Holding PLC, and in August 2007, the Commission has approved a tender offer on behalf of EUROHOLD BULGARIA AD to the shareholders of FORMOPLAST PLC. Another major group of projects in the sphere of investment banking was related to the current fulfillment of the Contract signed over the previous year for the provision of consulting services for restructuring and sale of shareholdings in BULGARTABAC- HOLDING AD. In 2007, the consortium between EURO-FINANCE AD, Subev&Co. Law Company and Balkan Consulting Company continued its successful work on the privatization of the companies within the group of Bulgartabac-Holding AD. In the beginning of 2007, EURO-FINANCE AD prepared the information memorandums and performed company valuations for YAMBOL TABAC AD and SHUMEN TABAC AD, which were presented to the investors in the virtual information room. In pursuance of the recommendations made by the participants in the consortium, four of the tobacco processing companies were successfully privatized through public tenders. The shares of GOTZE DELCHEV TABAC AD and DUPNITZA TABAC AD found their buyers on the stock exchange through the public auctions organized by EURO-FINANCE AD. The shares of SANDANSKI TABAC AD and SMOLYAN TABAC AD were sold through public tenders. The total value of sales was BGN 6.2 million. The cooperation between EURO-FINANCE AD and the fund focused on investments in agricultural land, BULLAND INVESTMENTS ADSIC, which started two years ago, continued in 2007 with a new procedure for capital increase. The FSC approved the prepared prospectus for public offering of shares, which was carried out by EURO-FINANCE AD in the period between October and November BULLAND INVESTMENTS ADSIC issued new shares at the total value of BGN 9.4 million. In May 2007, EURO-FINANCE AD cooperated with ENEMONA AD in the organization of the exchange sale of a large amount of shares of the FUND FOR ENERGY AND ENERGY EFFICIENCY FEEI ADSIC. 9.4% of the fund s capital were successfully sold in the process of offering. This cooperation was the logical continuation of the project implemented by EURO-FINANCE AD in 2006, whereby it initiated the overall development of the special purpose vehicle intended for securitization of receivables from energy efficient measures. In 2007, EURO-FINANCE AD completed an essential phase of the project on comprehensive business consulting of 3S COT Group. Analyses, valuations and restructuring plans were performed in 2006 while in 2007, EURO-FINANCE AD completed the procedure on the group s concentration through the merger of 24 regional subdivisions into a new stock company. In the future, EURO-FINANCE AD will continue to assist the management of ЗS СОТ AD in all its activities aimed at the optimization of the group s business, including through public offering of securities. A significant part of the investment banking activity in the preceding year 2007 was focused on drawing new issuers of securities. First debenture loans were issued by ENCOURAGEMENT BANK PLC and SPORT DEPOT AD. The first bond issue of WEB MEDIA GROUP AD is in the process of preparation and will be issued in the beginning of The bond issue of ENCOURAGEMENT BANK PLC in the amount of BGN 5 million was structured as a two-year short-term loan. The notes were placed with the assistance of CORPORATE BANK AD under the conditions of private offering. The first bond issue of SPORT DEPOT AD, the largest company in the world specialized in the sales of sports and fitness accessories and equipment, drew considerable interest among the investment community. The note was insured by IC EURO INS AD. In the process of private placement of the issue followed by secondary trading, notes were bought by four FINANCIAL STATEMENTS 13

15 pension funds, four mutual funds as well as other private investors. In 2008, EURO- FINANCE AD will prepare the prospectus for admission of the notes to trading on BSE-Sofia AD. In 2007, two new companies acknowledged the strategic advantages of being public and took actions for listing on the stock exchange. In the end of 2007, EURO-FINANCE AD filed with FSC the prospectuses for admission of the shares of MART BULGARIA AD and BALKAN PROJECTS MANAGEMENT AD to trading on a regulated market. MART BULGARIA AD is a hi-tech company, whose main activity is focused on the sale of mobile communication services. In the beginning of 2008, the issue of company s shares in the amount of BGN 1 million will be registered for trading on BSE-Sofia AD. BALKAN PROJECTS MANAGEMENT AD is a typical production company of the chemical sector. The company synthesizes detergents that are subsequently used in the manufacturing of washing powder and cleaning agents. It is expected that FSC will approve the company s prospectus in the beginning of 2008, after which its shares, amounting to total BGN 7 million, will be admitted to trading to the stock exchange. Over the whole year 2007, EURO-FINANCE AD assisted the management company, SENTINEL ASSET MANAGEMENT AD, in the selection of a suitable investment strategy for its two mutual funds, CF Sentinel Principal and CF Sentinel Rapid. The total amount of managed assets increased 47.5% (as of 30 November 2007) and reached BGN 5.3 million. The prospects for the investment banking activity of EURO-FINANCE AD remain very good for the next It is expected that EURO-FINANCE AD will be an authorized investment intermediary in the capital increase of several public companies. The company is working on the next prospectuses for listing of new companies on the stock exchange and of bond issues placed under the conditions of private offering. The overall work on the project for privatization of the other companies within the group of Bulgartabac Holding AD is continuing. V. DISCLOSURE OF INFORMATION RELATED TO THE IMPLEMENTATION OF ORDINANCE No. 35 of FSC on the capital adequacy and liquidity of investment intermediaries Investment intermediaries in the country are required to implement Ordinance No. 35 of FSC on the capital adequacy and liquidity (the Ordinance) since the beginning of This Ordinance transposes the regulations of the applicable European Directives concerning the subject matter, whereby this regulation underwent a radical change in our country. Subject to the provision of this Ordinance, EURO-FINANCE AD has adopted and implemented Rules for risk assessment and management, Procedure for making adjustments to the valuations or the reserves, and Rules for the disclosure of information. The investment intermediary s objectives and policy in relation to the risk management are defined in a decision taken by the Board of Directors on 30 May 2007, according to which the company shall pursue moderate conservative policy in the risk management in order to achieve a stable and timeconsistent increase of profit and protection of the value of own funds. In view of this policy, the aggregate investments in equity securities shall not exceed 30% of the own funds and each individual exposure in such investments at acquisition cost shall not exceed 10% of the own funds. It is permissible for an individual investment in a SPV for real estate property at acquisition cost to be up to 15% of the own funds. Investments in government treasury securities and bonds issued by the Republic of Bulgaria, another Member-State, the USA, Canada, Australia, Japan, South Korea and Mexico, as well as investments in debt instruments issued by financial institutions in the Republic of Bulgaria or in a Member-State, as well as in any of the above mentioned countries shall constitute at least 30% of the amount of own funds at acquisition costs. The maximum net currency position (different from the euro) may not exceed the equivalence of BGN 250,000, and the aggregate position in derivative instruments the equivalence of BGN 100,000. The table below shows the structure of investments of EURO-FINANCE AD as of 31 December 2007 in accordance with the pursued risk management policy. FINANCIAL STATEMENTS 14

16 name amount in share of the equity in % Checking account money and shortterm 9, deposits Equity securities (shares, rights, etc.) 1, Debt securities ( debentures and 3, treasury bonds issued by governments and financial institutions) Debt securities of other issuers Total 15, In the last reporting period, EURO-FINANCE AD has constantly observed the requirements on capital adequacy and liquidity resulting from Art. 21 of the Ordinance and the policy announced above. No deviations have been found. The company s capital base has at all times exceeded considerably the amount of the capital requirements to cover all risks related to and resulting from the activity of EURO-FINANCE AD. As of 31 December 2007, the company s own funds, according to the audited balance sheet, amount to BGN 16,143 thousand while the capital base amounts to BGN 14,434 thousand and is calculated as follows: А Original capital 14,583,375 1 Share (registered capital) 14,100,000 2 Statutory reserves 210,000 3 Other reserves 273,375 B Additional capital 49,500 1 Debt-capital (hybrid instrument) 49,500 C Total original and additional capital (А+B) 14,632,875 D Current year profit 1,560,343 E Own funds at book value (А+D) 16,143,718 F Total decreases in the original and additional capital 199,241 1 Non-current intangible assets 16,927 2 Participations in insurers, re-insurers and insurance 182,314 holdings CAPITAL BASE (C-F) 14,433,634 As of 31 December 2007, the capital requirements to cover risks amount to BGN 884 thousand. According to the adopted policy, in calculating the capital requirements, EURO- FINANCE AD applies the standardized approach, except for the operational risk, to which the basis indicator approach is applied. The capital requirements reflecting the nature and the scope of the operations of EURO- FINANCE AD are shown in the next table: FINANCIAL STATEMENTS 15

17 capital name requirement in BGN Credit risk 232,106 Settlement risk 0 Position, foreign exchange and 454,322 commodity risk Operational risk 197,661 Total capital requirements 884,089 EURO-FINANCE LTD. The capital requirement for credit risk is calculated on the basis of the following reference information on the company s receivables as of 31 December Fixed tangible and financial assets are also presented as receivables for the purposes of the calculations. Name Currency Balance Computers, peripherals and software BGN 158, Machinery, plant and equipment BGN 50, Vehicles BGN 12, Fixtures and fittings BGN 201, Long-term investments minority interest BGN 8,030 Long-term investments - controlling interest BGN 5,000 Long-term investments majority interest BGN 125,000 Depreciation of tangible fixed assets BGN -415, Deferred tax assets BGN 8, Receivables from participating interests BGN 109, Receivables on exchange differences on foreign BGN 3, exchange transactions with future value date Receivables on exchange differences from BGN 64, revaluations CFD Receivables on exchange differences from BGN 12, revaluations Netting Accounts with administration BGN 2,337.8 Receivables on active financial operations BGN 14, Other debtors BGN 110, TOTAL 586, Name Currency Balance Receivable on repo-transactions BGN 2,374, According to the standardized approach, receivables are classified in groups, to any of which a risk weight is assigned and the capital requirements is calculated in the amount of 8% of the risk weighed value of the exposure as follows: Type of receivable (group) Amount of receivable Risk weight in % Risk weighed amount of receivable Capital requirement (8%) Repo-transactions 2,374, ,374, ,978 Receivables from 10, , institutions Small exposures 205, ,031 12,322 Other positions 370, ,533 29,643 Total: 2,960, ,106 The capital requirement for position, foreign exchange and commodity risk in the amount of BGN 454,322 represents the sum of the requirements on position risk of debt instruments, of shares and on foreign exchange risk. No commodity risk has occurred in the operations of EURO-FINANCE AD during the period under review. The trading book of FINANCIAL STATEMENTS 16

18 EURO-FINANCE AD is presented in details in the section entitled Additional Information at the end of the report. The calculation of capital requirements for the position risk of debt securities is made on the basis of the maturity method, under which the separate positions by currencies are matched depending on their maturity structure and coupons. The capital requirement for the specific risk of debt instruments is calculated separately. The capital requirement for the position risk on shares consists of two components general risk and specific risk, for which the capital requirement is 8% and 4% respectively. In addition, the capital requirement for the positions in collective investment undertakings is in the amount of 32% of the relevant position. To determine the capital requirement for foreign exchange risk, the total long exposure, respectively short exposure, in foreign currency different from the euro is formed by calculating 8% of the relevant positions. The components of the capital requirements for position, foreign exchange and commodity risk are given in the table below: name Amount of the capital requirement Position risk of debt instruments 214,078 Position risk of shares 238,047 Foreign exchange risk 2,197 Commodity risk 0 Total 454,322 To determine the capital requirements for operational risk under the basic indicator method, it is calculated 15% of the average value of the sum of net interest income and the net income different from interests on the basis of a three-year period, not including the result from sale of positions in the non-trading book, extraordinary income and received insurance compensations. The values for EURO-FINANCE AD for the preceding three years are as follows: year value average value ,581, ,201, ,170,175 capital requirement (15%) 1,317, ,661 As of 31 December 2007, EURO-FINANCE AD reports as a large exposure to the parentcompany (EUROHOLD BULGARIA AD) and its subsidiaries a sum of BGN 1,295 thousand, which represents 9% of the capital base of the investment intermediary. According to the Ordinance, the maximum admissible amount of such an exposure is 20% of the capital base. The rules and procedures for assessment and maintenance of the value, types and allocation of the internal capital that are necessary for the adequate cover of the risks to which EURO- FINANCE AD is exposed, are an element of the Risk Assessment and Management Rules whose reliability and efficiency was inspected by the Board of Directors on 30 January FINANCIAL STATEMENTS 17

19 VІ. DISCLOSURE OF COMPULSORY AND ADDITIONAL INFORMATION EURO-FINANCE LTD. As of the date of preparation of this statement, the Board of Directors of EURO-FINANCE AD consists of: Asen Hristov Chairman of the Board of Directors Kiril Boshov Deputy Chairman of the Board of Directors Simeon Petkov Chief Executive Officer Jordan Popov Executive Officer Georgi Botzev Member of the Board of Directors (since 15 March 2007) Mr Chavdar Kunchev has been dismissed as a member of the Board of Directors at his request, according to a resolution of the General Meeting of Shareholders of the company held on 15 March EUROHOLD BULGARIA AD possesses 100% of the capital of EURO-FINANCE AD directly and through IC EUROINS AD controlled by it. The members of the Board of Directors do not hold directly shares and/or bonds issued by EURO-FINANCE AD and have no special rights or options for acquisition of company s shares or bonds. Neither of the members of the Board of Directors participates in a commercial partnership as a general partner. Mr. Asen Milkov Hristov holds more than 25% of the capital of the following commercial partnerships: STARCOM HOLDING AD /former Bulgarian Holding Corporation AD/ town of Etropole; ALPHA EUROAKTIV EOOD city of Sofia; CORPORATE ADVISORS EOOD city of Sofia; CAPITAL 3000 AD city of Sofia. Mr. Kiril Ivanov Boshov holds more than 25% of the capital of the following commercial partnerships: STARCOM HOLDING AD /former Bulgarian Holding Corporation AD/ town of Etropole; ALCOMMERCE EOOD city of Sofia. Mr. Asen Milkov Hristov participates in the management of the following commercial partnerships:scandinavia MOTORS EAD city of Sofia; EUROHOLD BULGARIA AD city of Sofia; SPORTPROEKT AD city of Sofia; GEOENERGOPROEKT AD city of Sofia; IC EURO INS AD city of Sofia; ALPHA EUROAKTIV EOOD city of Sofia; CORPORATE ADVISORS EOOD city of Sofia; BULSTAR INVESTMENT AD town of Pazardjik; EUROTEST CONTROL city of Sofia; FORMOPLAST AD town of Kurdjali; CARGOMOTORS AD town of Etropole; EURO POWER AD city of Sofia; ETROPAL AD town of Etropole; ASITRANS ASIGURARI AD city of Bucharest, and STARCOM HOLDING AD /former Bulgarian Holding Corporation AD/. Mr. Kiril Ivanov Boshov participates in the management of the following commercial partnerships: ALCOMMERCE EOOD city of Sofia; SCANDINAVIA MOTORS EAD city of Sofia; EUROHOLD BULGARIA EOOD city of Sofia; SPORTPROEKT EAD city of Sofia; EURO AUTO OOD city of Sofia; CAPITAL 3000 AD city of Sofia; EUROLEASE ASSET EAD city of Sofia; EUROLEASE AUTO AD city of Sofia; EUROHOTELS AD town of Samokov; IC SVETI NIKOLAY CHUDOTVORETZ AD city of Sofia; GEOENERGOPROEKT AD city of Sofia; IC EURO INS AD city of Sofia; ASITRANS ASIGURARI AD city of Bucharest; EUROLEASE AD city of Bucharest (former ASITRANS LEASING AD); EUROINS INSURANCE GROUP EAD city of Sofia; BRIDGECORP AD city of Sofia; EUROMOBILE LEASING AD city of Sofia; NISAN SOFIA EOOD city of Sofia, and STARCOM HOLDING AD /former Bulgarian Holding Corporation AD/. Mr. Simeon Petkov participates in the management of CF SENTINEL ASSET MANAGEMENT AD-Sofia, CLIFT OOD-Sofia, EUROSIS EOOD-Sofia, EUROHOLD BULGARIA AD and AUTOTRANS SREDETZ AD-Sofia. FINANCIAL STATEMENTS 18