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Shareholders of public limited company Arco Vara have asked the management board questions concerning the agenda of extraordinary meeting of shareholders on 4 July, which the management board will answer below.

The questions and answers:

1) The company’s Supervisory Board also supported the involving of new money. Was the Supervisory Board unanimous in its decision? Did the Supervisory Board members provide any counterarguments and alternatives and if so, which ones? Were those recorded in the minutes? If so, can they be provided?

Answer: the company’s Supervisory Board discussed the capital needs of the company and the issue size and price of shares to be issued on 13.05.2014. The Supervisory Board found it important that the issue of shares be successful. The Supervisory Board unanimously approved of making the proposition of increasing share capital at the general meeting of shareholders, in the draft wording as it was voted on June 5thand will be voted again on July 4thgeneral meeting. The Supervisory Board discussed no alternatives to increasing share capital.


2) For what exact purpose is the new money intended to be used? How would the involved money be distributed between various projects?

Answer: the Management Board and the Supervisory Board find it expedient to involve a total of €3,500,000 in the company, distributed between two important investments:

A. About €2,000,000 for self-financing the apartment development project in Tallinn, Paldiski mnt 70c. Volume of the project, according to information provided in earlier quarterly reports, exceeds 27,000 square metres on sale, and includes 300 apartments. With the money, designing works and preparation works for the infrastructure of the plot would begin in the 3rdquarter of 2014. Bank loan taken to obtain the immovable, to the sum of 1.4 million euros, also needs to be repaid. Self-financing is a prerequisite for developing the project further with finances from the bank, in order to obtain the required balance between equity finance and loan finance.

B. About €1,200,000 for repayment of principal amount of bank loan to extend the loan contract for multifunctional building located in Sofia, Madrid Blvd until December 2017. The building contains approx. 7,300 square metres of rented business and commercial premises on three floors, providing the company with annual rent revenue of nearly 1 million euros. The group also owns 34 unsold apartments with sellable area approx. 3,800 square metres.

Balance of bank loan for the building is 12.1 million euros. The bank has agreed to extend the bank loan until December 2017 for only interest payments if the owner of the building, the group’s 100% subsidiary Arco Invest EOOD decreases the loan balance by 1.2 million euros. If the bank loan is extended and if the building’s occupancy rate and payment discipline of tenants do not change to a significant extent, the free cash flow of the group from the building on Madrid Blvd will exceed €300,000 per year after the bearing of interest expenses and expenses related to the building’s operation.

The loan balance and interest expenses may decrease further if the group sells the 34 apartments it owns in the building.


3) If the proposition does not gain the required support at the general meeting, which plans need to be changed? Is there something planned that will not be done? In short, what would forgoing the investment result in?

Answer: if the proposition to increase share capital does not gain the required support of 2/3 of the votes of the general meeting, the Management Board assesses this to result in three likely and negative consequences:

(i) It is rather likely that the Piraeus Bank will terminate the loan contract of Madrid blvd and the building will be sold in enforcement proceeding to satisfy the loan claim of the bank, secured with mortgage. This would stop the annual rent revenue of the group for approx. 1 million euros per year and the positive cash flow. The building would be obtained by a third person.

In the case of sale in enforcement proceedings at the bank’s request, it is also rather likely that the revenue gained from the sale of the building is less than if the building was sold by the group on its own schedule and sales conditions. The interest of the bank that finances real estate is primarily in retrieving the loan, not in obtaining maximum revenue from selling the building which is the ultimate interest of the developer. This means that the group may bear additional loss in late 2014 or in 2015 if the loan is not extended and the building is foreclosed.

(ii) Designing and preparation works of the development project at Paldiski mnt 70c are postponed to 2015 at the earliest. Therefore, construction works and sales would begin in 2016 at the earliest. The group loses one year of sales revenue, waiting until the equity capital required to develop the project at Paldiski mnt is released from the development project of Manastirski 2ndstage in Bulgaria.

(iii) On the whole, the group’s current equity capital is approx. 7 million euros, which, divided over three markets (Estonia, Latvia, Bulgaria) and projects already in development is too little to start any new developments on any market in 2014. Considering the developments already in work in Riga (Bisumuisa 1) and Sofia (Manastirski Livadi 2ndstage), involving additional foreign capital from credit institutions is impossible – credit institutions require at least 30% self-financing for funding a development project – and involving private investors would cost the group too much, because private investors generally expect rate of return to exceed 15% when investing money in a development project.

The gap which occurred in Estonian development activities in 2011-2012 probably cannot be closed without increasing equity capital. If the equity capital is not increased, the group should focus on completing the existing developments in Riga and Sofia in 2014-2015. This means that the annual sales turnover of the group in 2014, 2015 and 2016 will likely remain below 10 million euros and also affect the prospect of revenue accordingly.


4) Expenses have been made to acquire capital. If capital increase is not approved, how many expenses have been made for no reason (financially speaking)?

Answer: the total expenses made to increase share capital today is under €85,000, which are related to international legal due diligence of the group, independent valuation of main real estate properties of the group, compiling a prospectus, verifying the prospectus by independent international auditors and investment banking services.

If the share capital increase will be approved by general meeting on July 5th, then the company will upgrade the prospectus as it was prepared for June 6thand release it after obtaining new approval by Financial Supervisory Authority, but before the subscription period commences.


Tarmo Sild
Juhatuse liige
Arco Vara AS
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