KEP TRUST. Independent Auditors Report and Condensed consolidated interim financial information

Transcription

1 Independent Auditors Report and Condensed consolidated interim financial information 30 September 2011

2 CONTENTS Page INDEPENDENT AUDITORS REPORT CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION: CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 1 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 3 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 4 EXPLANATORY NOTES 5-11

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5 Condensed consolidated statement of financial position as at 30 September 2011 (amounts in EUR) 30 September December 2010 (Restated) ASSETS Cash and cash equivalents 1,572,479 1,676,838 Loans and advances to customers 28,694,293 38,669,834 Other receivables and prepayments 106, ,588 Property and equipment 948,909 1,205,864 Intangible assets 247, ,135 Total assets 31,569,001 42,196,259 LIABILITIES Borrowings 17,153,707 27,772,754 Deferred income 7,323 7,323 Liabilities to employees 117, ,736 Provisions 205,686 - Accruals and other short term liabilities 224, ,830 Total liabilities 17,708,814 28,431,643 Equity Retained surplus 13,860,187 13,764,616 Total equity 13,860,187 13,764,616 Total liabilities and equity 31,569,001 42,196,259 1

6 Condensed consolidated statement of comprehensive income for the nine-month period ended 30 September 2011 (amounts in EUR) Continuing Operations Nine-month period ended 30 September 2011 Twelve-month period ended 31 December 2010 (Restated) Interest income 6,403,279 9,348,299 Interest expense (1,416,694) (2,253,646) Net interest income 4,986,585 7,094,653 Fee and commission income 33,437 72,553 Fee and commission expense (23,466) (85,321) Net fee and commission income/(expense) 9,971 (12,768) Other operating income 25,604 58,028 Operating income 5,022,160 7,139,913 Impairment losses on loans and advances to customers (1,091,530) (2,868,832) Personnel expenses (2,227,894) (2,885,879) Operating lease expenses (396,615) (501,241) Depreciation and amortisation (283,265) (365,823) Other expenses (681,490) (1,186,947) Operating expenses (4,680,794) (7,808,722) Operating profit/(loss) before grant income 341,366 (668,809) Grant income (net) - 6,524 Profit/(loss) before tax 341,366 (662,285) Tax expense - - Profit /(loss) from continuing operations 341,366 (662,285) Discontinued operations (see note 6) Loss from discontinued operations (net of tax) (245,795) (490,220) Profit /(loss) for the period 95,571 (1,152,505) Other comprehensive income - - Total comprehensive income /(loss) 95,571 (1,152,505) 2

7 Condensed consolidated statement of changes in equity for the nine-month period ended 30 September 2011 (amounts in EUR) Retained Surplus Balance at 1 January ,240,671 Impact of change in accounting policy (see note 3) (323,550) Restated balance at 1 January ,917,121 Total comprehensive income for the period Loss for the period (1,152,505) Total other comprehensive income - Total comprehensive loss for the period (1,152,505) Transactions recognized directly in equity - Restated balance at 31 December ,764,616 Profit for the period 95,571 Total other comprehensive income - Total comprehensive income for the period 95,571 Transactions recognized directly in equity - Balance at 30 September ,860,187 3

8 Condensed consolidated statement of cash flows for the nine-month period ended 30 September 2011 (amounts in EUR) Nine-month period ended 30 September 2011 Twelve-month period ended 31 December 2010 (Restated) Cash flows from operating activities Profit /(loss) for the period 95,571 (1,152,505) Adjustments for: Depreciation and amortisation 283, ,823 Impairment losses on loans and advances to customers 1,091,530 2,868,832 Depreciation and impairment of intangible assets of subsidiaries 210,366 28,019 Loss from disposal of PPE - 28,068 Impairment for accounts receivable 48,000 - Provisions for expenses 58,770 - Grant income - (1,633) Net interest income (4,986,585) (7,094,653) (3,199,083) (4,958,049) Change in loans and advances to customers 8,845,555 (483,736) Change in other assets 38,561 (58,554) Change in liabilities to employees 5,006 14,440 Change in other liabilities (167,559) 7,837 5,522,480 (5,478,062) Interest received 6,441,735 9,277,382 Interest paid (1,912,967) (2,357,168) Net cash from operating activities 10,051,248 1,442,152 Cash flows from investing activities Acquisition of property and equipment (32,833) (340,849) Net cash used in investing activities (32,833) (340,849) Cash flows from financing activities Proceeds from borrowings - 5,969,096 Repayment of borrowings (10,122,774) (10,440,124) Net cash used in financing activities (10,122,774) (4,471,028) Net decrease in cash and cash equivalents (104,359) (3,369,725) Cash and cash equivalents at 1 January 1,676,838 5,046,563 Cash and equivalents at end of the period 1,572,479 1,676,838 4

9 Explanatory notes as of and for the nine-month period ended 30 September 2011 (amounts in EUR, unless otherwise stated) 1. General Operations The Micro Finance Institution KEP Trust ( KEP or the Organization ), previously Kosovo Enterprise Program ( KEP ) was founded by the humanitarian organization International Catholic Migration Commission Switzerland ( ICMC ) and the Prizren Business Club in August 1999, obtaining authority to operate as a non-banking institution (program)from the Central Bank of the Republic of Kosovo ( CBK ), previously Banking and Payment Authority of Kosovo on 19 May 2000 when new regulations for financial institutions came into effect in Kosovo. KEP was registered as a separate local Non-Governmental Organization on 4 March 2002 and is registered with the CBK as a non-bank micro financial institution as defined in section 2 of Regulation 1999/21. KEP s principal activity is to provide financial services to the people of Kosovo. On 3 April 2002, approval was granted to register KEP with Banking and Payment Authority of Kosovo as a local NGO. As at 30 September 2011 KEP operated through 34 branches, which were organized in 6 regions in Kosovo. The Head Office is located in Str. Bajram Kelmendi, No 16, Prishtina, Kosovo. Board of Directors Effective from 5 January 2011, and based on the Decision No /2010, the Central Bank of Kosovo (CBK) appointed a Provisional Administrator for KEP Trust. Based on the CBK letter dated 5 July 2011, the mandate of the Provisional Administrator was extended until 5 October Subsidiaries In 2005 KEP established the International Center for Community and Enterprise Development ICCED headquartered in Dublin Ireland ( ICCED ). This is a company which provides training and other consulting services to microcredit institutions mainly in Kosovo. ICCED is fully owned by KEP and is registered in Ireland as ICCED Dublin, a limited liability company. ICCED Dublin has three subsidiaries: Kosovo, Belgrade and Montenegro which operate under the status of limited liability companies. In 2009 KEP established the KEP Holding Company L.L.C. ( KEP Holding ). KEP Holding is fully owned by KEP and is registered in state Delaware, USA as a limited liability company. KEP Holding has two subsidiaries, Hexagon Security Company L.L.C ( Hexagon ) in Kosovo which operate under the status of limited liability companies and KEP BANK J.S.C. Hexagon Security Company was registered in Kosovo on 13 November 2009 and KEP BANK J.S.C. was registered on 24 February Hexagon and KEP Holding were liquidated and closed in the current period. KEP BANK J.S.C had no activity in the current and previous period. The condensed consolidated interim financial statements of the Organization as at and for the nine-month period ended 30 September 2011, comprise the Organization and ICCED Dublin, ICCED Kosovo, ICCED Belgrade, ICCED Montenegro and KEP Holding fully owned subsidiaries (together referred to as the Group ). 5

10 Explanatory notes as of and for the nine-month period ended 30 September 2011 (amounts in EUR, unless otherwise stated) 2. Basis of preparation (a) Statement of compliance Except as described below, these condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. They do not include all the information required for full annual financial statements, and should be read in conjunction with the financial statements of the Group as at and for the year ended 31 December Comparative information The Group has been unable to accurately calculate and present certain comparative information for the comparable interim period of the immediately preceding financial year. This includes comparative information in the condensed consolidated statements of comprehensive income, changes in equity and cash flows, which according to IAS 34, paragraph 20, should include amounts recorded from 1 January to 30 September Instead, the Group has presented such information for the period 1 January to 31 December (b) Estimates The preparation of these condensed consolidated interim financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. In preparing these condensed consolidated interim financial statements, the significant judgments made by management in applying the Group s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the financial statements as at and for the year ended 31 December (c) Management assessment of the ability to continue as going concern Following the termination of the Provisional Administration and reconstitution of the new Board of Directors in November 2011 (see note 13), and as a result of existing resources and ongoing operations, the Management believes that the Group s ability to continue as going concern is not impaired. Therefore, the Group has prepared these financial statements on a going concern basis. 3. Significant accounting policies Except as described below, the accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December Change in accounting policies During the period ended 30 September 2011, the Group changed its accounting policy with respect to the recognition of income from loan disbursement fees. Based on the previous accounting policy, disbursement fees from loans under a certain threshold were recognized as the related loan was disbursed. In the current year, all fees that are integral to the effective interest rate on a financial asset are included in the measurement of the effective interest rate. The Group believes that such measurement provides more relevant information on the value of loans and related interest. This change was applied retrospectively and decreased the retained earnings at 1 January 2011 by EUR 372,030 (1 January 2010: EUR 323,550). The effect on the condensed consolidated statement of comprehensive income in the comparative period was to reduce interest income by EUR 48,480. 6

11 Explanatory notes as of and for the nine-month period ended 30 September 2011 (amounts in EUR, unless otherwise stated) 3. Significant accounting policies (continued) Change in accounting policies (continued) The following table summarizes the transitional adjustments on implementation of the new accounting policy: Loans and advances Retained Surplus to customers Balance as reported at 1 January ,307,565 15,240,671 Effect of change in accounting policy (323,550) (323,550) Restated balance at 1 January ,984,015 14,917,121 Balance as reported at 31 December ,041,864 14,136,646 Effect of change in accounting policy up to 1 January 2010 (323,550) (323,550) Effect of change during the year (48,480) (48,480) Restated balance as at 31 December ,669,834 13,764, Financial risk management During the nine months ended 30 September 2011 the Group s financial risk management objectives and policies are consistent with those disclosed in the financial statements as at and for the year ended 31 December Impairment of loans At each reporting date the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. As at 31 December 2010, the impairment for loan losses was EUR 3,406,917. Following the assessments made on 30 September 2011, an additional allowance for impairment of EUR 1,091,530 for the nine months ended 30 September 2011 was charged. The increase in the impairment for loan losses resulted from the deterioration of portfolio at risk ( PAR ). Set out below is the ageing analysis of all past due loans: PAR category 30 September December 2010 A: 0-15 days 1,469,606 1,163,272 A: days 763, ,713 B: days 395, ,154 C: days 269, ,088 D: days 611, ,783 E: days 788,749 1,171,156 F: over 365 days 2,380,397 1,195,111 Total PAR 6,678,688 5,547,277 KEP did not write off any loan to customers in the nine months ended 30 September The total of loans written off in 2010 was EUR 283,110. 7

12 Explanatory notes as of and for the nine-month period ended 30 September 2011 (amounts in EUR, unless otherwise stated) 5. Seasonality of operations The Group s activity is not subject to seasonal fluctuations. 6. Discontinued Operations At the beginning of its mandate, the Provisional Administrator announced a plan to liquidate and close all subsidiaries within his mandate. Following that decision, KEP did not finance any activity of the subsidiaries, except those relating to the liquidation. On 26 April 2011, with a Certificate of Cancellation issued by its authorized representatives, KEP Holding ceased its operations. In April 2011, Hexagon started the voluntary liquidation and the Kosovo Business Registration Agency notified its termination on 21 July The Group is in the process of closing down all other subsidiaries. This segment was not classified as a discontinued operation at 31 December 2010 and the comparative condensed consolidated statement of comprehensive income has been re-presented to show the discontinued operation separately from continuing operations. Such information is presented net of elimination of intragroup transactions and balances. Nine-month period ended 30 September 2011 Twelve-month period ended 31 December 2010 Results of discontinued operations Income 11,923 14,813 Expenses (54,019) (504,630) Impairment losses on intangible assets (203,699) - Net loss before income tax (245,795) (489,817) Income tax - (403) Net loss for the period (245,795) (490,220) Other comprehensive income - - Total comprehensive loss for period (245,795) (490,220) Effect of eliminations in consolidation (58,029) 403,002 Total comprehensive loss for period before eliminations (303,823) (87,218) Cash flows (used in)/from discontinued operation Net cash (used in)/from operating activities (7,888) 12,980 Net cash used in investing activities - (47,476) Effect on cash flows (7,888) (34,496) During the nine months ended 30 September 2011, the Group incurred impairment losses on Curricula, an intangible asset of ICCED Kosovo. Effect of discontinuing operations on the financial position of the Group Nine-month period ended 30 September 2011 Share capital 670,000 Accumulated losses (before eliminations on consolidation) (1,129,600) Net assets and liabilities (459,600) 8

13 Explanatory notes as of and for the nine-month period ended 30 September 2011 (amounts in EUR, unless otherwise stated) 7. Income tax The Group s consolidated effective tax rate in respect of continuing operations for the nine months ended 30 September 2011 was nil (31 December 2010: nil). On 10 June 2002, KEP obtained the Public Benefit Status (the PBS ) No , from the UNMIK authorities, which exempted KEP from tax on profit. On 19 March 2008, following the Kosovo Government request to renew the registration certificates, KEP obtained the PBS certificate from the Kosovo Government. Following a decision of the NGO Registration and Liaison Department in 2009 to discontinue the PBS for KEP, and KEP s appeal against that decision, on 27 June 2011, the NGO Registration and Liaison Department confirmed that KEP Trust was registered as an NGO. This notice was later suspended on 12 October 2011 (see note 13). Hexagon Security Company and ICCED Limited Kosovo are subject to income tax in accordance with Republic of Kosovo regulations. Effective from 1 January 2009, profit tax is calculated at the rate of 10% on taxable profit. These subsidiaries had a taxable loss in the current and previous periods. No deferred tax asset has been recognized in respect of this item because it is not probable that future taxable profit would be available against which the Group can utilize the benefits therefrom. 8. Intangible assets Intangible assets at 30 September 2011, include an amount of EUR 247,293 (31 December 2010: EUR 247,437), which represent the cost of a new software in process. A corresponding amount of EUR 146,916 (31 December 2010: EUR 146,916) was recorded as payable to the software provider and was included in Provisions at 30 September 2011 and in Accruals and other short term liabilities at 31 December At 31 December 2010, KEP was planning to finalize the development phases and start pre-testing of the software in January In January 2011, the Provisional Administrator suspended the software implementation project. KEP has not been presented with any claim from the providers following the notification and the Group s management is of the opinion that no material losses will be incurred and no additional amounts will be paid, should the project be terminated. The Management is in the process of reassessing the software implementation project. At 30 September 2011, the Group has not taken a final decision on whether the project will be terminated or continued. 9. Borrowing covenants Starting from the last quarter of 2009, KEP has been in breach of covenants. KEP has been in continuous contact with the lenders explaining the reasons of such breaches. Meanwhile, to the date of this report, KEP has not received any call from lenders for immediate repayments of outstanding amounts due. KEP is in breach of the following covenants with the lenders as of 30 September 2011: Financial covenant not greater than the limit Limit 30 September 2011 Par > 30 days EBRD: 5% DWM: 5% OIKO Credit: 6% EFSE: 3% 13% (PAR>30 days + Restructured Loans) /Outstanding Portfolio Blue Orchard: 8% Triple Jump-2: 7% 14% Operating expenses to operating results EBRD: 75% FMO: 82.5% 85% Balance of nonperforming loans EFSE: 5% 11% Ratio of total borrowings to net assets Clann Credo: 50% 118% 9

14 Explanatory notes as of and for the nine-month period ended 30 September 2011 (amounts in EUR, unless otherwise stated) 10. Related party transactions Identity of related parties The Group has related party relationships with its directors and executive officers. For the nine months ended 30 September 2011, these include the Provisional Administrator and his team. Transactions with related parties The remuneration of executives and key management is included in personnel expenses. It can be detailed as follows: Nine-month period ended 30 September 2011 Other Twelve-month period ended 31 December 2010 Other Remuneration benefits Remuneration benefits Executive directors - 3, ,691 30,353 Provisional Administrator 135,285 20, Key management of the Group 58,071 2, ,357 - Key management of subsidiaries 12,285-36,500 - Other directors 12, ,638 95,383 Total 218,450 27, , ,736 Balances with related parties include a loan of EUR 48,000 to the previous Executive Director, who left KEP in As at 30 September 2011, the loan was classified as a receivable and was fully provided. 11. Provisions Provisions at 30 September 2011 include an amount of EUR 146,916 (31 December 2010: nil) which relates to the software (see note 8) and an amount of EUR 58,770 (31 December 2010: nil), which relates to the assessment of outstanding legal claims. 12. Contingencies In the normal course of business the Group is presented with legal claims and litigation; the Group s management is of the opinion that no material losses will be incurred in relation to legal claims outstanding as at 30 September The management cannot make a reliable estimate of the costs of liquidation for the subsidiaries. 10

15 Explanatory notes as of and for the nine-month period ended 30 September 2011 (amounts in EUR, unless otherwise stated) 13. Events after the reporting period Reconstitution of the Board of Directors On 8 November 2011 the NGO Office approved the new Board of Directors of KEP. On the same date the Board of KEP appointed Mr. Koen Wasmus as the Executive Director of KEP. On 9 November the NGO Office approved Mr. Koen Wasmus as the Authorized Representative of KEP. On 10 November 2011, the Executive Board of the Central Bank of Kosovo terminated the Provisional Administration of KEP and the mandate of the Provisional Administrator, based on the approval of the new Board of Directors. The composition of the new Board of Directors of KEP is as follows: Johan Ketelers - Chairman of the Board Gezim Tosuni Member of the Board Adriaan Stoop - Member of the Board Gani Pireva - Member of the Board Judith Brandsma - Member of the Board Luljeta Plakolli Kasumi - Member of the Board Ramadan Berisha - Member of the Board Suspension of Public Beneficiary Status With an official letter dated 12 October 2011, the NGO Office has informed KEP that effective from the same date the PBS had been suspended. The suspension was caused by the delays in the submission of the annual report and the audited financial statements for the year 2010 to the NGO Office. KEP has requested an extension of the deadline for meeting all legal requirements in relation to its status. The management believes that KEP will meet all such requirements within the extended deadline and the PBS will be restored. Meanwhile, the suspension does not legally oblige KEP to pay income tax. Forensic Audit On 21 November 2011, as a result of breaches in covenants and of circumstances which occurred prior to the initial appointment of the Provisional Administrator, the lenders commissioned the appointment of an external advisor to conduct a forensic audit engagement. The new board welcomed the engagement. The main focus of the forensic audit will be the review of the loan portfolio. The forensic audit is ongoing and is expected to be finalized in January Status of Subsidiaries On 5 December 2011, the request of the Group to officially liquidate the ICCED Dublin was heard by the Irish High Court. The application was successful and the court made an order for placing ICCED into official liquidation. As part of the liquidation process, ICCED's subsidiaries in Kosovo, Montenegro and Serbia will also be closed. KEP Bank is in the process of being closed down. 11