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bbyy tthhee rreessoolluuttiioonn ooff tthhee BBooaarrdd
ooff OOJJSSCC ““MMaaggnniitt”” ooff MMaayy 88,, 22000088,,
mmiinnuutteess ooff 0088..0055..22000088
22000077 AANNNNUUAALL RREEPPOORRTT
OOFF TTHHEE OOPPEENN JJOOIINNTT--SSTTOOCCKK CCOOMMPPAANNYY
««MMAAGGNNIITT»»
118855 LLeevvaanneevvsskkooggoo ssttrreeeett,, KKrraassnnooddaarr,, 335500000022,, RRuussssiiaann FFeeddeerraattiioonn
CChhiieeff EExxeeccuuttiivvee OOffffiicceerr
__________________________________________ СС..НН..ГГааллииццккиийй
PPeerrssoonn iinn cchhaarrggee ooff tthhee cchhiieeff aaccccoouunnttaanntt,,
CChhiieeff EExxeeccuuttiivvee OOffffiicceerr ooff OOJJSSCC ““MMaaggnniitt””,,
AAccttiinngg oonn tthhee bbaassiiss ooff
OOrrddeerr №№ 44 ooff 1133..0044..22000066
__________________________________________ СС..НН..ГГааллииццккиийй
sseeaall..
KKRRAASSNNOODDAARR 22000088
TABLE OF CONTENTS
11.. KKEEYY OOPPEERRAATTIIOONNAALL AANNDD FFIINNAANNCCIIAALL HHIIGGHHLLIIGGHHTTSS ................... 4
22.. MMIISSSSIIOONN ............................................................................................................ 5
33.. CCHHIIEEFF EEXXEECCUUTTIIVVEE OOFFFFIICCEERR’’SS SSTTAATTEEMMEENNTT ......................................... 6
44.. IINNFFOORRMMAATTIIOONN OONN TTHHEE PPEERRSSOONN IINN TTHHEE PPOOSSIITTIIOONN OOFF AA SSOOLLEE
EEXXEECCUUTTIIVVEE BBOODDYY............................................................................................... 7
55.. IINNFFOORRMMAATTIIOONN OONN TTHHEE BBOOAARRDD MMEEMMBBEERRSS ........................................ 9
66.. RREEPPOORRTT OOFF TTHHEE BBOOAARRDD OONN 22000077 OOPPEERRAATTIIOONNSS .............................. 16
77.. PPRRIIMMAARRYY 22000077 CCOORRPPOORRAATTEE EEVVEENNTTSS.................................................... 21
88.. PPOOSSIITTIIOONN OOFF TTHHEE CCOOMMPPAANNYY IINN TTHHEE FFIIEELLDD..................................... 22
99.. PPRRIIOORRIITTYY DDIIRREECCTTIIOONNSS OOFF TTHHEE CCOOMMPPAANNYY’’SS OOPPEERRAATTIIOONN......... 38
1100.. PPRRIIOORRIITTYY DDIIRREECCTTIIOONNSS OOFF TTHHEE CCOOMMPPAANNYY’’SS DDEEVVEELLOOPPMMEENNTT 40
1111.. IINNFFOORRMMAATTIIOONN OONN TTHHEE PPAAIIDD DDIIVVIIDDEENNDDSS ..................................... 43
1122.. SSEECCUURRIITTIIEESS................................................................................................... 44
1133.. LLIISSTT OOFF 22000077 TTRRAANNSSAACCTTIIOONNSS DDEECCLLAARREEDD AASS MMAAJJOORR IINN
AACCCCOORRDDAANNCCEE WWIITTHH TTHHEE FFEEDDEERRAALL LLAAWW ““OONN JJOOIINNTT--SSTTOOCCKK
CCOOMMPPAANNIIEESS”” ..................................................................................................... 49
1144.. LLIISSTT 00FF 22000077 TTRRAANNSSAACCTTIIOONNSS DDEECCLLAARREEDD AASS RREELLAATTEEDD--PPAARRTTYY
IINN AACCCCOORRDDAANNCCEE WWIITTHH TTHHEE FFEEDDEERRAALL LLAAWW ““JJOOIINNTT--SSTTOOCCKK
CCOOMMPPAANNIIEESS”” ..................................................................................................... 51
1155.. DDEESSCCRRIIPPTTIIOONN OOFF TTHHEE MMAAIINN RRIISSKK FFAACCTTOORRSS RREELLAATTEEDD TTOO TTHHEE
OOPPEERRAATTIIOONN OOFF TTHHEE CCOOMMPPAANNYY................................................................. 54
INDUSTRY RISKS ................................................................................................. 55
COUNTRY AND REGIONAL RISKS ................................................................. 62
FINANCIAL RISKS................................................................................................ 68
LLEEGGAALL RRIISSKKSS......................................................................................................... 72
2
RRIISSKKSS RREELLAATTEEDD TTOO TTHHEE CCOOMMPPAANNYY’’SS OOPPEERRAATTIIOONN ................................ 75
1166.. IINNFFOORRMMAATTIIOONN OONN TTHHEE CCOOMMPPLLIIAANNCCEE WWIITTHH TTHHEE FFFFMMSS CCOODDEE
OOFF CCOORRPPOORRAATTEE CCOONNDDUUCCTT OOFF RRUUSSSSIIAANN FFEEDDEERRAATTIIOONN .................. 82
1177.. IINNFFOORRMMAATTIIOONN OONN TTHHEE AAUUDDIITTOORR AANNDD TTHHEE CCOONNSSUULLTTAANNTT OOFF
TTHHEE CCOOMMPPAANNYY.................................................................................................. 97
ANNEX TO 2007 ANNUAL REPORT OF OJSC “MAGNIT”.................. 100
ANNEX № 1. Open Joint-Stock Company “Magnit” and its subsidiaries.
Independent Auditors’ Report. Year ended December 31, 2007. .................... 100
ANNEX № 2. RAS Accounting report of CJSC “Tander” for the year 2007 100
ANNEX № 3. RAS Accounting report of OJSC “Magnit” for the year 2007
................................................................................................................................. 100
3
11.. KKEEYY OOPPEERRAATTIIOONNAALL AANNDD FFIINNAANNCCIIAALL HHIIGGHHLLIIGGHHTTSS
Number of opened stores, NET
Total number of stores
Selling space, sq. m.
Number of customers
Net sales, million RUR
Net sales, million USD
Gross profit, million RUR
Gross profit, million USD
Gross margin, %
EBITDAR, million RUR
EBITDAR, million USD
EBITDAR margin, %
EBITDA, million RUR
EBITDA, million USD
EBITDA margin, %
EBIT, million RUR
EBIT, million USD
EBIT margin, %
Net profit, million RUR
Net profit, million USD
Net profit margin, %
Capitalization as of 31.12.2007, million RUR
Capitalization as of 31.12.2007, million USD
4
304
2,197
651 658
765 160 000
94 035
3 676,56
18 672
730,04
19.9%
8,177
319.69
8.7%
5,608
219.24
6.0%
4,235
165.58
4.5%
2,491
97,39
2.6%
82,831.8
3,361.9
22.. MMIISSSSIIOONN
“WWee wwoorrkk hhaarrdd ttoo iinnccrreeaassee tthhee pprroossppeerriittyy ooff oouurr ccuussttoommeerrss bbyy
mmiinniimmiizziinngg tthheeiirr eexxppeennddiittuurree oonn qquuaalliittyy ccoonnssuummeerr ggooooddss tthhrroouugghh::
-- EEffffiicciieenntt uussee ooff tthhee CCoommppaannyy''ss rreessoouurrcceess;;
-- OOnn--ggooiinngg iimmpprroovveemmeennttss iinn tteecchhnnoollooggyy;;
-- AAddeeqquuaattee ccoommppeennssaattiioonn ffoorr oouurr eemmppllooyyeeeess..””
5
33.. CCHHIIEEFF EEXXEECCUUTTIIVVEE OOFFFFIICCEERR’’SS SSTTAATTEEMMEENNTT
Last year was an important year for our Company.
We opened our first hypermarket in October which marked the beginning of the active
stage of the development of a new format for us.
Financial and operational results of the past year confirmed the correctness of the chosen
development strategy and we hope they assured our shareholders of the fact that the Company
always realizes its plans.
Organic development
“Magnit” retail chain is Russia’s leading retailer in terms of number of stores and
customers at the end of 2007.
In the medium-term outlook we are going to keep the expansion rates: we plan to open
not less than 300 “convenience stores” this year and up to 250 annually in the next 2-3 years.
Special attention will be made to increase the share of owned stores: up to the half of the
new retail outlets will be located on the constructed or purchased by the Company premises.
Business efficiency improvement
Reduction of logistics costs, improvement of the purchasing conditions and increase of
the share of private label products as a percent of total sales are strategic directions of the
company’s profitability growth.
Construction and launch of the new distribution centers as well as the increase of the
fleet to 1,200 vehicles will enable us in the nearest term to achieve the target of the share of
products delivered to the stores and processed by the in-hose logistics system.
Opening new stores and strengthening our position on the operational territory we plan
to significantly improve purchasing conditions primarily through the local suppliers.
Multi-format model
Implementation of the expansion to the new format for us – a hypermarket format – was
not simple and easy for the Company. Real-life experience of operation of the first opened
projects assured us of the accuracy of our assumptions and made insignificant corrections into
the tactical objectives for this year.
General trends of the market development on the back of growing income of our
customers, evolutional experience of European retail and low share of modern formats in the
total volume of Russian retail assure us of the forthcoming efficiency of the new development
direction.
6
44.. IINNFFOORRMMAATTIIOONN OONN TTHHEE PPEERRSSOONN IINN TTHHEE PPOOSSIITTIIOONN OOFF AA
SSOOLLEE EEXXEECCUUTTIIVVEE BBOODDYY
As of April 13, 2006 Sergey Galitskiy is elected a Chief Executive Officer by the
resolution of the Board of directors of April 12, 2006.
Biographical information of the person in the position of a sole executive body:
Name: Sergey Galitskiy
Date of birth: 14.08.1967
Education: Mr. Galitskiy graduated from Kuban State University with a degree in
Economics in 1992
Positions occupied in the Company and other companies in the last five years including
plural offices:
1) Period: 25.04.1996 – 27.06.2006.
Organization: CJSC “Tander”.
Position: CEO;
2) Period: 28.06.2002 – 18.04.2006.
Organization: CJSC “Tander”.
Position: member of the Board;
3) Period: 01.04.2004 – present day.
Organization: OJSC “Magnit”.
Position: member of the Board;
4) Period: 13.04.2006 – present day.
Organization: OJSC “Magnit”.
Position: CEO
Stockholding of CEO in the Company’s share capital: 51.00 %.
Ordinary shares, owned by CEO: 51.00 %.
Information on transactions of acquisition/alienation of the Company’s shares,
made by the person in the position of a sole executive body during the reporting period:
During the reporting period no transactions of acquisition/alienation of the Company’s
shares were made.
CCEEOO RREEMMUUNNIIRRAATTIIOONN CCRRIITTEERRIIAA AANNDD AAMMOOUUNNTT OOFF CCEEOO RREEMMUUNNEERRAATTIIOONN
((RREEFFUUNNDD OOFF CCHHAARRGGEESS)) PPAAIIDD AACCCCOORRDDIINNGG TTOO TTHHEE RREESSUULLTTSS AACCHHIIEEVVEEDD IINN TTHHEE
FFIINNAANNCCIIAALL YYEEAARR
7
Under Clause 7 of Regulations “On the chief executive officer of OJSC “Magnit”,
ratified by the resolution of the annual general shareholders’ meeting of 28.01.2008
(minutes of meeting of 04.02.2008 and previous editions), the wage rate and other
payments set upon CEO are determined by the labor contract agreed with CEO.
Remuneration of CEO of OJSC “Magnit” in 2007 amounted to 960,000.00 Rub.
8
55.. IINNFFOORRMMAATTIIOONN OONN TTHHEE BBOOAARRDD MMEEMMBBEERRSS
Andrey Arutyunyan – the Chairman of the Board
Date of birth: 12.01.1969.
Education: a graduate of Kuban State University with a degree in Economics, 1991.
Positions occupied in the Company and other companies in the last five years including
plural offices:
1) Period: 01.03.2002 – 30.09.2004.
Organization: LLC “Health Centre “Biryuza”.
Position: Deputy Director for commercial issues;
2) Period: 28.06.2002 – 18.04.2006.
Organization: CJSC “Tander”.
Position: Directors’ Board member;
3) Period: 01.12.2003 – present day.
Organization: OJSC “Magnit”.
Position: first Deputy CEO;
4) Period: 01.04.2004 – present day.
Organization: OJSC “Magnit”.
Position: the Chairman of the Board;
5) Period: 01.10.2004 – present day.
Organization: CJSC “Tander”.
Position: Director of Development department;
6) Period: 30.01.2006 – present day.
Organization: LLC “Magnit – Nizhniy Novgorod”.
Position: Chairman of Directors’ Board”.
Shareholding of the person in the Company’s charter capital: 0.2593 %.
Ordinary shares, owned by the person: 0.2593%.
Information on transactions of acquisition/alienation of the Company’s shares made by
the Board member during the reporting period:
During the reporting period no transactions of acquisition/alienation of the Company’s
shares were made.
Vladimir Gordeychuk – Deputy Chairman of the Board of Directors
Date of birth – 15.08.1961.
Education – a graduate of Novorossisk Engineering Marine School, 1998, navigator.
Positions occupied in the Company and other companies in the last five years including
plural offices:
1) Period: 01.04.1999 – 27.06.2006.
Organization: CJSC “Tander”.
9
Position: Director;
2) Period: 28.06.2002 – 18.04.2006.
Organization: CJSC “Tander”.
Position: member of the Board;
3) Period: 10.11.2003 – 12.04.2006.
Organization: OJSC “Magnit”.
Position: CEO;
4) Period: 01.04.2004 – present day.
Organization: OJSC “Magnit”.
Position: member of the Board;
5) Period: 30.01.2006 – present day.
Organization: LLC “Magnit – Nizhniy Novgorod”.
Position: CEO;
6) Period: 13.04.2006 – present day.
Organization: OJSC “Magnit”.
Position: second Deputy CEO;
7) Period: 28.06.2006 – present day.
Organization: CJSC “Tander”.
Position: CEO.
8) Period: 20.12.2006 – present day.
Organization: LLC “Tandem”.
Position: Chairman of the Board.
Shareholding of the person in the Company’s charter capital: 4.1654 %.
Ordinary shares, owned by the person: 4.1654 %.
Information on transactions of acquisition/alienation of the Company’s shares made by
the Board member during the reporting period:
№
Date of
operation
1
06.12.2007
Operation
Number of shares
Type of shares
Alienation of
securities (purchase
and sale)
115,000
Ordinary nominal
uncertified shares
Sergey Galitskiy
Date of birth: 14.08.1967.
Education: a graduate of Kuban State University with a degree in Economics in 1992.
Positions occupied in the Company and other companies in the last five years including
plural offices:
10
1) Period: 25.04.1996 – 27.06.2006.
Organization: CJSC “Tander”.
Position: CEO.
2) Period: 28.06.2002 – 18.04.2006.
Organization: CJSC “Tander”.
Position: member of the Board;
3) Period: 01.04.2004 – present day.
Organization: OJSC “Magnit”.
Position: member of the Board;
4) Period: 13.04.2006 – present day.
Organization: OJSC “Magnit”.
Position: CEO.
Shareholding of the person in the Company’s charter capital: 51.00%.
Ordinary shares, owned by the person: 51.00%.
Information on transactions of acquisition/alienation of the Company’s shares made by
the Board member during the reporting period:
During the reporting period no transactions of acquisition/alienation of the Company’s
shares were made.
Alexander Prisyazhnyuk
Date of birth: 23.05.1972.
Education: a graduate of Kuban State University with a degree in Physics.
Positions occupied in the Company and other companies in the last five years including
plural offices:
1) Period: 01.11.2000 – present day.
Organization: CJSC “Tander”.
Position: CFO;
2) Period: 28.06.2002 – 18.04.2006.
Organization: CJSC “Tander”.
Position: member of the Board;
3) Period: 01.12.2003 – present day.
Organization: OJSC “Magnit”.
Position: CFO;
4) Period: 01.04.2004 – present day.
Organization: OJSC “Magnit”.
Position: member of the Board;
5) Period: 03.08.2005 – present day.
Organization: LLC “Magnit Finance”.
11
Position: CEO;
6) Period: 30.01.2006 – present day.
Organization: LLC “Magnit – Nizhniy Novgorod”.
Position: member of the Board;
7) Period: 29.11.2006 – present day.
Organization: CJSC “Digital Gallery”.
Position: member of the Board.
Shareholding of the person in the Company’s charter capital: 0.75 %.
Ordinary shares, owned by the person: 0.75 %.
Information on transactions of acquisition/alienation of the Company’s shares made by
the Board member during the reporting period:
During the reporting period no transactions of acquisition/alienation of the Company’s
shares were made.
Alexander Chalikov
Date of birth: 20.06.1978.
Education: a graduate of Kuban State Agrarian University with a degree in Law, 2001.
Positions occupied in the Company and other companies in the last five years including
plural offices:
1) Period: 05.11.2001 – 19.05.2002.
Organization: OJSC “Company “Krasnodaragropromsnab”.
Position: senior legal advisor, legal department;
2) Period: 20.05.2002 – 02.06.2002.
Organization: OJSC “Company “Krasnodaragropromsnab”.
Position: senior legal advisor, securities and property department;
3) Period: 03.06.2002 – 11.08.2002.
Organization: OJSC “Company “Krasnodaragropromsnab”.
Position: Deputy Director, securities and property department;
4) Period: 12.08.2002 – 09.07.2003.
Organization: OJSC “Company “Krasnodaragropromsnab”.
Position: Director, Securities and Property department;
5) Period: 10.07.2003 – 07.10.2004.
Organization: OJSC “Company “Krasnodaragropromsnab”.
Position: Director, Legal department;
6) Period: 08.10.2004 – 22.11.2007.
Organization: CJSC “Tander”.
Position: Director, Legal department;
7) Period: 12.04.2006 – present day.
12
Organization: OJSC “Magnit”.
Position: member of the Board;
8) Period: 20.12.2006 – 17.09.2007.
Organization: LLC “Tandem”.
Position: member of the Board.
Shareholding of the person in the Company’s charter capital: no share
Ordinary shares, owned by the person: no share
Information on transactions of acquisition/alienation of the Company’s shares made by
the Board member during the reporting period:
During the reporting period no transactions of acquisition/alienation of the Company’s
shares were made.
Dmitriy Chenikov – the Secretary of the Board
Date of birth: 08.09.1965.
Education: Krasnodar Polytechnic Institute, engineer/constructor/technologist,
candidate of technical sciences.
Positions occupied in the Company and other companies during last five years
including plural offices:
1) Period: 22.01.2001 – 31.08.2007.
Organization: CJSC “Tander”.
Position: Director, Discounter format development;
2) Period: 12.04.2006 – present day.
Organization: OJSC “Magnit”.
Position: member of the Board.
3) Period: 01.09.2007 – present day.
Organization: CJSC “Tander”.
Position: Regional Director.
4) Period: 18.09.2007 – present day.
Organization: LLC “Tandem”
Position: member of the Board.
Shareholding of the person in the Company’s charter capital: 0.3473 %.
Ordinary shares, owned by the person: 0.3473 %.
Information on transactions of acquisition/alienation of the Company’s shares made by
the Board member during the reporting period:
During the reporting period no transactions of acquisition/alienation of the Company’s
shares were made.
Westman Johan Mattias
Date of birth: 05.02.1966.
13
Education: Stockholm School of Economics, 1992, master’s degree in Business
Administration; Linguistic School of Sweden Armed Forces, 1997.
Positions occupied in the Company and other companies in the last five years including
plural offices:
1) Period: 1996 – present day.
Organization: Prosperity Capital Management.
Position: CEO;
2) Period: 2004 – present day.
Organization: Prosperity Capital Management (UK) Ltd.
Position: CEO;
3) Period: 23.05.2002 – 15.05.2003.
Organization: OJSC “Lenenergo”.
Position: member of Board;
4) Period: 12.04.2006 – present day.
Organization: OJSC “Magnit”.
Position: member of the Board.
Shareholding of the person in the Company’s charter capital: no share
Ordinary shares, owned by the person: no share
Information on transactions of acquisition/alienation of the Company’s shares made by
the Board member during the reporting period:
During the reporting period no transactions of acquisition/alienation of the Company’s
shares were made.
REMUNIRATION CRITERIA AND AMOUNT OF REMUNERATION (REFUND OF CHARGES) OF
EVERY MEMBER OF COMPANY’S BOARD OF DIRECTORS PAID ACCORDING TO THE
RESULTS ACHIEVED IN THE REPORTING YEAR
According to Regulations “On OJSC “Magnit” Board of Directors”, ratified by the
resolution of the annual General Shareholders’ meeting of 08.04.2006 (minutes of meeting of
12.04.2006), remuneration of the Board members is paid upon the resolution of general
shareholders’ meeting in the form of remuneration for participation in the board operation and
remuneration for the achieved results.
Remuneration for participation in the board operation amounts to 120,000 (one hundred
twenty thousand) rubles per month.
Remuneration to the independent director for participation in the board operation
amounts to 30,000 (thirty thousand) USD per year, additionally
-
-
2 000 (two thousand) US dollars for participation by personal presence in each ‘in
praesentia’ meeting of the board,
500 (hundred) US dollars for participation by directing the written opinion for each ‘in
praesentia’ meeting of the board, or for participation in each ‘in absentia’ meeting.
14
Year-end bonus, based on the operation results, is also paid to the members of the board
in addition to the remuneration. Fixed amount of year-end bonus is paid to the members of the
board after approval of appropriate annual financial report by the general shareholders’
meeting of the Company.
At the time of drawing up the present Annual report the remuneration of the Board
members for the results achieved in the reporting year has not been paid.
15
66.. RREEPPOORRTT OOFF TTHHEE BBOOAARRDD OONN 22000077 OOPPEERRAATTIIOONNSS
The structure of the Board of directors (elected at the annual shareholders’ meeting of
28.06.2007, minutes of 10.07.2007):
№
1
2
3
4
5
6
7
Name of the Board member
Date of birth
Andrey Arutyunyan
Sergey Galitskiy
Vladimir Gordeychuk
Alexandr Prisyazhnyuk
Alexandr Chalikov
Dmitriy Chenikov
Westman Johan Mattias
12.01.1969
14.08.1967
15.08.1961
23.05.1972
20.06.1978
08.09.1965
05.02.1966
Westman Johan Mattias (Director of the Representative Office of “Prosperity Capital
Management (RF) Ltd.”) is the independent member of the Board of directors.
By the unanimous resolution at the first meeting of 24.10.2007, Andrey Arutyunyan was
elected the Chairman of the Board of directors, Vladimir Gordeychuk was appointed a Deputy
Chairman and Dmitriy Chenikov was elected a Secretary of the Board.
The Board of directors of the Company operated in accordance with Law regulations
“Of joint-stock companies” and the Charter of the Company.
According to the provisions of the corporate documents, during the reporting period the
following committees of the Board operated to provide its efficiency and prepare the most
important issues attributed to the competence of the Board of directors:
HR and Remuneration Committee of the Board of directors:
Name of the Board member
Position occupied in the committee
Vladimir Gordeychuk
Chairman of the committee
Andrey Arutyunyan
Dmitriy Chenikov
member of the committee
member of the committee
№
1
2
3
Audit Committee of the Board of directors:
№
Name of the Board of directors member
Position occupied in the committee
1 Westman Johan Mattias
Chairman of the committee
2
3
Sergey Galitskiy
member of the committee
Alexandr Prisyazhnyuk
member of the committee
During 2007 the Board of directors held 9 meetings and examined 38 issues. All the
meetings of the Board of directors were held in the form of joint presence.
16
Main issues considered by the Board of directors in 2007:
Date of meeting
Considered issues
04.02.2007
04.02.2007
04.02.2007
04.02.2007
04.02.2007
Suggestions on the issues to be placed on the agenda of the annual
shareholders’ meeting were viewed
The nominees for election into the Board of directors were considered and
put in the list at the annual shareholders’ meeting
The nominees for election into the Audit Committee were considered and
put in the list at the annual shareholders’ meeting
The nominees for election into the Counting Board were considered and
put in the list at the annual shareholders’ meeting
The nominees for the auditor position were considered and put in the list at
the annual shareholders’ meeting
21.05.2007
The annual report of OJSC “Magnit” was preliminary approved
21.05.2007
Recommendations to the General Shareholders Meeting regarding profit
distribution, including distribution according to the amount of dividend of
the OJSC “Magnit” shares and payment procedure, and losses of the
Company based on the results of financial year were approved
21.05.2007
The decision to hold annual general shareholders’ meeting was adopted
24.10.2007
The Chairman of the Board of directors, the Deputy Chairman of the Board
of directors and the Secretary of the Board of OJSC “Magnit” were elected
24.10.2007
24.10.2007
The members of the Audit Committee of the Board of directors of OJSC
“Magnit” and its Chairman were elected
The members of the HR and Remuneration Committee of the Board of
directors of OJSC “Magnit” and its Chairman were elected
24.10.2007
The remuneration to the Company’s auditor was defined
24.10.2007
24.12.2007
24.12.2007
The candidates of investment advisors of OJSC “Magnit” for effective
investment policy-making process were appointed
The decision to hold the Extraordinary General Shareholders’ Meeting was
adopted
The recommended transaction price for the Annual General Shareholders’
Meeting of OJSC “Magnit” to make a resolution on approval of the large-
scale interested party transaction was determined
24.12.2007
Repurchase price of shares belonging to the shareholders was defined
24.12.2007
24.12.2007
29.12.2007
The Regulations on the in-house audit of the financial and economic
activity of OJSC “Magnit” were approved as amended
The personnel and operational structure of the OJSC “Magnit” internal
audit service were determined, the candidate for the position of the service
manager was approved
The supplementary agreement to the contract with the person in the
position of sole executive body of the Company is ratified
17
Besides, the questions in the reporting period concerning the definition of the OJSC
“Magnit” representative position under the realization of suffrage over the Company’s stocks
and shares owned in other organizations (economic companies) were examined by the Board of
directors of OJSC “Magnit” in accordance with the Clause 14.2 of the Charter. Thus, the
meetings with the examined issues concerning the definition of the OJSC “Magnit”
representative position under the realization of suffrage over the Company’s owned shares of
CJSC “Tander”, equity stakes of LLC “Magnit Finance” and LLC “Magnit Ninzhniy
Novgorod”, were held in January, February, March, April, May, October, and December of the
year 2007.
As a result of 2007 operations the management of the Company achieved the
following results:
1. Net sales of the Company increased from 2,505 million USD to 3,677 million USD by
46.8%.
2. Number of the Company’s stores increased from 1,893 in 2006 to 2,194 “convenience
stores” and 3 hypermarkets in 2007, total selling space of the stores increased from 522.9
thousand sq. m. to 615.7 thousand sq. m. correspondingly.
3
651 658
2194
2007
522 916
1893
2006
convenience stores
hypermarkets
selling space
3. Number of customers increased from 640.2 million in 2006 to 765.2 million in 2007.
4. In 2007 the Company continued the development of private label. As of December 31,
2007 private label products were presented by over 700 SKUs with 12% share of retail revenue.
800
700
600
500
400
300
200
100
0
12,0%
10,9%
8,2%
508
551
700
14,0%
12,0%
10,0%
8,0%
6,0%
4,0%
2,0%
0,0%
6,3%
5,1%
2,2%
46
265
162
2002
2003
2004
2005
2006
2007
Number of items
18
Share in retail sales
5. In 2007 the Company opened distribution centers in Bataysk and Chelyabinsk as well
as the second phase of Ivanovo distribution center which will process non-food products for
hypermarkets. Total space of 8 distributions centers as of December 31, 2007 amounted to 138
thousand sq. m.
6. During the reporting year the fleet of the Company increased by more than 70 vehicles
and amounted to 802 own trucks which resulted in the considerable reduction of transportation
costs.
7. In 2007 the Company increased the share of products processed via its distribution
centers to 71% which is one of the gross margin drivers.
8. The Company was actively working with its personnel increasing their loyalty and
developing corporate culture. As of December 31, 2007 the Company had 48,194 employees out
of which 35,726 are in-store personnel, 6,679 people engaged in distribution, 4,634 people in
regional branches and 1,155 employees of Head Office.
9. Effective work with our customers and development of our marketing program
enabled us to achieve the following results:
13.91% LFL revenue growth of 2007 to 2006 in ruble terms was driven principally by
14.84% average ticket growth.
Number of tickets,
LFL growth
(0.78)%
Average ticket,
LFL growth
14.84%
LFL revenue growth
13.91%
Gross margin of the Company increased from 18.2% in 2006 to 19.9% in 2007, gross
profit increased from 457.03 million USD to 730.04 million USD correspondingly due to the
better purchasing terms and in-house logistics system.
800
600
400
200
0
18,2%
457,03
19,9%
730,04
20,0%
19,5%
19,0%
18,5%
18,0%
17,5%
17,0%
12M2006
12M2007
Gross profit, USD mln
Gross margin, %
19
EBITDA increased by 77.40% from 123.59 million USD in 2006 to 219.24 million USD in
2007.
240,0
180,0
120,0
60,0
0,0
4,9%
123,6
6,0%
219,2
6,0%
5,5%
5,0%
4,5%
4,0%
12M2006
12M2007
EBITDA, mln USD
EBITDA margin, %
Net profit of the Company increased by 68.02% and amounted to 97.39 million USD in
2007 vs. 57.97 million USD in 2006.
120,0
80,0
40,0
0,0
2,3%
58,0
2,6%
97,4
2,8%
2,5%
2,3%
2,0%
12M2006
12M2007
Net profit, mln USD
Net margin, %
On the whole, the Board of Directors of the Company considers achieved financial and
economic results positive and fitting in with 2007 target plans.
According to the carried out work the Board of the Company recommends to
the annual general shareholders’ meeting to approve the activity of the Company’s
management bodies during 2007 and to ratify 2007 annual report submitted for
agenda of the meeting.
20
77.. PPRRIIMMAARRYY 22000077 CCOORRPPOORRAATTEE EEVVEENNTTSS
January
May
June
October
December
The Board of Directors determines position of OJSC “Magnit”
representative upon exercise of voting right on the share of the Company in
the charter capital of LLC “Magnit-Finance”. The decision is made to place
bonds, Prospectus and Decision of bonds issue is ratified.
Extraordinary general meeting of OJSC “Magnit” shareholders makes the
decision to determine the price and approve major transaction of pledging
for the purposes of bond issue of LLC “Magnit-Finance” in the amount of
5,000,000 bonds with the nominal value of 1,000 rubles each.
CJSC “Tander” branch in Izhevsk is established.
Annual general shareholders’ meeting ratifies new editions of the Charter.
Regulations on the general shareholders’ meeting, Regulations on the sole
executive body (CEO), forms new membership of the Board including one
independent director, ratifies the auditors of the Company, approves rent
agreement for the real estate with CJSC “Tander” being a lease holder.
Board of directors ratifies candidates of the investment consultants to carry
out active investment policy of the Company: Morgan Stanley & Co.
International plc, CJSC «United Financial group» - Deutsche UFG.
The Board of directors forms the committees of the Board, appoints the
chairman, deputy chairman and the secretary of the Board.
CJSC «Tander» in Novgorod Velikiy is established.
The agreement on inclusion and sustention of the securities in the Quotation
list of the Close joint-stock company “MICEX stock exchange”, OJSC
“Magnit” shares are admitted to tradings in the Quotation list “B” of CJSC
“MICEX SE”.
Agreement for listing services is made with OJSC “Russian Trading System”
stock exchange”, OJSC “Magnit” shares are admitted to tradings in the
Quotation list “B” of OJSC “RTS SE”.
Board of directors ratifies new edition of the Regulations on internal control
over financial and economic activity, determines the number of members
and organizational structure of internal audit department, ratifies the
candidate for the head of the department.
Board of Directors preliminary approves the Underwriting Agreement and
the Depositary agreement as well as other transactions provided by the
above agreements, issues of approval are proposed to the extraordinary
shareholders’ meeting appointed on 28.01.2008.
The decision of CJSC “Tander”’s entry to the Association of the Retail
Companies.
CJSC “Tander” branch in Tyumen is established.
21
88.. PPOOSSIITTIIOONN OOFF TTHHEE CCOOMMPPAANNYY IINN TTHHEE FFIIEELLDD
RRUUSSSSIIAANN MMAARRKKEETT
Retail turnover in 2007 amounted to 10,757.8 billion rubles which is by 15.2% higher
than in 2006 in terms of mass of commodities. At that growth rates of add value in “wholesale
and retail” sector amounted to 12% which is a lot higher than the growth rates of GDP (8.1%).
Dynamics of the key figures of the retail market in 2005-2007, as a % to the corresponding
period of the previous year
1 6,7
15,9
13 ,8
13,3
12
10,7
1 1,3
10 ,4
14 ,1
1 5
13, 5
11,9
16 ,5
13,3
13, 4
11,2
9
7 ,4
10,6
10,1
12, 7
10,5
8,4
8,3
17,9
17 ,6
1 5,1
1 5,1
15, 1
1 5,4
13,7
1 3,8
1 4
16, 1
14, 8
13,4
14
11 ,8
1 2,3
12, 1
18,7
1 5,8
15,8
19, 6
16,7
12, 5
12, 6
1 1,3
1Q2 005
2Q200 5
3Q20 05
4 Q2005
1Q20 06
2Q 2006
3Q20 06
4 Q2006
1Q200 7
2Q 2007
3Q200 7
4Q2 007
Growth rate of the retail turnover
Growth rate of non-food products turnover
Growth rate of food products turnover
Growth rate of catering turnover
Source: Infoline
In 2007 rates of retail turnover continued to grow compared with 2006 which was due
25
20
15
10
5
0
to:
insignificant slowdown of population income growth on the back of high dynamics of
the real wages as well as the decrease of the financial funds aimed by the population at savings;
considerable increase of consumer credit financing;
retaining of high growth rates of import due to expansion of the consumer demand and
strengthening of the real ruble rate due to increase of the gold holdings and retaining of
significant surplus through oil price growth to 100 USD per barrel.
1300
1200
1100
1000
900
800
700
600
500
Dynamics of retail turnover in 2005-2007, billion rubles in 2007 prices
12 29,1
791 ,2
8 14,3
834, 9
85 5,9
8 90,3
71 8,2
718,9
6 32,8
631, 7
571,1
57 3,8
69 7,7
6 29,7
715,3
724 ,6
736
644, 4
64 7,6
6 45,6
758, 4
66 7
929, 3
94 0,1
993,9
1012 ,9
1 011, 1
880, 8
786 ,7
8 01,6
6 92,6
706, 3
837, 5
84 3,6
730 ,8
7 40,6
January
February
March
April
May
Ju ne
July
Au gust
Sep tember
Octob er
No vember
Decemb er
2007 (in 2007 prices)
2006 (in 2007 prices)
2005 (in 2007 prices)
Source: Infoline
Retail turnover dynamics in 2006-2007
22
Period
2006
2007
Turnover, billion rub.
As a % of the previous year
8693.4
10757.8
113.9
115.2
Источник: данные ФСГС
High growth rates of the retail turnover in Russia maintan despite the formation of the
complex of negative factors in the ecnomics development and consumer markets:
increase of inflation rates due to nonmonetary factors, out of which the most important
is the growth of the world prices on food as well as costs inflation on the food markets of all
elements of the chain “producer – distributor – retailer”;
active interference of the federal and local authorities in the sphere of chain retail
developmet regulations by means of exericise of the complex of measures limitating trading
margins and producers’ prices on some groups of socially important products (agreement
concluded on the federal level with retail chains and foodstuffs producers has come into effect
in 2007 and has been prolonged until April 30, 2008);
negative for disadvantaged population groups inflation structure (priority growth rates
of prices on fast-moving consumer goods – dairy, bread, sunflower oil) because of increased
differentiation of living standards between population groups;
decrease of cash surplus of trade balance of Russia due to priority growth rates of
import on the back of the modest export rates and retaining of prevailing positions of fuel,
energy and metal products in its structure.
Key factor stimulating the growth of retail turnover in Russia is still the growth of the
real population income which increased by 10.4% in 2007 compared with 2006 (13.3% in 2006)
and the actual earnings increased by 16.2% (13.4% in 2006).
Structure of disposable income of population in 2004-2007, %
1, 5
18, 9
9, 2
16, 7
53, 7
3 ,4
17 ,1
10 ,5
16 ,3
52 ,7
3,7
1 4,1
1 2,6
1 6,1
5 3,5
1,8
19,1
9,1
16,3
53,7
100%
80%
60%
40%
20%
0%
200 4
20 05
2 006
2007
goods purchasing
growth rate of financial assets
payment for services
growth rate of population income
obligatory payments and fees
Source: Infoline
Moreover, in Russia there is a growth trend of consumer expenses in the structure of
disposable cash income: in 2007 nominal cash income of population increased by 22.4%
compared to 2006, expenses for purchase of goods and payment for services increased by 23.5%
and savings by 0.5%. As a result the share of consumer expenses in the disposable income
structure amounted to 69.6% and goods purchasing expenses amounted to 53%.
Please note that in the economics development in Russia there is an increase of
structural disproportions which in the medium-term outlook may lead to the reduction
economics growth rates and slowdown of consumer markets development:
23
lack of qualified man power and corresponding disbalance of growth rates of actul
earnings and labour capacity. Thus, in 2007 the gap between the rates of actual earnings and
labour capacity amounted to 10.6% compared to 6.3% in 2006;
increase of import products in the Russian consumer market: in 2007 growth rates of
physical volume of production output by Russian production units of consumer sector to meet
the needs of the internal market amounted to 3.5% which is nearly 9 times lower than the rates
of import volume. The share of import in GDP increased from 16.7% in 2006 to 17.5% in 2007
and the share of export in GDP reduced from 30.8% in 2006 to 27.4%. At that the deficit of trade
balance for the group of food and non-food consumer products increases.
As a result of the above disproportions in the development of domestic production of
consumer goods in 2004-2007 there was a decline of the share of domestic products in the retail
market from 57% to 53%.
Struc ture of retail turnover according to the country of production in 2004-2007
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
43
57
2004
45
55
46
54
47
53
2005
Russia
2006
Foreign countries
2007
Source: Infoline
In 2007 growth rates of agricultural products output were lower compared with 2006
(3.3% in 2007 compared to 3.6% in 2006), at the time when the output of industrial products by
food enterprisers on the contrary exceeded 2006 (6.1% and 5.4%). In some field the dynamics
was more positive: meat and meat products production increased by 9.2%, vegetable and tallow
oil production increased by 8.6% and production of soft drinks - by 13.8%. Import of food
products grows faster: in 2007 it increased by 28.6% to 26.1 billion USD which conditioned the
growth of import products in the retail turnover.
The share of import products in the Russian food retail market in 2007 compared with
the previous year has been steadily growing during 1Q-3Q and the reduction in 4Q was not
because the trend has changed but due to seasonal factor.
24
Structure of food retail turnover according to the country of producers in 2006-2007
33
32
37
38
3 6
3 3
35
67
68
63
62
6 4
6 7
65
3 7
6 3
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q2 006
2 Q2006
3 Q2006
Russia
4Q200 6
1Q20 07
2Q2 007
3Q2 007
4 Q2007
Foreign countries
Source: Infoline
FFOOOODD IINNFFLLAATTIIOONN
In 2007 Russia faced the growth of prices on food products in the internal market due to
price “shocks” on the world market of food products conditioned by the expansion of use of
agricultural products as a source of bioethanol production, increase of demand for food
products in the emerging markets as well as high level of Russia’s dependence on import of
food products and low level agriculture efficiency. Growth rates of prices in 2007 on several
categories of food products exceeded 30%: butter – by 40.3%, sunflower oil - by 52.3%, milk and
milk products – by 30.4%. At that the prices on bread and flour products increased by 22.4%
despite strict administrative regulation.
Measures of Russian Government and local authorities aimed at stabilization of internal
prices for food products were characterized by comparatively low efficiency and focus on strict
measures of the customs and administrative regulations:
Freezing of retail prices on the limited food products which is appeared to be not
effective enough measure due to the increase of the trading margins on the products which are
not subject to regulation and deficit.
Increase of the export fees and the reduction (cancellation) of import fees for some food
products and agricultural raw materials led to destabilization of operations of Russian
exporters of agricultural products and did not lead to significant import growth which could
have increased the level of satiety of the internal market and have an impact on retail prices
towards reduction.
25
1,7
1,1
1,8
1,6
1,4
1,2
1
0,8
0,6
0,4
0,2
0
Consumer price index in 2007-2008, as a % to the previous month
1,6
1,2
1 ,1
1
0 ,9
0,8
0, 6
0, 6
0,6
0, 1
January
February
March
April
May
J une
Ju ly
Au gust
Sept ember
Oct ober
No vember
D ecember
2007
Source: Infoline
TTHHEE SSTTRRUUCCTTUURREE OOFF RREETTAAIILL TTUURRNNOOVVEERR BBYY PPRROODDUUCCTT TTYYPPEESS
In 2007 reduction of the share of the food products in the retail turnover gathered pace
due to keeping ahead growth rates of prices on food products and change of the structure of
Russian population’s consumption.
The structure of retail turnover in 2002-2007, billion rub.
Index
Retail turnover
Food products
Non-food products
Share of food products, %
Share of non-food products, %
2002
3765
1754
2011
46,6
53,4
2003
4529
2092
2437
46,2
53,8
2004
2005
5642
7038
2578
3216
3064
3822
45,7
54,3
45,7
54,3
2006
8690
3945
4745
45,4
54,6
2007
10757,8
4869,7
5888,1
45,3
54,7
Source: Federal Sate Statistic Service
Dynamics of the share of food products in retail turnover in 2005-2007, %
47
46,5
46
45,5
45
44,5
44
5
0
0
2
y
r
a
u
n
a
J
5
0
0
2
y
r
a
u
r
b
e
F
5
0
0
2
h
c
r
a
M
5
0
0
2
l
i
r
p
A
5
0
0
2
y
a
M
5
0
0
2
e
n
u
J
5
0
0
2
y
l
u
J
5
0
0
2
t
s
u
g
u
A
5
0
0
2
r
e
b
o
t
c
O
5
0
0
2
r
e
b
m
e
t
p
e
S
5
0
0
2
r
e
b
m
e
v
o
N
5
0
0
2
r
e
b
m
e
c
e
D
6
0
0
2
y
r
a
u
n
a
J
6
0
0
2
y
r
a
u
r
b
e
F
6
0
0
2
h
c
r
a
M
6
0
0
2
l
i
r
p
A
6
0
0
2
y
a
M
6
0
0
2
e
n
u
J
6
0
0
2
y
l
u
J
6
0
0
2
t
s
u
g
u
A
6
0
0
2
r
e
b
o
t
c
O
6
0
0
2
r
e
b
m
e
t
p
e
S
6
0
0
2
r
e
b
m
e
v
o
N
6
0
0
2
r
e
b
m
e
c
e
D
7
0
0
2
y
r
a
u
n
a
J
7
0
0
2
y
r
a
u
r
b
e
F
7
0
0
2
h
c
r
a
M
7
0
0
2
l
i
r
p
A
7
0
0
2
y
a
M
7
0
0
2
e
n
u
J
7
0
0
2
y
l
u
J
7
0
0
2
t
s
u
g
u
A
7
0
0
2
r
e
b
o
t
c
O
7
0
0
2
r
e
b
m
e
t
p
e
S
7
0
0
2
r
e
b
m
e
v
o
N
7
0
0
2
r
e
b
m
e
c
e
D
Source: Infoline
Thus, growth rates of non-food products turnover currently exceeds the corresponding
figures of food products thrice while within the last five years this figure has never passed 1.5.
This speaks of the trend of the change in the consumption structure in Russia. In the structure of
consumer expenses of households there is a trend of the further reduction of the food
purchasing expenses alongside with the growth of non-food purchasing expenses and payment
for services. The share of food purchasing expenses in Russia is still considerably higher than it
26
is in mature markets: in the structure of final consumption food amounts to 23% while in the
USA it is 6.4%, Great Britain – 9%, Germany – 11.4%, France – 13.7%. Food purchasing expenses
of population groups with low income amount to 70% of the total product purchasing, those
with high income spend on food about 26%.
Dynamics of retail turnover in mass of commodities in 2003-2007, %
Index
2004 to 2003
2005 to 2004
2006 to 2005
2007 to 2006
Retail turnover
Food products
Non-food products
113,3
109,8
114,3
112,8
110,6
113,4
113,9
110,9
115,2
112,3
116,5
Source: Federal State Statistics Service
117,6
In 2007 within the group of food products the most significant growth compared to 2006
comes to retail sales of sugar (by 24.7%), meat and poultry, sausage goods, confectionary, fruit
and berries.
Growth rates of food retail sales in 2005-2007 in physical terms, %
Index
Food products
Meat and poultry
Sausage goods
Fish food consumable goods
Vegetable oils
Fat cheeses
Sugar
Confectionary
Potatoes
Vegetables
Fruits, berries, grapes
2005
10,6
7,0
7,8
3,2
12,7
10,2
9,1
8,2
5,1
6,0
12,7
2006
10,9
9,7
7,6
12,6
6,9
4,0
-0,8
4,9
0,7
9,2
10,9
2007
12,3
13,2
14,2
12,9
10,2
9,1
24,7
14,9
10,3
7,9
13,4
Source: Federal State Statistics Service, Russia’s Ministry for Economic Development and Trade
Growth rates of non-food retail sales in 2005-2007 in physical terms, %
Index
Non-food products
Detergents
Cosmetics
TVs
Videotape recorder
Computers
Household refrigerator
Vacuum cleaner
Washing machines
Cars
2005
13,4
2,5
17,4
31,9
31,2
28,4
7,3
15,9
15,8
44,9
2006
16,5
12,1
15,3
8,5
25,5
50,0
9,0
10,8
7,2
7,3
2007
17,6
13,7
14,8
29,6
26,2
30,5
18,5
16,5
23,3
28,4
Source: Federal State Statistics Service, Russia’s Ministry for Economic Development and Trade
In 2007 there was an alcohol sales increase: realization of alcohol drinks and beer
increased by 5.7% to 142.7 million USD (in conversion to net alcohol) while in 2006 there was a
27
reduction by 3.2%. Increase of volumes was due to the growth of sales of grape and fruit wines
by 13.9% (in 2006 reduction of 4.8%), cognac by12.3%, (in 2006 growth by 7.7%), champagne
and sparkling wines by 15.2% (in 2006 growth by 2.1%), beer by 15.2% (in 2006 growth by
12.4%) as well as slowdown of rates of vodka and spirits sales to -0.8% compared to -9.7% in
2006.
Structure of retail sales of alcohol drinks and beer in 2004-2007, as a % in conversion to new
alcohol
1,6
24
1,9
8,3
64,2
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1 ,6
24 ,9
2 ,1
8 ,8
62 ,6
1,7
28,9
2,4
8,6
58,4
1,9
31,5
2,5
9,3
54,8
200 4
20 05
2006
200 7
Vodka and spirits
Grape and fruit wines
Cognacs
Beer
Shampagne and sparkling wines
Source: Infoline
SSTTRRUUCCTTUURREE OOFF RREETTAAIILL SSAALLEESS OOFF PPAACCKKAAGGEEDD PPRROODDUUCCTTSS
Most important changes in the consumption structure of the packaged products in
Russia in 2007 were the following:
Growth of consumption of instant food products and ready-made meals as well as
mixed vegetables and fruits;
Growth of consumption of innovative products and group of healthy products;
Growth of consumption of more expensive and of a better quality alcohol drinks and the
reduction of vodka and spirits share.
This is due to such customers’ food shopping motives as convenience of consumption,
innovation and healthiness. Thus despite much lower living standards in comparison with the
European countries and the USA Russia demonstrates the same trends of higher interest to the
products aimed at preservation of youth and health.
Structure of the packaged products market in Russia in 2007, %
snacks
4%
cookery
5%
dairy products
18%
beverages
18%
confectionary
17%
alcohol drinks
38%
28
Source: Infoline
Moreover, increase of the pace of life and involving of more women in labor activity
result in the growth of consumption of instant food products and ready made meals. According
to the audit of the retail carried out by AC Nielsen in 2007 the structure of retail turnover of
packaged food products broken down such categories as “dairy products”, “confectionary”
“alcohol drinks and beverages”, “snacks”, “cookery products” is characterized by a series of
features which are thoroughly viewed below.
Growth rates of the main products groups in Russia in 2007, in monetary terms
Products category/subcategory
2007 growth rates, %
Alcohol products
Beer
Vodka
Beverages, tea and coffee
Kvass (whole sour)
Sparkling soft drinks
Juices
Confectionary
Chocolate
Dairy products
Bio products
Drinking yogurt
Thin milk desserts
Curd
Cookery products
Ready-made mixture for cooking
Instant food products
Mayonnaise
Snacks
Salty seafood snacks
Crisps
20
31
6
11
60
18
14
9
11
5
26
24
20
14
4
29
21
1
11
23
11
Source: АС Nielsen
Leading product category in terms of its share in the monetary terms – “Alcohol drinks”
– demonstrated the highest growth rates and increased the gap between the other groups. The
highest rates were demonstrated by the subcategory “beer”, which sales in physical terms
increased by 17%. In the segment of alcohol products premium and sub-premium segments
demonstrated the highest rates. At that vodka sales in natural terms reduced by nearly 2%
compared to 2006. Thus, in Russia there is a trend of changing alcohol consumption structure
which is in the growth of share of products with lower content of alcohol on one hand and more
expensive and of a better quality drinks on the other. Such a significant sale of alcohol drinks is
largely explained by a series of 2006 alcohol crises when the production and retail sales of
alcohol drinks demonstrated considerably worse dynamics.
Products category “Soft drinks” which in monetary terms takes the second place
demonstrated less rapid growth rates than retail sales of food products in general. At the same
time such subcategories as “juices”, “carbonated drinks” demonstrated higher growth rates
especially the latter (kvass sales increased by more than 50%).
29
Sales of confectionary in retail increased by only 9%, at the same time higher growth
rates were demonstrated by the subcategory of “chocolate” within which sales of chocolate bars
increased by 21% in monetary terms.
Sales of dairy products in 2007 increased insignificantly – just by 5%. At the same time
sales growth dynamics of subcategories within this product group was characterized by
differently directed trends: curd, innovative products (juicy milk drinks, drinking yogurt, kefir
products, etc.) a well as bio products (for example sales of milk products containing pro biotic
increased by 43%) demonstrated dynamic growth. At the same time milk sales increased
extremely insignificantly. As a result of 2007 the market share of milk products with bio
additives is 25% in monetary terms.
In spite of the fact that the sales of product category “snacks” has been growing at lower
rates than food products, “seafood snacks” subcategory increased by more than 23%. At that in
terms of sales this subcategory is close to the leading subcategory of “crisps”. It is also
important to note that bread sticks sales reduced by nearly 10% in 2007.
Product category of “cookery products” in 2007 demonstrated lower rates due to
stagnation of the sales of the key subcategory “mayo” which takes 50% of the total sales. At the
same time segments of “mixtures for cooking” and “ready-made meals” increased by more than
20% in monetary terms which speaks of the change of demand in this segment towards more
expensive products including products with natural ingredients.
RREETTAAIILL TTUURRNNOOVVEERR SSTTRRUUCCTTUURREE BBYY TTHHEE TTYYPPEESS OOFF TTRRAADDIINNGG
OORRGGAANNIIZZAATTIIOONNSS
In 2007 the trend of sales growth of trading organizations continued and their share in
the retail structure increased to 84,5% and the share of sales in merchandize, mixed and food
markets reduced to 15.5% compared with 19,6% in 2006. In February 2008 this trend has
strengthened: 86.3% of the retail turnover was formed by trading organizations and the share of
retail markets and fairs amounted to 13.7% (in February 2007 – 83.3% and 16.7%
correspondingly).
The share of the markets in the retail turnover continues to fall:
Of food products it amounted to 17.6% in 2004, 16.8% in 2005, 15.6% in 2006, 12% in 2007
and 10.5% is expected in 2008;
Of non-food products 26% in 2004, 24.5% in 2005, 22.8% in 2006, 19% in 2007 and 15.5%
is expected in 2008.
Structure of re tail turnove r formation in
2007, %
Structure of retail turnover formation in
2006, %
Large and
m edium
organizations
(including retail
chains)
37,3%
Sm all enterprises
22,2%
Markets
15,3%
Sole traders
outside the
m arket
25,2%
Large and
medium
organizations
(including
retail chains)
32,7%
Small
enterprises
22,3%
Markets
19,7%
Sole traders
outside the
market
25,3%
Turnover of trading organizations and markets in 2002-2007, billion rub.
Source: Infoline
30
Index
Retail turnover
2002
3765
2003
4529
2004
5642
2005
7038
Trading organizations’ turnover
2838,8
3451,1
4420,5
5558,2
2006
8690
6987
2007
10757,8
9111,8
Sales of merchandize, mixed and
food markets
Share of trading organizations, %
Share of markets, %
926,2
1077,9
1254,1
1479,8
1703
1646,0
75,4
24,6
76,2
23,8
77,9
22,1
79,0
21,0
80,4
19,6
84,7
15,3
Source: Federal State Statistics Service
Growth of turnover of trading organizations in 2007 amounted to 21.5% and sales of
markets reduced by 10.5%. In monetary terms monthly volume of market sales in 2007
increased by 43.4% (in January – 121.3 billion rub., in December – 173.9 billion rub.) while
turnover of trading organizations increased by 77.6% (from 594.4 billion rub. to 1,055.2 billion
rub. correspondingly). The reduction of the market turnover and decrease of their number was
due to:
Dynamic growth of the turnover and the number of trading outlets of FMCG chains
which represent more attractive purchasing conditions, better prices and product quality for
customers;
Stiffening of legislation in the sphere of retail, complicated conditions of enterprises and
organizations activity being participants of the market;
Realization of programs aimed at the reduction of non-organized trade in the series of
Russian regions.
Dynamics of the number of markets in Russia and their share in the retail turnover in 2004-2007.
22,1
6444
21
19,6
5831
5892
7000
6000
5000
4000
3000
2000
1000
0
15,3
4771
25
20
15
10
5
0
20 04
20 05
200 6
200 7
The number of markets in Russia at the year end
Share of markets in Russian retail turnover, %
Source: Infoline
The reduction of the share of markets in retail turnover was accompanied by the
decrease of their number due to liquidation or reorientation in shopping centers: as of January
1, 2005 there were 6.44 thousand markets operating in Russia, as of January, 2008 – about 4.7
thousand. The reduction of the number of markets was due to the stiffening of the state
regulations: markets which had not received the permission had to be converted into shopping
31
centers upon availability of capital buildings which meet modern requirements, into seasonal
fairs or closed down if their location is not provided by the approved plan of market locations.
As a result of 2007 there was a trend of markets integration: as of January 1, 2007 one
market consisted of 204 trading points on average, as of June 1 - 228 points and at the beginning
of 2008 – 245 points.
Thus in 2007 in the development of Russian retail there were three important trends that
had a significant impact on food market development:
Considerable reduction of the share of markets in retail turnover and increase of the
share of trading organizations and retail chains in particular which are related to the group of
“large and medium, trading organizations” according to the Federal State Statistics Service;
Increase of growth rates of food turnover and import share in the structure of mass of
commodities of retail enterprises caused by the growth of real income and the change in the
demand structure due to the growth of the share of meat, vegetables, semi-finished products,
innovative products, healthy products, etc.
Significant increase of prices on the series of food products (dairy products, sunflower
oil, bread) conditioned the agreements on the Governmental and local level between producers
and retail chains on freezing of prices on the socially important products.
RREEGGIIOONNAALL RREETTAAIILL TTUURRNNOOVVEERR SSTTRRUUCCTTUURREE
Russia’s regional retail turnover structure is quite uneven: 49% of retail turnover was
made by 10 subjects of Russian Federation (Moscow, Moscow region, Saint-Petersburg,
Sverdlovsk region, Krasnodar region, Samara region, the Republic of Tatarstan, Tyumen region,
Chelyabinsk and Rostov region). The share of the largest subjects of Russian Federation has
been reducing (by 1.5-2% per year) due to lower growth rates of retail turnover in Moscow and
Saint-Petersburg compared to the other regions.
Structure of retail turnover by subjects of RF in 2007
Rostov
region
2,9%
Republic of
Bashkortostan
3,0%
Samara
region
2,9%
Other
51,0%
Krasnodar
region
3,5%
Sverdlovsk
region
3,6%
Tyumen
region
3,9%
Saint-Petersburg
4,1%
Moscow region
6,1%
Moscow
19,0%
Source: Infoline
32
Retail turnover structure by districts in 2007
Siberia
11,5%
Far-East
3,6%
Central
34,8%
Southern
12,3%
North-West
9,4%
Ural
10,4%
Volga
17,9%
Source: Infoline
Retail turnover in 2007 compared with 2006 increased in all federal districts and subjects
of RF. Increase by more than 20% was recorded in 21 subjects of Russian Federation, by more
than 25% - in 7 subjects of RF (including Moscow and Tula region as well as the Republic of
Altai and Bashkortostan), by more than 30% - in 3 subjects of RF (Vladimir region, the Chechen
Republic, Ust-Ordynski Buryat autonomous district).
In January-February 2008 compared with January-February 2007 retail turnover
increased in all federal districts and nearly all subjects of RF apart from Kalmykia and
Chechnia. The highest increase (by 30% and more) was recorded in Krasnodar region (by
30.2%), Ulyanovsk region (31.6%), Ivanovo region (38.1%), the Republic of Udmurtia (40.5%),
Chukotka autonomous district (47.3%). Moreover, it is important to note high growth rates of
retail turnover in Moscow which are just 2.2% below the level of Moscow region.
Regional structure of Russia’ retail turnover in 2002-2007, %
Region
2002
2003
Central Federal District
Moscow
Moscow region
North-West Federal District
Saint-Petersburg
Southern Federal District
Volga Federal District
Ural Federal District
Siberian Federal District
Far-East Federal District
40,2
27,3
4,0
9,3
3,7
10,6
16,6
7,9
11,5
4,2
39,2
26,1
4,3
9,2
3,9
10,5
16,6
8,4
11,6
4,2
2004
38,9
24,6
5,2
9,0
3,6
10,7
16,7
8,8
11,7
4,2
2005
37,4
22,9
5,3
8,9
3,5
11,5
17,1
9,3
11,7
4,1
2006
35,9
21,1
5,7
9,3
4,0
11,7
17,4
10,0
11,6
4,0
2007
34,7
19,0
6,1
9,4
4,1
12,3
17,9
10,4
11,5
3,9
Source: Federal State Statistics Service
33
MMAAIINN CCOOMMPPEETTIITTOORRSS11
Concentration of the Russian food retail market is quite low – the share of 3 largest
players is 6% of the market which considerably yields to analogous figures in Eastern and
Western European countries.
Such a low capital concentration creates the preconditions for competition intensification
among retail chains in the nearest future. Currently competition development is expressed in
capture of the extra markets due to the growth of the chain itself including the use of
franchising schemes as well as M&A deals. As a result, chains operating in the Russian market
actively increase their presence in Moscow and regions which leads to the record indices of the
business growth.
X5 Retail Group
X5 Retail Group N.V. (LSE: FIVE, Moody's - "B1", S&P - "BB-") is Russia’s largest food
retailer in terms of sales. It operates under two brands of “Pyaterochka” and “Perekrestok”.
The merger of the “Pyaterochka” and “Perekrestok” companies took place on May 18,
2006 with the aim of creation of the largest company in the food retail market in Russia.
As of December 31, 2007 the Company consisted of 674 owned “Pyaterochka” stores in
the format of a soft discounter located in Moscow (309), Saint-Petersburg (244) and other
regions of Russia (121) as well as 179 owned “Perekrestok” supermarkets in the Central region
of Russia and Ukraine including 105 stores in Moscow as well as 15 owned hypermarkets.
As of December 31, 2007 the number of franchised stores on the territory of Russia and
Kazakhstan amounted to 688.
Net sales of the consolidated company in 2007 amounted to 5,320 million USD which is
by 53% higher than in 2006. Gross profit in 2007 reached 1,404 million USD, EBITDA amounted
to 479 million USD, net profit – 141 million USD.
Metro Group
In 2005-2007 Metro C&C opened 8-10 outlets every year, most of them demonstrated
high sales. In 2008-2009 there will be stabilization of the number of openings of not less than 8
objects per year and as opposed to 2005-2006 when the stores were opened in the new regions
for the company, Metro Group is increasing the number of stores in the regions where
operating stores demonstrate the best results.
Moreover Metro Group in Russia implements the strategy of the multi-format
development in the framework of which the hypermarket Real was opened in 2005 and a
hypermarket of household electronics Media Markt was opened in 2007. Strategic development
program of Metro Group provides simultaneous opening of Metro C&C stores, Real
hypermarkets and Media Markt hypermarkets of household electronics in the most prospect
regions which will enable to improve the efficiency of purchasing and logistics structures.
Despite the development of the unique format for Russia - cash&carry significantly limiting the
number of potential customers - in the majority of regions Metro stores successfully compete
with hypermarkets of Russian chains and with Auchan hypermarkets in Moscow.
Auchan
Development of Auchan chain in 2007 has slowed down: the number of openings
declined from 7 to 4. In the end of 2007 Auchan completed extremely successful transaction on
1 Source: Infoline, companies
34
acquisition of the retail business of hypermarkets of “Ramstore” chain, which despite the
necessity of the development of the new for the company format in Russia – “Auchan-city mini-
hypermarket provided extremely high growth rates of the selling space and expansion in the
present regions.
At the end of 2008 Auchan efficiency is likely to decrease (for example, sales per sq. m.
of space) in the result of rebranding and reconstruction of “Ramstore” hypermarkets. However
in 2009 this trend will be overcome. Auchan would not have achieved similar growth rates of
selling space and geographical coverage expansion by means of organic development. Thus,
acquisition of “Ramstore” hypermarkets will enable Auchan chain to reduce the underrun from
the top three Russian retailers in 2008.
Dixy
As of the end of December 2007 “Dixy group” managed 388 stores – 377 “Dixy” stores
(discounter format), 8 “Megamart” stores (compact hypermarket), 7 «Mimimart» stores
(economy supermarket). In 2007 “Dixy group” opened 65 stores including 61 “Dixy”
discounters, 3 “Megamart” hypermarkets and 1 “Minimart” supermarket. 3 stores were closed
in 2007. Total selling space of the stores increased from by 22.85 thousand sq. m. to 151
thousand sq. m. in 2007. The stores of the chain are represented in 3 federal districts of Russia
(Central, North-West and Urals).
In 2008 “Dixy group” is considering the opportunity to buy-out leased stores opened
during 1999-2002 in Moscow and Saint-Petersburg to improve infrastructure and their organic
growth.
Dynamics of stores of Russia’s retailers in 2004-2007
№
Legal name
Main formats
Brand
Supermarket,
discounter
Pyaterochka and
Perekrestok
Number of stores
2004 2005 2006 2007
330
446
619
868
Hypermarket Metro C&C
12
22
31
39
1 X5 Retail Group N.V.
2
“METRO Cash and Carry”
company limited
3 “Tander”, CJSC
Discounter
Magnit
1014 1500 1893 2197
4
“Auchan-Russia" company
limited
Hypermarket
Auchan
6
7
14
18
5 “Dixy-group”, OJSC
Discounter
Megamart,
Minimart, Dixy,
V-mart
152
220
300
388
Source: Infoline
Dynamics of selling space of Russia’s retailer in 2004-2007
№
Legal name
Main formats
Brand
Supermarket,
discounter
Pyaterochka and
Perekrestok
Selling space
2004 2005 2006 2007
251
337
466 609,1
Hypermarket Metro C&C
90
170
260
330
1 X5 Retail Group N.V.
2
“METRO Cash and Carry”
company limited
3 “Tander”, CJSC
4 “Auchan-Russia" company Hypermarket
Discounter
Magnit
Auchan
282
95
381
99
530 651,7
210
180
35
№
Legal name
Main formats
Brand
Selling space
2004 2005 2006 2007
limited
5 “Dixy-group”, OJSC
Discounter
Megamart,
Minimart, Dixy,
V-mart
70
100 128,2 151
Source: Infoline
Dynamics of sales of Russia’ retailers in 2004-2007
№
Legal name
Main formats
Brand
Supermarket,
discounter
Pyaterochka and
Perekrestok
Sales, million USD
2004 2005 2006 2007
1769 2374 3551 5320
Hypermarket Metro C&C
1100 1801 2893 3400
1 X5 Retail Group N.V.
2
“METRO Cash and Carry”
company limited
3 “Tander”, CJSC
Discounter
Magnit
848,5 1578 2504 3676
4
“Auchan-Russia" company
limited
Hypermarket
Auchan
525 1496 2000 3000
5 “Dixy-group”, OJSC
Discounter
Megamart,
Minimart, Dixy,
V-mart
500
845 1086 1433
Source:Infoline
CCOOMMPPEETTEETTIIVVEE AADDVVAANNTTAAGGEESS OOFF ““MMAAGGNNIITT”” CCHHAAIINN
Formation of the multi-format business
The strategic decision to develop the additional format of a hypermarket will provide
the Group with the deeper segmentation of the current markets and potential customers with
different income simultaneously achieving high efficiency of turnover per store and of the
average ticket as well as rapid paces of business growth. Moreover, the pricing policy of
“Magnit” allows it to compete with open-air markets taking into consideration the potential
customers with income below average.
Strong regional coverage
The group of “Magnit” companies has considerable experience of operation in the
regions: 2002 - 2007 impressive growth of the Group turnover was a result of expansion in the
cities with a population of less than 500 thousand people. In the nearest future it is the regions
where the Company will experience the biggest growth of the consumer demand which creates
the favorable conditions for medium-term dynamics of the Group’s business.
The largest chain in RF in terms of number of stores
In terms of number of stores “Magnit” chain occupies the first place in Russia which
favorably effects the cooperation with the largest producers of food and beverages promoting
their products on the regional markets. First of all it reflects in purchasing on the advantageous
conditions and corresponding increase of the business profitability.
Recognized brand
36
According to independent expert research, IGD in particular, Russian customers pay
considerable attention to the brand when shopping for food. Moreover, loyalty of Russian
customer to one or another brand is higher in comparison with European citizens, which makes
Russian customers less sensitive to the growth of product prices. Therefore, wide chain of stores
united under “Magnit” brand allows the Group to strengthen its positions in the occupied
market niche.
Effective logistics system
Developed logistics system, distribution centers and own fleet of vehicles allows the
Group to carry out strict control over overhead charges. The use of distribution centers favors to
reduce the purchasing prices as well as the load of the store when accepting the goods and, at
the end, contributes to more efficient business organization.
The Group employs highly efficient automated stock replenishment system which
furthers to achieve high turnover as well as to reduce the costs.
37
99.. PPRRIIOORRIITTYY DDIIRREECCTTIIOONNSS OOFF TTHHEE CCOOMMPPAANNYY’’SS OOPPEERRAATTIIOONN
Based in Krasnodar, in the Southern region of Russia, open joint-stock company
“Magnit” is a holding company for a group of entities that operate in the retail trade under
the “Magnit” name. The chain of “Magnit” stores is one of the leading operators in the
Russian food retail market. As of December 31, 2007 the chain consisted of 2,194 convenience
stores and 3 hypermarkets in more than 700 locations in the Russian Federation.
Approximately two-thirds of the Company’s stores are located in cities with a
population of less than 500 thousand. The Company operates in 5 out of 7 federal districs. Most
of its stores are located within the Southern, Central and Volga regions. The Company also
operates stores in the North-Western and Urals regions. At the end 2007, stores located in the
Southern Federal district accounted for 889, in Volga region there were 628, Central Region –
546, in the North-West and Ural regions the number of stores amounted to 89 and 45
correspondingly.
Central: 546 stores
3 Distribution centers
North-West:
89 stores
Urals:
45 stores
1 Distribution center
Volga:
628 stores
2 Distribution centers
Southern:
889 stores
2 Distribution centers
The Company operates an in-house logistics system consisting of 8 modern
distribution centers: two of them are located in Kropotkin and Bataysk, Southern
Federal district, two are in Engels and Togliatti, Volga Federal district, another three
38
distribution centers are based in Tver, Oryol and Ivanovo, Central Federal district and
one in Chelyabinsk, Urals.
City
Federal District
Warehousing
space, sq. m.
Number of
serviced stores
Bataysk1
Southern
16,576
Kropotkin
Southern
30,048
Engels
Volga
19,495
Togliatti
Volga
8,379
Tver
Central
10,714
Oryol
Central
12,472
Ivanovo
Central
24,120
Chelyabinsk
Urals
16,576
267
492
322
254
170
325
274
93
Total
138,380
2,197
Leased/Owned
Собственный**
Собственный
Собственный
Арендованный
Собственный
Собственный
Собственный
Собственный
The Company operates automated stock replenishment systems and a fleet of 802
vehicles.
1 Ownership rights are being obtained
39
1100.. PPRRIIOORRIITTYY DDIIRREECCTTIIOONNSS OOFF TTHHEE CCOOMMPPAANNYY’’SS
DDEEVVEELLOOPPMMEENNTT
Within the medium-term development outlook the Company marks out the
following directions:
• Further expansion of the chain due to the growth of the key markets coverage
as well as organic expansion in the least developed regions.
• Development of
the multi-format business-model
through active
implementation of the hypermarket format.
• Formation of the high level of loyalty of the key audience to the brand.
• Achieving and keeping up with the leading positions in the field in terms of
level of expenses.
Chain development
In the nearest 2-3- years the Company plans to keep high rates of the business
growth, opening not less than 250 main format stores per year in the cities with the
population up to 500,000 people.
The key territories for the Company are Southern, Volga and Central regions, it is
planned to increase the number of stores in Ural. In the long-term outlook the
management of the chain does not exclude an approach to the markets of Siberia and
the Far East.
Development of the multi-format model
Currently the Company is actively constructing the hypermarket format on the
developed territories.
Hypermarkets will be principally opened in the cities with population from 50,000 –
500,000 citizens, at that the retail outlet will be located inside the city (within the city
boundaries).
As of 01.01.2008 the Company had 3 operating hypermarkets in:
Krasnodar, population of 646,175 people, total space of 11,283 sq. m., hypermarket
selling space of 4,200 sq. m., lease space of 3,000 sq. m.;
Kingisepp, population of 50,295 people, total space of 6,264 sq. m., hypermarket selling
space of 2,790 sq. m., lease space of 445 sq .m.;
Solnechnogorsk, population of 58,374 people, total space of 11,655 sq. m., hypermarket
selling space of 4,600 sq. m., lease space of 2,650 sq. m.;
40
Kingisepp
Solnechnogorsk
Krasnodar
Depending on the location (size of the location or of the area in a large city) there are 3
sub-formats of the hypermarket:
«small» will have total space of 3,200 – 4,700 sq. m., selling space of 2,000 – 2,500 sq. m.;
«average» will have total space of 11,100 - 11700 sq. m., hypermarket selling space of
6,000 – 8,100 sq. m. (including lease space);
«large» will have total space of 21,000 sq. m., hypermarket selling space of up to 12,500
sq. m.; (including lease space).
Strategic development direction of the new format for the Company – a format of a
hypermarket will enable to carry out more profound segmentation of the existing markets and
consider population with different income as potential customers which results in high
turnover per store and average ticket as well as fast business growth.
Pricing policy of the Company allows it to compete with open air markets considering
customers with income below average as the target audience.
Brand recognition and customer loyalty
The management of the Company takes measures to adapt the traditional format
for changing preferences of the customers. In the regions with the most solvent demand
the work is carried out with the traditional discounter assortment in the direction of its
expansion in favor of more expensive products (for example, ready cookery and semi-
prepared meat).
Within the complex of measures taken to improve the loyalty to the “Magnit”
brand there will be analysis carried out to study the preferences of the customer and the
marketing program set out according to the peculiarities of different formats.
As an additional factor of the brand popularity the management of the Company
supposes to improve the service in the chain stores through appropriate work with its
employees.
Minimization of expenses
41
The main means of the successful development in the above direction is further
improvement of the logistics processes and investments in the IT system which will
provide the Company with maximum effective stock management and transport flows
and will be conductive to its transition to the leader in terms of expenses control.
Among the plans of the Company is an active development of private label
products which enables the Company to increase its profitability.
The status of Russia’s leading chain in terms of number of stores and customers
makes the Company effectively co-operate with suppliers achieving maximum
favorable purchasing conditions.
42
1111.. IINNFFOORRMMAATTIIOONN OONN TTHHEE PPAAIIDD DDIIVVIIDDEENNDDSS
It was resolved by the annual general shareholders’ meeting of June 28, 2007
(minutes of meeting of 10.07.2007) not to pass any dividends on ordinary nominal
shares of OJSC “Magnit”.
43
1122.. SSEECCUURRIITTIIEESS
AAUUTTHHOORRIIZZEEDD CCAAPPIITTAALL SSTTOOCCKK
The authorized capital stock of the Company determines the minimum amount of assets
that guarantee its creditors’ interests.
As of December 31, 2007 authorized capital stock of the open joint-stock company
“Magnit” amounted to 720,000 rubles. It consists of 72,000,000 ordinary nominal uncertified
shares with par value of 0.01 rubles.
During 2007 charter capital of OJSC “Magnit” remained unaffected.
The Company has a right to offer in addition to the placed shares ordinary nominal
shares numbering 128,850,000 shares with par value of 0.01 RUB each (authorized shares).
Information on the placed shares of OJSC “Magnit” as of 31.12.2007:
Description of
securities
Ordinary nominal
uncertified shares
Total:
Number of state
registration
Date of state
registration
Nominal,
RUR
Total number
of securities
1-01-60525-Р
04.03.2004
0.01
72,000,000
72,000,000
Structure of OJSC “Magnit” share capital as of 31.12.2007:
Number of registered
persons
Name
Share in the charter
capital, %
Legal persons
Including nominal holders
Natural persons
Total:
BBOONNDDSS
11
10
15
26
41.7256
41.7255
58.2744
100
Bond issue of OJSC “Magnit Finance” of 01 series:
In 2005 The Company entered the stock market offering their investors the bond issue
issued by Limited Liability Company “Magnit – Finance”, the subsidiary of OJSC “Magnit”.
The Bond issue allowed the Company to optimize its debt portfolio and work out the
technologies of cooperation with investors in order to move out further on the stock market
with the Company’s shares.
Bond included 2 million securities with nominal value of 1 thousand RUB guaranteed by
CJSC “Magnit” and CJSC “Tander”. Bonds will be outstanding for three years. The primary
intent of the bond issue was the refinancing of short-term liabilities of the Group. For this
purposes the management invested not less than 75% of the raised funds, the rest was spent on
further development of “Magnit” chain.
The offering of the certified interest-bearing non-convertible bonds payable to bearer of
01 series with the obligatory centralized deposit of LLC “Magnit-Finance” on the MICEX
44
Federal stock exchange started at November 23, 2005. The number of the virtually offered
securities amounted to 2,000 thousand securities which constitutes 100% of the total number of
securities liable to the offering. The bond issue was fully realized in the course of auction in the
first day of offering.
Parameters of the bond issue of LLC “Magnit-Finance” of 01 series:
Date and the number of state registration
Issue volume
Number of securities
Nominal value of each security
Offering price
Offering date
Offering method
Due date
Number of coupons
Trading code
ISIN code
Coupon interest rate as of auctions’ results
First coupon interest rate
Second coupon interest rate
Third coupon interest rate
Fourth coupon interest rate
№ 4-01-36102-R of October 27, 2005
2,000,000,000 rubles
2,000,000 bonds
1,000 rubles
100% of par value
23.11.2005
Open subscription
1092 days from the offering date
(19.11.2008)
6
RU000A0GJ0L9
RU000A0GJ0L9
9.34%
9.34%
9.34%
9.34%
9.34%
The first coupon profit of 01 series bond issue was paid out on May 24, 2006. The total
amount of profit paid out of the first coupon amounted to 93.14 million RUB, the amount of
profit on the first coupon paid out per one bond amounted to 46.57 RUB.
The second coupon profit of 01 series bond issue was paid out on November 22, 2006.
The total amount of profit paid out on the second coupon amounted to 93.14 million RUB, the
amount of profit of the second coupon paid out per one bond amounted to 46.57 RUB.
The third coupon profit of 01 series bond issue was paid out on May 23, 2007. The total
amount of profit paid out on the third coupon amounted to 93.14 million RUB, the amount of
profit of the second coupon paid out per one bond amounted to 46.57 RUB.
The fourth coupon profit of 01 series bond issue was paid out on November 21, 2007.
The total amount of profit paid out on the fourth coupon amounted to 93.14 million RUB, the
amount of profit of the second coupon paid out per one bond amounted to 46.57 RUB.
According to the trading sessions during the period from 01.01.2007 to 31.12.2007 the
weighted average price of the bond transactions fluctuated from min 98.86% (26.12.2007) to max
113.6 % (27.07.2007) of par value. Declared quotation during this period fluctuated from min
100.15% (03.10.2007) to max 104.79% (02.08.2007) of nominal value.
45
116
114
112
110
108
106
104
102
100
98
01.01.2007
31.01.2007
02.03.2007
01.04.2007
01.05.2007
31.05.2007
30.06.2007
30.07.2007
29.08.2007
28.09.2007
28.10.2007
27.11.2007
27.12.2007
weighted average price
declared quatation
Bond issue of LLC “Magnit Finance” of 02 series:
In 2007 the Company offered its investors the second bond issue also issued by “Magnit
Finance” company limited, subsidiary of OJSC “Magnit”.
Issue included 5 million securities with the nominal of 1 thousand RUB guaranteed by
OJSC “Magnit” and CJSC “Tander”. Issue will be outstanding for 5 years. As it is of the first
issue, the second was conditioned by the necessity of refinancing short-term liabilities of the
group.
The offering of the certified interest-bearing non-convertible bonds payable to bearer of
02 series with the obligatory centralized deposit of LLC “Magnit-Finance” on the MICEX
Federal stock exchange started at March 30, 2007. The number of the virtually offered securities
amounted to 5,000 thousand securities which constitutes 100% of the total number of securities
liable to the offering. The bond issue was fully realized in the course of auction in the first day
of offering.
Parameters of the bond issue of LLC “Magnit-Finance” of 02 series:
Date and the number of state registration
Issue volume
Number of securities
Nominal value of each security
Offering price
Offering date
Offering method
Due date
Number of coupons
Trading code
ISIN code
Interest rate of the auction results
1 coupon interest rate
2 coupon interest rate
№ 4-02-36102-R of March 6, 2007
5,000,000,000 rubles
5 000 000 bonds
1,000 rubles
100% of par value
30.03.2007
open subscription
1 820 days from the offering date
(23.03.2012)
10
RU000A0JP4W7
RU000A0JP4W7
8.20 %
8.20 %
8.20 %
46
The first coupon profit of 02 series bond issue was paid out on September 28, 2007. The
total amount of profit paid out on the first coupon amounted to 204.45 million RUB, the amount
of profit of the first coupon paid out per one bond amounted to 40.89 RUB.
The second coupon profit of 02 series bond issue was paid out on March 28, 2007. The
total amount of profit paid out on the second coupon amounted to 204.45 million RUB, the
amount of profit of the second coupon paid out per one bond amounted to 40.89 RUB.
According to the trading sessions during the period from 30.03.2007 to 31.12.2007 the
weighted average price of the bond transactions of 02 series fluctuated from min 96.21%
(04.12.07) to max 101.98% (24.05.07) of par value. Declared quotation during this period
fluctuated from min 96.21% (04.12.2007) to max 101.42% (29.05.07).
103
102
101
100
99
98
97
96
95
19.03.2007
18.04.2007
18.05.2007
17.06.2007
17.07.2007
16.08.2007
15.09.2007
15.10.2007
14.11.2007
14.12.2007
weighted average price
declared quotation
47
SSHHAARREESS TTRRAADDIINNGGSS
The shares of OJSC “Magnit” entered the Russian stock markets in April 2006.
On April 14, 2006 the shares of OJSC “Magnit” were admitted to tradings in the section
of the List “Securities admitted to floatation but not included into the quotation lists” of Non-
profit partnership ““Russian Trading System” Stock Exchange”.
On April 24, 2006 tradings of the shares of OJSC “Magnit” in the List of non-listed
securities of Close joint-stock company “MICEX Stock Exchange” commenced.
On April 28, 2006 the IPO of OJSC “Magnit” on the Russian Trading System (RTS) and
the Moscow Interbank Currency Exchange (MICEX) was completed.
The price of one share of OJSC “Magnit” in the course of offering on RTS and MICEX
was fixed on the level of 27 USD. Proceeds for the whole block comprising 18.94% of the capital
stock amounted to 368.355 million USD. Deutsche UFG functioned as an IPO coordinator;
foreign investors were able to take part in the offering by purchasing the securities of “Magnit”
in accordance with the rule “S”.
Since December 11, 2007 the shares of OJSC “Magnit” have been included into the
Quotation list “B” of OJSC “Russian Trading System” stock exchange”, OJSC “Magnit” shares
have been included to tradings in the corresponding list on December 13, 2007.
OJSC “Magnit” shares have been included in the quotation list “B” of CJSC “MICEX SE”
and admitted to tradings in the corresponding list.
According to trading sessions for the period from 01.01.2007 to 31.12.2007 on “RTS SE”
weighted average price of the shares transactions varied from min 950 rubles (17.01.2007) to
max 1,215 rubles (23.04.2007).
1400
1200
1000
800
600
400
200
0
7
0
0
2
.
1
0
.
7
1
7
0
0
2
.
1
0
.
1
3
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0
0
2
.
2
0
.
4
1
7
0
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.
2
0
.
8
2
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0
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.
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1
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.
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.
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0
Price, RUR
Market capitalization of OJSC “Magnit” at the end of 2007 amounted to 82,831,802,400
rubles according to OJSC “RTS” SE”.
48
1133.. LLIISSTT OOFF 22000077 TTRRAANNSSAACCTTIIOONNSS DDEECCLLAARREEDD AASS MMAAJJOORR IINN
AACCCCOORRDDAANNCCEE WWIITTHH TTHHEE FFEEDDEERRAALL LLAAWW ““OONN JJOOIINNTT--SSTTOOCCKK
CCOOMMPPAANNIIEESS””
1.
Date of transaction
30.03.2007
Extension of pledge in the form of guarantee
for the purposes of issue of non-convertible
interest-bearing certified bonds of LLC “Magnit
Finance” payable
to bearer with obligatory
centralized deposit of 02 series in the amount of
5,000,000 bonds with the par value of 1,000 rubles
each offered by open subscription with the due
term of 1,820 days from the bonds offering date
(hereafter “Bonds”).
Subject and other essentials of transaction
The Guarantor as well as the Issuer shall bear
full responsibility to the holders of Issuer’s bond
the report on the issue of which is registered by
the procedure provided by law or notification of
issue of which is submitted to the registering
authority for Issuer’s fulfilling its obligations to
the Bonds’ holders including: - obligation to pay
out aggregate coupon profit on 5,000,000 (five
million) Bonds
the amount
determination and payment term is specified by
the Issuer in the decision on securities’ issue and
“Issuing
securities
documents”);
(procedure of
prospectus
(hereafter
- obligation of acquisition of Bonds as
provided by the Issuing documents;
- obligation of Bonds redemption (including
long-term) as provided by the Issuing documents
and Russian law.
The Guarantor shall bear responsibility equal
to the Issuer’s in case of non- or unduly execution
by the Issuer of its bonds obligations.
The Guarantor shall bear responsibility to the
Bonds holders in the amount of not exceeding
Maximum Amount which
the
aggregate par value of Bonds (5,000,000,000 rubles)
and aggregate coupon profit on Bonds.
constitutes
Guarantee agreement which pledges the Bonds
obligations shall be effective from the date of
creation of right of the first holder for such Bonds,
and simple written form of
the guarantee
agreement shall be declared observed.
State
acknowledgement is not required.
registration
transaction
and
/or
Data on the compliance with the requirements of
state
transaction
acknowledgement in the cases provided for by the
registration
and/or
49
Russian law
Price of transaction in monetary terms and in percent
of the balance sheet value of the issuer’s assets as of
the last date of the reporting period preceding the
date of transaction
Due term of obligations hereof as well as information
on their fulfillment
Reasons of expiry and consequences for the party or
for the issuer with specification of penalties provided
for by the conditions of transaction
No expiry
7 044 500 000 RUR. (Guarantee in the amount of
the aggregate par value of Bonds of 5,000,000,000
rubles and aggregate coupon profit on Bonds),
which constitutes 138.78% of the balance sheet
value of the Issuer’s assets as of 01.01.2007.
23.03.2012 (the possibility exists of early payment),
obligations are being exercised
Information on the transaction being referred to the
major transaction as well as on the approval of the
transaction by the management body of the issuer
transaction which
Major
related-party
transaction at the same time. The transaction is
approved by the General shareholders’ meeting of
15.01.2007, minutes w/o No. of 30.01.2007
is a
Other information to be specified at the discretion of
the Issuer
None
50
1144.. LLIISSTT 00FF 22000077 TTRRAANNSSAACCTTIIOONNSS DDEECCLLAARREEDD AASS RREELLAATTEEDD--
PPAARRTTYY IINN AACCCCOORRDDAANNCCEE WWIITTHH TTHHEE FFEEDDEERRAALL LLAAWW ““JJOOIINNTT--
SSTTOOCCKK CCOOMMPPAANNIIEESS””
1.
Date of transaction
30.03.2007
Extension of pledge in the form of guarantee
for the purposes of issue of non-convertible
interest-bearing certified bonds of LLC “Magnit
Finance” payable
to bearer with obligatory
centralized deposit of 02 series in the amount of
5,000,000 bonds with the par value of 1,000 rubles
each offered by open subscription with the due
term of 1,820 days from the bonds offering date
(hereafter “Bonds”).
The Guarantor as well as the Issuer shall bear
full responsibility to the holders of Issuer’s bond
the report on the issue of which is registered by
the procedure provided by law or notification of
issue of which is submitted to the registering
authority for Issuer’s fulfilling its obligations to
the Bonds’ holders including: - obligation to pay
out aggregate coupon profit on 5,000,000 (five
million) Bonds
the amount
determination and payment term is specified by
the Issuer in the decision on securities’ issue and
“Issuing
securities
documents”);
(procedure of
prospectus
(hereafter
- obligation of acquisition of Bonds as provided
by the Issuing documents;
- obligation of Bonds redemption (including
long-term) as provided by the Issuing documents
and Russian law.
The Guarantor shall bear responsibility equal
to the Issuer’s in case of non- or unduly execution
by the Issuer of its bonds obligations.
The Guarantor shall bear responsibility to the
Bonds holders in the amount of not exceeding
Maximum Amount which
the
aggregate par value of Bonds (5,000,000,000 rubles)
and aggregate coupon profit on Bonds.
constitutes
Guarantee agreement which pledges the Bonds
obligations shall be effective from the date of
creation of right of the first holder for such Bonds,
and simple written form of
the guarantee
agreement shall be declared observed.
(cid:1) the body giving the pledge in the form of
(hereafter
– OJSC
«Magnit»
guarantee
«Guarantor»);
51
Subject and other essentials of transaction
Parties of transaction
(cid:1) natural and legal persons – owners of the
Bonds (as provided by article 27.4 of the Federal
Law “On the securities’ market”.
Beneficiary under transaction: issuer of the
Bonds – LLC«Magnit Finance»
Full and short corporate name (names) of the
legal body or the name of the natural person
declared as an interested party to the transaction
under the legislation of Russian Federation
Alexandr Prisyazhnyuk
Grounds (argumentation) on which such person
is declared as an interested party to the transaction
Alexandr Prisyazhnyuk being a member of the
Board of directors of the Issuer and CEO of LLC
“Magnit-Finance” at the same time
The amount of transaction in monetary terms,
thousand rubles
7,044,500
(Guarantee
the amount of
aggregate par value of Bonds (5,000,000,00 rubles)
and aggregate coupon profit on Bonds)
in
The amount of transaction as percent of the
balance value of issuer’s assets on the date of the end
of the last fiscal reporting period prior to the date of
transaction, %
138.78%
The liability term of transaction
Data on the exercise of obligations
The management body of the issuer which takes
the resolution on approval of the transaction, date of
the resolution (date of record and minutes №)
2.
Date of transaction
Subject of transaction and other essentials
Parties of transaction
23.03.2012
redemption)
(the possibility
of pre-term
transaction
The obligations are being exercised
The
the
is
extraordinary shareholders’ meeting of OJSC
“Magnit” on January 15, 2007 (minutes w/n of
January 30, 2007)
approved by
13.07.2007
The Lessor shall lease to the Lessee the
following real estate:
- any real estate owned by the Lessor on the
date of effecting the Lease Contract;
- the Lessor’s real estate, newly erected or
reconstructed after the Lease Contract, purchased
by the Lessor (executed through supplementary
agreements to the contract).
The Lessor – OJSC«Magnit»
The Lessee– CJSC«Tander»
Full and short corporate name (names) of the
legal body or the name of the natural person
declared as an interested party to the transaction
under the legislation of Russian Federation
Evgeniy Gordeychuk
Grounds (argumentation) on which such person
is declared as an interested party to the transaction
Evgeniy Gordeychuk being a member of the
board of directors of OJSC “Magnit” and CEO of
CJSC «Tander » at the same time
The amount of transaction in monetary terms,
thousand rubles
Lease term
The management body of the issuer which takes
the resolution on approval of the transaction, date of
105,647
11 months
The transaction is approved by the annual
general shareholders’ meeting of OJSC “Magnit”
52
the resolution (date of record and minutes №)
on June 28, 2007 (minutes w/o No. of July 10, 2007)
53
1155.. DDEESSCCRRIIPPTTIIOONN OOFF TTHHEE MMAAIINN RRIISSKK FFAACCTTOORRSS RREELLAATTEEDD TTOO
TTHHEE OOPPEERRAATTIIOONN OOFF TTHHEE CCOOMMPPAANNYY
Due to the fact that OJSC “Magnit” and its subsidiaries operate within one group of
companies of OJSC “Magnit” (hereinafter - “the Group”, retail chain “Magnit” or “The
Company”), the risks are described for the entire Group in general.
The description of risks provided herein is not full-scale or extensive, but expresses
Company’s viewpoint and its own assessment. Along with the risks specified herein, there
exist other risks not included in the report which may affect the amount of investments into
OJSC “Magnit” shares. Other risks, including those the Company is not aware of or which
deem insignificant at the present time, may lead to reduction of revenue, excess of expenses or
other events and (or) repercussions, as a result of which the price of Company’s securities will
decline.
In case if one or several risks as described below arise, OJSC “Magnit” will take all the
possible measures and apply best efforts to minimize the effect of negative changes. Today it is
impossible to define particular actions of the Company in any risk conditions, as the elaboration
of the adequate measures is impeded by the indeterminate character of the further situation
development. The character of undertaken measures will depend on the conditions of each
specific case. OJSC “Magnit” cannot guarantee that the measures taken to meet the negative
fluctuations will considerably change the situation, because the majority of the described risks
are beyond the control of the Company.
Risk Management Policy of the Company.
Generally the Company and the Group apply system approach of risk management. The
key constituent elements of the risk management policy in each focus area are:
Risk identification
Risk assessment methods
Elaboration and implementation of comprehensive risk management framework
Ongoing monitoring of risk status
Risk management is fulfilled and applied to the entire Group
In regard to the industry risks, industry environment in the market for the intermediate-
term and long-term periods is estimated according to the macroeconomic forecasts of MEDT
and investment analysts. The prospective demand estimation is based on the forecasts on the
population income sector and consumption level. The industry trends are estimated and
defined in respect of diverse trade formats, breakdown of demand in the formats and
competitive environment.
The conducted analysis underlies the development strategy aimed at consolidation of
competitive positions and increase of market share of the Company.
Regarding country and regional risks, we monitor political and economic situation, as
well as estimate the risk level of natural disasters, cease of transport communication in the
regions, where “Magnit” chain stores are located. Territorial diversification of ‘Magnit’
company groups’ operation adds up to risk reduction.
Regarding financial risks, the level of interest rate, currency exchange, credit and
liquidity risks is estimated.
Interest risks management is carried out through the most optimal ways of financing
and coordination of resource attraction terms with the terms of implementation of the projects
which are to be financed. To provide the opportunity of attracted resources’ optimization, the
Group develops its credit profile, expands the data base of potential creditors and diversifies
54
means of their attraction. The reduction of resources costs is achieved through the policy of
information transparency. One of the tools of interest risk management is the forecasting of the
interest rate changes and the assessment of appropriate debt liability level of the Company with
consideration such overall interest rate changes.
Regarding the currency risks, the analysts’ forecasts on the possible fluctuations of the
exchange rate are assessed, and the decisions on the amount and direction of currency position
are taken. Since “Magnit” receives all revenues in Russian rubles and do not possess assets
denominated in foreign currency, the Company does not take liabilities in foreign currency to
minimize currency risks.
Regarding liquidity risks, the Company and the group in general maintains balanced
ratio of assets and liabilities.
Regarding credit risks, the Company applies analysis of financial state of counteragents
and the limit system.
Legal risk management is based on the strict observance of the present Russian
legislation. Jurisdictional agencies regulate all legislation fluctuations which refer to the
company activity and conducts legal inspection of all the contracts and agreements.
INDUSTRY RISKS
Risks related to customer demand and competition
Negative changes of macroeconomic conditions and the decrease of customer demand
in Russia may adversely affect sales of the Group and its profit
The Group operates in the retail sector of food and goods of primary necessity.
The development of the retail sector, where the Group operates, in many aspects
depends on macroeconomic factors because the demand for the consumer goods is determined
by the amount of disposable income of population.
According to the forecasts of the Russian Government, GDP and as a result the
population income will continue to grow over the next few years. However in case of economic
instability the reduction of the actual disposable income of population may lead to deterioration
of the growth dynamics and sector profitability. It should be noted that the growth of Russian
economy is mainly assured by the growth of the oil price, other energy and mineral resources
on the world market. Price collapse of mineral resources will negatively affect the economy of
Russian Federation on the whole due to the dominant share of raw materials in GDP.
Deterioration of the economic situation will also result in the reduction of the solvent demand
in the country.
Consumer demand on the markets, where the Group operates, depends on a number of
factors which are beyond control of the Group, including demographical factors, consumer
preferences and spending capacity of the consumers. The reduction of the consumer demand or
fluctuations of consumer preferences may dramatically reduce the sales and the profit of the
Group, and substantially affect business activity, financial state and results of the Group and
the Company. Moreover, the seasonality of the consumer demand may lead to considerable
fluctuations of the Group operation results in different periods of time.
High level of competition may lead to decline of the market share of the Group and
its profit
55
The Group operates in 5 federal districts and in more than 700 locations of Russian
Federation with the highest concentration in the South, Central and Volga regions, and the
nearest future plans to develop in the retail store chain in other regions of the country,
including the Central and the Urals regions which are a priority. The retail market of the South
Federal District (hereinafter “SFD”) is quite a competitive regional market in Russia and
presented by the majority of the big Russian players and a number of western companies.
Russian retail sector is characterized by a high level of competition. The Group competes
with a significant amount of Russian and international companies. In recent years consumer
demand growth in Russia attracted new market participants and led to the intensification of
competition. Retail chains compete with each other mainly for store locations, product quality,
service and price, variety of goods and store conditions. Appearance of the additional players
on the Russian market may intensify competition even more and reduce the operating
efficiency of the Group.
Some of the Group’s competitors which are on the market today, and also those
planning to enter the Russian market, are big international companies and apparently have
more opportunities to attract resources than the Group. Moreover, many other international
players, including those surpassing the Group in financial and other opportunities, will enter in
the nearest years the Russian market through acquisition of local players and setting up of their
own chains from the ground up.
If the above process is intensive, the competition may substantially grow, what will
negatively affect the market share of the Group and its competitive position. The ability of
“Magnit” retail chain to retain its competitive position depends on its opportunities to maintain
and remodel the existing stores and open new stores in advantageous locations, as well as to
offer competitive prices and services. There is no guarantee that the Group will be able to
successfully compete with the present and new competitors in the future.
On the present stage of competitive activity the considerable risks for the Group are also
connected with the fact that the main competitors to the Group use more aggressive approach
such as gaining a foothold in the additional markets through the growth of the competitive
chains based on franchising schemes. Such approach allows competitors to enhance their
presence in many regions of Russia as well as considerably reduce the costs of new stores
installations. The fact that the Group does not use the franchising schemes may lead to serious
reduction of mobility in fluctuation of geographical coverage, and as a result to the loss of a
considerable market share.
These factors as well as economic conditions and strategy of the discount pricing may
lead to further competition intensification and negatively affect business, financial position and
operational results of the Group and the Company.
Risks related to the intensive growth
Failure of the Group’s strategy in intensive expansion may obstruct its further growth
The stores operating under “Magnit” trade mark today are located in Moscow (7), Saint-
Petersburg (13), Krasnodar region and 41 other constituent entities of Russian Federation.
Within its strategy the Group plans to considerably increase the number of its stores in the
above regions maintaining the same development rates as well as further to expand its chain in
another 7 constituent entities of Russian Federation. The development plans of the Group make
it dependent on economic conditions and some other factors.
The successful roll-out of the Group development strategy depends on its ability to
identify and acquire suitable premises on commercially reasonable terms, to open new stores in
56
time, to employ, train and keep extra store and management personnel and to integrate new
stores into the Group’s existing operation on a profitable basis. There is no assurance that the
Group will achieve the target growth and that the new stores will profit.
There is a risk of loss of target audience over the time. Gradual increase of population
income may lead to the attrition of “Magnit” chain customers, and as a result to the material
adverse effects on the Group.
The Russian food retail market is subject to changing customer trends, demands and
preferences. The Group’s target customers are mainly the consumers with medium or low
income. If the level of disposable consumer income continues to increase nationwide (either
generally or in certain federal districts, especially in the Southern Federal District where we
derive a large portion of out total revenue), we may not be able to adjust the assortment of
products in our stores quickly enough to reflect changes in the preferences of the consumers,
and thus will lose a part of the target audience. As a result of such changes, the number of
customers shopping in our stores may decrease (or increase more slowly than in the past), or
average ticket at our convenience stores may decrease (or increase more slowly than in the
past), which could have a material adverse effect on business, results of operation, financial
position and prospects of the Group.
Failure to successfully launch and operate our hypermarket chain may result in
material losses
Our expansion into the hypermarket business presents a particularly difficult challenge.
While we have a long track record of successful installations of large numbers of new
convenience stores, expanding the scope of activity, the Group has started its hypermarket
expansion only recently. The first hypermarket was opened in October 2007, therefore many
elements of our strategy with respect to hypermarket operations have not yet found its practical
use or been applied.
In addition, our senior managers have relatively limited experience in managing
hypermarkets, and there is no assurance that specialists recently involved in the operation of
the hypermarkets will be able to control and to manage risks and duly exercise their authority.
Moreover, hypermarket construction requires big financial investments and takes a significantly
longer time. Based on the practice in hypermarket construction, on the average it takes the
Group from 2 up to 8,7 months from the date of decision to purchase a land plot to receiving
rights on it, additional 6 months go for obtaining of a construction license and 9 months for
construction and obtaining of the rest necessary permissions and licenses. Since the Group have
made large capital investments in already opened hypermarkets and hypermarkets under
construction, and in the nearest future intends to make additional large capital expenditures on
hypermarket chain expansion, the consequences of Croup’s inability to effectively manage and
achieve target levels of profitability would be particularly negative to its business, results of
operation, financial position and prospects.
Expansion of the Group through acquisition of other companies or their assets may be
connected with different risks which may have serious adverse affect on the economic
activity of the Group and its financial position
The Group plans to expand its operation through acquisition. Acquisition opportunities
presuppose certain risks, including failure to single out the aims, appropriate for acquisition,
and/or to carry out adequate complex examination of their operations and/or financial position,
financial risks and operation expenses considerably higher than the assumed ones, moreover
there is a risk of incapability to assimilate the operation and personnel of the acquired
57
companies, absence of the arrangement and integration of all the required systems and control,
the risk of customer loss, as well as the risk of entering the markets, where the Group does not
have any experience or has minor experience and/or markets, where the access to the necessary
logistics provision and distribution chain is limited, as well as the risk of business interruption
and diffusion of the Group management resources. If the Group is not able to integrate its
acquisitions, such failures may have a material adverse effect on its financial position and
results of operation.
Failure to raise enough funds may prevent the Group from realization of its plans on
operation expansion
Implementation of the growth strategy of the Group may require large capital
expenditures. There’s no guarantee that the cash flow from operation of the Group and/or
borrowings from financial institutions or financial assets attracted from the stock market would
be enough for financing its scheduled expenses in the nearest future. If the Group fails to raise
enough funds to cover its scheduled expenses, it is possible that it will have to reduce or cease
expansion.
Expansive growth of the Group may lead to administrative, industrial and financial
gap of resources
Group’s output is growing very fast. The growth is expected to continue in the projected
future. Such expansive growth as well as extra growth may lead to administrative, operational
and financial gap of resources. As a result, “Magnit” retail chain will have in particular to
continue improvement of its operational and financial systems, administrative management
and approaches. The Group will also have to achieve strict coordination of transportation,
technical, account, legal, financial, marketing, warehouse and store personnel operation. If the
Group fails to manage with the above tasks, it may have an adverse effect on the operation and
financial position of the Group.
Moreover, due to the ongoing growth, the Group may experience difficulties in
application, expansion and improvement of its management information system. If the Group
fails to maintain its management information system, financial accounting and in-house audit
system at a proper level, its economic operations and financial position may materially suffer.
Risks related to the investments in real estate:
Lack of reliable information about the real estate market in Russian Federation makes
it difficult to estimate the real estate owned by the Group
The amount of reliable public information and research concerning the real estate
market in Russia is limited. The volume of the available data is not that comprehensive and
complete as similar data on the real estate market in other industrially developed countries. The
lack of information makes it difficult to assess the market value and rent price of the real estate
in Russia. Therefore there is no confidence that the price set to the real estate of the Group
reflects its market value.
The value of Group’s investments in real estate may decline
The Group in whole and the Company in particular make substantial investments in real
estate which is used for the store premises. The market of any goods including commercial
property is subject to fluctuations. Market value of the real estate may decline or grow as a
result of different factors, i.e.:
58
a) changes in the competitive environment;
b) changes of the appeal level of the real estate on the market of Russian Federation as a
whole, as well as on the regional markets with the property objects of the Company, due
to the changes of the country and regional risks;
c) fluctuations of the demand for commercial real estate.
As a result of any negative changes on the real estate market the value of the real estate
acquired by the Company or its subsidiaries may decline and negatively affect the assets value
of the Group. Thus, in case of realization of such property the Group won’t be able to
compensate its acquisition costs, which may negatively affect the financial position of the
Group and the Company.
Inability to receive rights on the suitable real estate object on commercially acceptable
terms, to protect the real estate rights of the Group or to build new stores on newly acquired
land plots may have a material adverse effect on economic operations of the Group and its
financial position
Ability of the Group to open new stores is heavily dependent on identifying and leasing
and/or acquisition of the premises suitable for its needs on commercially reasonable terms. The
market for property in metropolitan areas of Russia is highly competitive and, in conditions of
favorable economic environment, the competition for, and therefore the cost of, high quality
land plots may increase. However, there’s no guarantee that the Group will manage to exercise
it in the future. If due to any reason, including competition from third parties seeking similar
land plots and premises, the Group is not able to identify and obtain the new objects in time,
Group’s anticipated growth will be adversely affected. Even after the Group procures the rights
on the suitable land plots and premises, it may experience difficulties or delays when obtaining
permissions from various regional authorities, required for the exercise of the Group rights to
use, renovate or reequip the stores. Therefore, there’s no assurance that the Group will
successfully identify, lease and/or purchase the suitable property objects on acceptable terms or
if necessary.
Failure to renew the lease contracts for the stores or prolong them on reasonable terms
may have materially adverse effect on economic activity of the Group and its financial
position
There can be no assurance that the Group will be able to extend the lease contracts on
reasonable terms, and even that there will be the opportunity itself to prolong the lease
contracts, the share of which is big enough, as they expire. If the Group is not able to prolong
the lease contracts for its stores as they expire or lease another suitable objects on acceptable
terms, or if the present lease contracts of the Group are terminated for any reason (including
those due to the loss of right on such objects by the lessor), or if their terms are revised to the
detriment of the Group, it could have material adverse effect on its financial position and
operation results.
Lack of professional building contractors may adversely affect the development
strategy of the Group
The ability of the Group to construct and develop specially constructed new stores is
exclusively important for its strategy and commercial success. There is a shortage of highly-
skilled contractors which able to build new stores in time and in compliance with standardized
requirements of the Group. There’s no guarantee that in future the Group will be able to find
the suitable skilled and qualified team of designers who could enable the Group to build and
open new stores in time. Inability of the Group to construct and develop new stores on the
59
newly acquired land plots may have material adverse effect on its potential to stick to its
strategy and accordingly to achieve the required financial position and operation results.
Contestation of the rights of the Group to real estate or cessation of the Group’s
projects for new stores construction may have materially adverse effect on economic activity
of the Group and its financial position.
The operation of the Group includes the obtaining of ownerships and lease rights for the
land plots and premises for the purpose of its further use for the new stores. In addition, the
Group owns objects and premises where its offices are located. Russian land and property
legislation is complex and often ambiguous and may contain contradictory provisions at the
federal and regional levels. In particular, it is not always clear which state bodies or agencies are
authorized to enter into land leases with respect to particular land plots, the procedures of
construction approval are complex and prone to challenge or complete abolition, construction
and environmental regulations often contain the requirements which in practice are impossible
to meet in full. As a result, the ownership and lease rights of the Group for land plots and
building could be challenged by the governmental authorities and third parties, and its
construction projects may be delayed or cancelled.
Under Russian law, property transactions may be challenged on many grounds,
including ineligibility of the property seller or right holder to dispose this property, breach of
internal corporate requirements by the counterparty and failure to register the transfer of rights
in the unified state register. As a result, defect in the real estate transactions may lead to
invalidation of such transactions with individual property objects, and thus may affect the
rights of the Group to this property.
Moreover, Russian law does not require certain encumbrances over real estate
(including leases of less than one year and uncompensated use agreements) to be registered
with the unified state register to make the charge legally valid. In addition, the time limits,
within which the charge liable to registration in the unified state register should be entered into
this register, are not stipulated in the law. Therefore, there is always a risk that the third parties
may register at any moment or claim the existence of encumbrances (of which the Group had no
prior knowledge) over real estate of the Group whether owned or leased.
Unionization of the Group employees may have material adverse effect on its
financial position and operation results
At the present time the majority of Group employees do not league any labor unions. If
the considerable part of Group employees league labor unions, it may materially affect the
payroll costs of the Group and/or escalation of labor conflicts, and as a result may have a
material adverse effect on financial position and operation results of the Group.
The increase of the Group’s expenses may have material adverse effect on its
profitability
The operating efficiency of the Company and its subsidiaries largely depend on the
prices on the purchased products for retail sale products, as well as on the prices on services
used by them in their operation and on the amount of rent payment for the used movable and
immovable property and construction costs, acquisition and opening of the new stores.
Fluctuations of the agreement and receipt of rights procedures to the land plots (including lease
right), fluctuations of the norms and regulations applicable to the Group activity, town-
planning, tax and environmental legislations in particular, may entail to the Company and its
subsidiaries the increase of new stores opening costs or costs for the use of the premises, as well
as the increase of the payback period of the stores.
60
The growth of the purchase prices, the growth of the installation costs, the growth of the price on
land plots (other real estate) and amount of rent for their use, as well as the growth of the employees’
wage may lead to the substantial growth of the Group’s expenses and thus seriously affect the Company
profitability in case if the Group is not able to adequately increase the sale prices due to low purchasing
capacity of the population in particular. Since “Magnit” retail chain, while working with one of the most
economical formats, mainly targets at the customers with the income below the average, the Group is
substantially subject to the above risk.
Profitability rundown may affect the ability of the Company’s relevant authority to decide on the
payment of dividends on securities, and the market value of the Company securities.
The decline of goods’ prices in “Magnit” stores may lead to the profitability rundown
of the Group
Changes of the prices on the goods in “Magnit” stores are largely determined by the
changes of the purchase prices of the Group. The Group is doing their best not to increase the
mark up for the encashed products. Product price changes may affect the rate of the purchasing
capacity of the population. The price growth is mainly forecasted under the inflation conditions,
which as well affects the decrease of the purchasing capacity of the population. The
deterioration of macroeconomic environment and the fall of the purchasing capacity of the
population may also lead to the decline of selling prices. Herewith, if the purchase prices are
less lowered than the selling prices, it will lead to the decline of Group profitability.
The sudden deterioration of macroeconomic situation and intensification of competition
may force “Magnit” chain to cut the prices on the products in order to maintain the target
turnover growth and market share, which may also lead to the profitability decline.
The prospective actions of the Company in case of industrial fluctuations
In case of one or several risks hereof, the Company will undertake all the possible
measure to reduce the effect of the existing fluctuations. It deems impossible to determine the
specific measures of the Group regarding any risk hereof, as it is hard to work out adequate
measures due to uncertainty of further situation development. The character of the applied
actions will depend on the specific situation of every case. The Company cannot guarantee that
the activities taken to overcome negative fluctuations will lead to considerable change in the
situation, as most of the risks hereof are out of the Company’s control.
In case of deterioration of the situation in the industry sector the Company plans:
a) if possible, to further expand its operation in order to reduce the prime cost of the goods
and diversify some risks;
b) to carry out the diversification between the most and the least perspective stores and to
cut the stores with no prospects;
c) to extend the territory of its operation choosing the most profitable regions of Russian
Federation in terms of growth prospects;
d) to carry out adequate changes in the pricing policy for keeping the demand for goods on
the necessary level;
e) to optimize the expenses;
f)
to continue engaging highly-skilled specialists as well to conclude agreements with
reliable specialists only, counteragents, contractors, which makes it possible to minimize
risks and carry out the detailed analysis of the scheduled Company operation in order to
reduce the prime cost of the investments, minimize the expenses structure and get more
profit.
61
COUNTRY AND REGIONAL RISKS
The company as well as CJSC “Tander” are registered as a tax-payer in the Southern
Federal district, Krasnodar. The Group operates in 5 federal districts and in more than 700
locations of Russian Federation. The Group does not operate outside Russian Federation.
As the Group operates in Russian Federation, the main country and regional risks,
affecting the operation of the Group and the Company, - are the risks within Russian
Federation. However, due to the growth of globalization of the world economy, considerable
deterioration of the economic situation in the world may lead to the serious economic recession
in Russia and as a result – the reduction of the demand on the consumer goods.
In spite of the fact that during last few years all public spheres in Russia saw positive
changes – the economy grew, some positive political stability was achieved, Russia is still the
state with the rapidly developing and changing political, economic and financial system. The
risks of the industrial production reduction, the increase of the national debt, negative
dynamics of the currency exchanges, increase of unemployment, etc, still exist and may lead to
the drop of the living standards in the country and negatively affect the operation of the Group,
as the main target consumers of the “Magnit” chain are people with income below the average.
Apart from risks of economic character, Russia is subject to the political and regulatory risks to a
greater extent than other countries with the developed market economy.
Political risks:
Political instability in Russia may negatively affect the investment cost in Russia as
well as the price of the Company’s shares
Since 1991 Russia moves from single-party state with the centralized planned economy to
democracy with the market economy. As a result of the large-scale reforms as well as of failures
of some of these reforms, Russian political system remains vulnerable to the public discontent
and disorders among individual social and ethnic communities. Significant political instability
may have considerable negative effect on the cost of the foreign investments in Russia including
the price of the Company’s shares.
Reconsideration of reforms or state policy in respect of some individuals, may have
an adverse negative impact on Company business and on investment potential of Russia
Future changes in the government, major political changes and lack of consensus
between different branches of power and economic groups may also lead to the breakdown or
converse turn of economic, political and judicial reforms. Any significant contradiction on the
orientation of the future reforms, breakdown or resignation of reform policy, political instability
and rise of conflicts between powerful economic groups may negatively affect the operation of
the Group, its financial results and development prospects as well as the cost of investments in
Russia and the price of the Company’s shares.
During the period of presidency of Vladimir Putin, the political and economic situation
in Russia has generally become more stable and conductive to investment. However any
significant struggle over the orientation of future reforms or countermand of the existing
reforms by a new president may lead to deterioration in Russian investment climate that might
constrain the ability of Group to receive financing on the international financial markets, cut
62
Company sales in Russia or otherwise negatively affect Group’s business, operation results,
financial position and potential.
In the recent past, our law-enforcement authorities have prosecuted some Russian
companies, their officials and shareholders for tax evasion and related tax offences. In some
cases, the results of such prosecutions have been the imposition of prison sentences for
individuals such as Yukos, TNK-BP and Vimpelcom. Some analysts consider that such
prosecutions demonstrate a willingness to reverse key political and economic reforms of the
1990s. Other analysts, however, believe that these prosecutions are isolated cases and do not
signal any deviation from greater political or economic reforms.
Conflicts between the federal and regional authorities and other conflicts may set an
unfavorable economic environment which may have an adverse effect on the operation and
financial position of the Group
The distribution of powers between the federal and regional authorities, as well as
between different federal authorities in some cases remains obscure. In connection herewith
Russian political system is subject to certain internal contradictions and conflicts between
federal and regional authorities regarding different issues, particularly tax collection, property
right to land, powers to regulate individual industries and regional autonomy. Conflicts
between different authorities may have serious adverse effect on the price of the Company’s
shares.
Besides, ethnical, religious and other segregations periodically arouse public tension and
sometimes result into conflicts including armed conflicts. Thus, the continuous conflict in
Chechnya led to the cessation of normal economic activity in Chechnya as well as negatively
affected economic and political situation in the neighboring regions and in Russia on the whole.
Terrorist activity and counter measures aimed at the elimination of violence, particularly by
imposing emergency rule in certain territorial subjects of Russian Federation, may have an
adverse negative effect on the potential of Russian business on the whole and Group
performance in particular, especially taking into consideration the significant scale of the
Group’s operation in the Southern federal district.
Social instability could lead to popular frustration, induce the call of the change of
powers, nationalism or violence
Failure of the Russian government to adequately address social problems has led in the
past and may lead in the future to popular frustration. Such frustration might have social,
economic and political consequences, e.g. call for the change of power, growth of nationalism
enhanced by appeal for property nationalization, expropriation and constraints on overseas
property in Russia, as well as the increase of violence. Any of these could have an adverse
negative effect on confidence in Russia’s social environment and investment potential, could
restrict our operations and lead to losses or could otherwise affect Group’s business, operation
results, financial position and prospects.
Economic risks:
Deterioration of the economic situation in the Southern Federal district may arise from
the considerable changes in the economic situation in Russia, including dramatic fluctuations of
the national currency exchange which may result in the reduction of the number of industrial
enterprises and agriculture of all forms of ownership operating in the district, unemployment
growth, decrease of the purchasing power of population. Such a scenario could lead to the
interruption of the investment program of the Group, slowdown of Group development on the
63
territory of Southern Federal district and other regions of Russian Federation, as well as the
slowdown of the income basis growth.
Economic instability in Russia may negatively affect the consumer demand which may
have a serious adverse negative impact on the business of the Company.
Any of the risks provided herein, which the Russian economy has previously
experienced, may seriously change the investment climate in Russia and the activity of the
Company:
Significant declines in GDP;
Hyperinflation;
Currency instability;
High level of state debt against GDP;
Weak banking system which provide Russian enterprises with the limited liquidity;
High ratio of unprofitable enterprises which continue to operate due to deficiency of
effective bankruptcy procedure;
Wide use of barter and non-liquid bills in settlements for commercial transactions;
Prevalent practice of tax evasion;
Growth of black economy;
Stable capital outflow;
High level of corruption and penetration of the organized crime in the economy;
Serious growth of unemployment and underemployment;
Low living standards of the substantial part of the Russian population
Russian economy has faced abrupt downturns. In particular, the period of a rapidly
deteriorating economic situation after August 17, 1998 when government defaulted on its ruble-
denominated securities, the CBR stopped to support the ruble, and temporary restrictions were
imposed on certain foreign currency payments. These actions resulted in immediate and severe
ruble devaluation and a sharp increase of inflation rate, dramatic decline of Russian share
quotes and bonds as well as failure of the Russian issuers to raise funds on the international
capital markets.
The problems were aggravated by almost a complete collapse of the Russian banking
sector after the events of August 17, 1998, which is proved by revocation of banking licenses of
a number of Russian high profile banks. This even more impaired the capacity and potential of
the banking sector to a reliable source of liquidity to Russian companies and resulted in the
widespread loss of bank deposits.
There is no guarantee that recent positive trends over the last years in Russian economy
will continue to be positive in future.
For example, during 2005, economic growth slowed down, and the inflation rate
remained high during the years of 2005, 2006 and 2007. In addition, recent fluctuations in
international oil and gas prices, ruble strengthening against US dollar in real terms, and the
weakening of monetary policy or other factors, may adversely affect Russian economy and
Group’s business, especially the expansion plans of the Group.
Physical infrastructure of Russia is in extremely poor condition which may lead to
interruptions in the effective financial and economic activity
Physical infrastructure of Russia was mainly set up in the soviet times and has not been
adequately funded and maintained over the last. Particularly affected are the rail and road
networks, power generation and transmission, communication system and building stock.
Electricity and heat deficiency in some regions of Russia dramatically disrupted the local
economies. For instance, May 2005 power-substation failures of May 2005 resulted in power cut
64
in Moscow and neighboring regions and thus in the heavy damage of economy of Moscow and
corresponding regions.
Road conditions throughout Russia are also poor, and in some areas roads do not meet
minimum requirements of security standards.
The deterioration of Russian physical infrastructure damages the national economy,
disrupts goods and cargo transportation, adds costs to business activity in Russia and may lead
to interruptions in financial and economic activity thus negatively affecting the business of the
Group.
The fluctuations of global economy may negatively affect the economy of Russia,
limiting the access of the Company to the capital and negatively influencing the purchasing
power of the final consumers of the products sold by “Magnit” chain stores
Russian economy is vulnerable to market downturns and economic slowdowns
elsewhere in the world. By former practice, financial problems or exacerbated perception of
risks concerning investment in countries with developing economy might reduce the volume of
foreign investments in Russia, thus affecting Russian economy. As Russia produces and exports
large quantities of natural gas, oil and other energy and mineral resources, Russian economy is
especially vulnerable to commodity prices, and decline in such prices may slowdown or shake
economic development of Russia. These developments may severely limit Group access to
capital and have an adverse negative effect on the purchasing power of consumers to buy goods
sold by the Group.
Social risks:
Social instability may lead to the increased support of resumption of the statism,
nationalism and violation, having serious negative effect on the opportunities of the Group
to effectively operate its business
Social instability may lead to the increased support of resumption of the statism,
nationalism and violation, having serious negative effect on the opportunities of the Group to
effectively operate its business. Inability of the government and many private companies to pay
out the full salaries in time, and altogether arrears of salary and benefits, which were a result of
rapidly growing living costs, led in the past and may lead in the future to riot risk. For example,
in 2005 groups of Russian pensioners and some public organizations held protest actions all
over Russia against benefits monetization, and temporary blocked the roads. Similar actions,
labor and social disorders may have negative political, social and economic consequences
including the nationalism growth, imposing limitations on the foreign share in Russian
economy and the violence growth. All of the events herein may lead to the restrictions on
activity of the Group and loss of is profits.
Crime and corruption may hay an adverse negative effect on the operation and
financial position of the Group
The local and international press has reported that the level of the organized criminal
activity has considerably grown, particularly in large metropolitan centers. The amount of
property-related crime increased in large cities as well. Russian business often involves high
level of corruption among officials. Additionally, diverse publications indicate that some
members of the Russian media regularly publish planted articles for remuneration. The Group
activities may be affected by the illegal actions, corruption and accusation of the Group of
illegal operation and therefore have negative impact on the Group operation and price of
Company’s shares.
65
Legal risks related to the Russian Federation:
Weakness of the Russian legal system and imperfection of the Russian legislation
create an uncertain environment for investments and business activity
Effective legal system required to support market economy functioning in Russia is still
developing. Many key laws have only recently become effective. Insufficient consensus
regarding the amount, contents and time limits of economic and political reform, rapid
development of the Russian legal system which did not always coincide with the trend of the
market relations development, and in a number of cases resulted in ambiguity, noncompliance
and inconsistence of the law regulatory and by-laws. Moreover, Russian legislation very often
contemplates implementing regulations that have not yet been promulgated, leaving substantial
gaps in the regular infrastructure. In some cases the new laws and regulations are ratified
without complete consideration by the interested parties of the civil law circle and do not
contain any adequate transitional regulations, which lead to serious difficulties when being
applied.
Drawbacks of the Russian legal system may affect the ability of the Group to exercise its
legal rights under the agreements or to defend against claims from the third parties. There is no
guarantee that the state and judicial authorities, as well as third parties, will not go against
Group’s meeting the requirements of laws and by-laws.
Risks related to the fiscal policy of the Government of Russian Federation:
The Company pays taxes into the federal, regional and local budgets. Within the
economy transformation there is a risk of changes of the enterprise activity tax treatment, tax
legislation and peculiarities of tax registration in Russia often change and bear ambiguous
interpretation. The process of tax legislation reforming has not been completed yet. In case of
stiffening of the tax legislation and increase of tax burden, the financial position of the Group
may deteriorate.
Risks related to the possible military conflicts, state of emergency and strikes in the
country and regions, where the Company is registered as a tax payer and/or operates:
The Company is a registered taxpayer and operates mainly in the Southern Federal
District. Politico-social risks are of primary concern for the Southern Federal District due to
trouble spots on the frontiers of territories of the Northern Caucasian republics and closeness of
the Chechen republic. Major risks are connected with the fact that private capitals (investments)
may be nationalized in case of a sudden change of policy line or destroyed in case of armed
conflict.
However the major part of the Southern Federal District is occupied by the subjects of
Russian Federation with favorable business development conditions and with the regional risk
level of not below the average throughout the country. It’s worth noting, that the Company
does not operate on the territory of Chechen republic and Ingushetiya, social and political
instability of which substantially aggravate the integral index of the Southern Federal District
risks.
Practically all the Northern Caucasian Republics face substantial social-ethnical
instability, economic and political risks remain high. Herewith the South of Russia is
characterized by the rapid growth of industrial production, accommodation provision is in high
gear, increase of the disposal income of population, and the financial market of the regions is
having a significant part in the picture.
66
Russian Federation is a multinational country, consisting of the regions with different
social and economic development levels; in connection herewith it is impossible to completely
eliminate the possibility of internal tension in Russia including the armed conflicts. The
Company as well cannot absolutely exclude the risks related to the emergency state.
Risks related to the geographical peculiarities of the country (countries) and the
region, where the Company is registered as a tax payer and/or perform the main activity,
including increased danger of natural disasters, possible stop of transport connection due to
remoteness and/or inaccessibility, etc.
According to Ministry of Emergency Situations of Russia, factors of man-caused, natural
or terrorist character are one of the most real threats to the stable social-economic development
of the country, increase of the living standards of population, security-building measures of
Russian Federation.
The terrorist status, recently escalated, leads to the continuous threat of terrorism acts on
the whole territory of the Group’s operation.
The regions with the Group presence may face the drastic consequences of
conflagrations on the economic objects and in the public sector, accidents and failures of utility
systems and transport, natural fire, dangerous hydro-meteorological phenomena (strong winds,
frosts, heavy snowfalls and heavy rains), earthquakes, land subsidence and sinkhole collapse,
contagion outbreaks among people and animals. Exposure to natural and climatic risks,
including natural disasters (hurricane, floods, earthquakes, etc) is distinctive geographical
feature of the Southern Federal District.
The risk of possible stop of transport connection due to remoteness and/or
inaccessibility, etc, should not be eliminated regarding the geographical peculiarities of the
region.
Ecological risks:
Accidents at hazardous industrial facilities of Russian Federation and environmental
pollution may have an adverse negative effect on the Group activity
In respect of all four components of the environment (air, water sources, soil and land
resources, wildlife) in large industrial cities, the ecological situation is unfavorable for
population inhabitation. According to some reports, up to 15% of the territory of Russia are
zones of ecological catastrophe. The above factors negatively affect the health of the country
population. Moreover, nuclear and other dangerous objects are located on the territory of
Russia, while the system of control over ecologically dangerous object status is not sufficiently
effective. The rise of emergency state on these objects and an unfavorable ecological situation in
large Russian industrial cities may have an adverse negative effect on the Group activity.
.
Prospective measures of the Company in case if changes of the situation in the
country and region will have an adverse negative effect on the Group operation:
The majority of the risks, provided herein, of economic, political and legal character are
out of the Company’s control due to the global scale of the threat they present.
The Companies of the Group have reached the certain level of financial stability which
helps to overcome the short-term negative economic fluctuations in the country. In case if
significant political and economic instability, which will negatively affect the operation and the
profit of the Group, arises in Russia, the Company plans to undertake comprehensive measures
of Contingency Plan Administration aiming at mobilization of the business and maximum
67
reduction of the negative effect of political and economic situation in the country and region on
the business of the main companies of the Group.
It deems impossible to determine the specific measures of the Group regarding any risk
hereof, as it is hard to work out adequate measures due to uncertainty of further situation
development. The character of the applied actions will depend on the specific situation of every
case. Company cannot guarantee that the activities taken to overcome negative fluctuations lead
to considerable change in the situation, as most of the risks hereof are out of the Company’s
control.
However, in case of negative effect of the country and regional fluctuations on the Group
operation, the Company plans to carry out the following common arrangements to maintain the
Group’s profitability:
•
•
if possible, to save main assets until the situation improves;
to undertake measures focused on the life support of the Group employees, on the
productivity of the Group;
• To carry out adequate pricing policy adjustments to keep up the demand on the
products on the proper level;
• To optimize the expenses, including measures on purchasing prices reduction and
wages expenses limitation;
• To revise the program of capital investment.
To minimize the risks related to the force majeure circumstances (military conflicts, riots,
natural disasters, state of emergency), the Company takes into account the possibility of such
events within its contract activity.
The Company acts under paragraph 401 of the Civil Code of Russian Federation which
states that the person, who does not exercise the obligation due to insuperable force, provided
herein, does not answer to the contracting party.
To reduce the above risks the Group plans to further operate in different regions of Russia
to diversify the risks.
FINANCIAL RISKS
Risks related to the changes of the interest rates, foreign currency exchange rates,
related to the Company’s operation or hedging carried out by the Company to reduce
unfavorable consequences of the risks indicated above:
The Company is exposed to risks related to the changes of the interest rates. Loan funds
have become the main funding sources of the development of the Group companies and
expansion of its resource base. Changes of the interest rates may have substantial negative effect
on the operation results of LLC “Magnit Finance”, other companies of the Group and the
Company due to the loan of funds and provision of the debt financing on the repayable basis.
Group does not export its production; all its primary obligations are denominated in
rubles. Import products amount to about 5% of proceeds, which makes the Company
dependent on the possible foreign exchange movements.
Exposure of the financial position of the Company, its liquidity, funding sources,
operation results, etc., to the foreign exchange movements (currency risks)
68
For the last fifteen years Russia has faced considerable fluctuations of the exchange rate
of Russian ruble to the foreign currencies. Substantial ruble devaluation may result in the
reduction of the relative cost of ruble-denominated sales and assets of the Group, such as bank
deposits and accounts receivable. Additionally, fall in the exchange rate of the ruble may lead to
the decline of the dollar cost of tax deductions arising from the actualization of capital
investments, since the balance sheet assets will reflect their mark-up in ruble terms at the
moment of acquisition.
Group does not export its production; all its primary obligations are denominated in
rubles. Import products amount to about 5% of proceeds, which makes the Company
dependent on the possible foreign exchange movements. In case of such fluctuations, the Group
is able to modify the structure of goods sales in favor of Russian counterparts, which may
potentially reduce the sales growth rate. Thus, the incurrence of such risk may have an adverse
negative effect on the Group’s revenue and profitability.
The Group purchases and plans to continue purchasing the import equipment and
vehicles for foreign currency, thus considerable decline of the ruble exchange rate may lead to
the increase of the Group expenses in ruble terms and negatively affect the results of its
operation.
Drastic changes of the exchange rate may have an adverse negative effect on the country
economy on the whole, and lead to the reduction of the solvent demand.
Prospective measures of the Company in case if currency fluctuations and interest
rates have an adverse negative effect on the Group operation
In case if movements of exchange rate and interest rates are negative for the Company, it
is expected to carry out tough policy of cost cutting. However, it should be taken into
consideration, that the risk cannot be completely evened, since the indicated risks mainly lie
beyond Company’s control, but depend on the general economic situation in the country.
Inflation effect on the payment on securities. Inflation indices which the Company
considers to be crucial, and potential measures which may be undertaken by the Company to
reduce risks specified herein
The Company faces inflation risks, which may have an adverse negative effect on its
business activity. The purchasing prices on the products depend on the overall price level in
Russia. The acceleration of inflation growth may affect the financial performance of the Group.
The growth of the purchasing prices may lead to the further increase of retail prices on the
products and goods sold by the OJSC “Magnit” and its subsidiaries, and as a result impair the
competitive environment of the Group.
If the exchange rate of the ruble to the US dollar increases simultaneously with inflation,
the Group may face costs increase in dollar terms on certain budget items, for instance, payroll
expenses which is vulnerable to the growth of the overall price level in Russia. In such a
situation in view of inflation thrust, the Company may not be able to raise prices on its products
reasonably in order to retain the operation margin. Accordingly, high inflation rate in Russia
may result in the increase of the Group expenses and decline of the operation margin. Inflation
growth in Russian Federation will entail the overall growth of the interest rates including rates
on the ruble bonds of LLC “Magnit Finance” which may oblige the Group to adequately
increase the coupon rates.
Inflation indices which the Company considers crucial
The 30-35% level of inflation is considered critical by the Company. The serious
acceleration of the price increase rate may lead to the growth of Company’s expenses, loan
funds costs, and result in the earnings dilution. Therefore, in case of dramatic excess of actual
69
inflation indices over the forecasts of the Russian Federation Government, the Company plans
to assume all required measures to limit the other expenses growth (not related to the purchase
of the products for selling), to reduce the accounts receivable and its average term.
Risks arising from bank operations:
Russian bank system is underdeveloped, a new bank crises may hay an adverse effect
on the operation of the Group and its financial position
Russian banking and the other financial systems are not properly developed and
regulated, and Russian legislation on banks and bank accounts is interpreted ambiguously and
applied not homogenously. Financial crisis of August 1998 led to the bankruptcy and
liquidation of many Russian banks and almost destroyed the developing market of the
commercial bank credits which was functioning at that time. Moreover, many Russian banks do
not meet the international banking standards, and the transparency of the Russian bank sector
in several respects falls behind the generally accepted international standards of bank
transactions. Due to the lack of close supervision from the regulatory authorities, individual
banks do not follow the requirements and regulations set by the Central Bank, concerning the
governing criteria for credit accommodation, credit quality, reserve balances in case of losses on
loans or diversification of the borrowers’ structure. As a rule, bank deposits made by legal
bodies are not insured in Russia. Stiffening of the regulations or interpretation of the operative
rules may result in capital risk and insolvency of individual banks.
Lately we’ve faced a rapid growth of the joint crediting provided by the Russian banks,
which is considered by the majority to be accompanied by the deterioration of the crediting
quality. Moreover, the stable growth of the internal market of corporate debts leads to the
accumulation in the investment portfolio of Russian banks of more and more ruble bonds
issued by the Russian companies, which even more aggravates the risk characteristics of
Russian banks’ assets.
Grave disadvantages of the Russian bank sector together with the deterioration of the
credit portfolio quality of the Russian banks may lead to the exposition of the bank sector to the
negative influence of the market trends recession, economy growth retardation, including
defaults of Russian companies, which may arise from such any market trends recession or
economy growth retardation. Furthermore, in 2004 the Central bank withdrew licenses of a
number of Russian banks, which aroused rumors on the market about closing of another
number of banks. As a result many depositors rushed to withdraw their savings. In case of bank
crisis, Russian companies will face severe deficit of liquid funds due to the limited savings
inflow to the domestic banks and loss of opportunity to use foreign financing sources which
might occur in the time of a such-like crisis.
At the moment the majority out of a limited number of sufficiently trustworthy Russian
banks are located in Moscow. The Group tried to reduce its risks by receiving and keeping its
ruble cash assets with several Russian banks, including Sberbank, Alfa-bank, OJSC Commercial
bank “Uralsib – Yugbank”, Unicredit, and with subsidiaries of foreign banks, including CJSC
BSGV, CJSC Reiffeisen, however insolvency of at least one of the banks may have a substantial
adverse effect on the business activity of the Group. In case of a bank crisis or if the banks,
where the Group holds its funds, become insolvent or declare bankrupt, it may entail a failure
to access the cash assets or inability to exercise bank transaction in Russia, which in turn may
have a material adverse effect on the business activity , financial position and operational
results of the Group.
70
Risks related to the transfer pricing:
Ambiguity of law on transfer pricing regulations alongside with deficiency of
accurate and authentic information about the market prices may have an adverse effect on
the financial performance of the Group business.
Russian law on transfer pricing regulations, which came into effect in 1999, provides for
that taxation authorities and administration have the right to make allowance for transfer
pricing and to levy additional taxes in case of discrepancy between the price and market price
for more than 20%. Since Russian law on transfer pricing regulations is not precise enough,
taxation authorities and arbitration courts have freedom in interpretation of applicable
regulations. Due to the ambiguity of transfer pricing regulations, taxation authorities may
challenge the prices of transactions of the Company and its subsidiaries, adjust the assigned
taxes.
Financial report statements of the Company which are mostly subject to changes
under the foregoing financial risks. Risks, probability of occurrence and nature of changes in
accounting
The amount of expenses and profit is mostly exposed to the influence of the foregoing
financial risks. In case of adverse change of the situation, first of all, the expenses will grow
which will entail profit reduction, correspondingly.
In case of inflation growth and/or currency rate growth and therefore the expenses
growth, the Group may increase the prices on the products for sale.
In case of negative effect of fluctuations of the exchange rate, inflation and interest
rates on the operation of the Group, it plans to take the following measures:
• To revise the financing structure;
• To optimize the spending segment of the operation;
• To revise the programs of capital investments and loans;
• To take measure to increase the receivables turnover.
At the moment hedging of the foregoing risks is not carried out.
Liquidity risks:
The risks provided herein create the liquidity risk, i.e. the risk of bearing losses due to
lack of funds within the established terms and as a result, risk of inability of the Group to fulfill
its obligations. Such risk event may entail penalties, fines, injury to the goodwill of the Group,
etc.
The Group exercises liquidity risk management through analysis of the estimated cash
flows.
Risks
Exposure of the financial report statements to the foregoing financial risks:
Degree of
probability
Nature of changes in the report
71
Interest rates
growth
medium
Inflation rates
growth
medium
Interest rates growth will increase the loans’ price for
the Group, thus it may have an adverse effect on the
Group’s
it will
financial position, particularly,
increase the operating expenditures of the Group and
impair its profit.
Inflation rates growth will lead to the increase of the
prime cost expenses (raw commodities costs, payroll
expenses, etc.). At the same time, the acceleration of
the inflation rate growth will result in the growth of
the consumer prices on the Group products and
correspondingly increase the sales of the Group in
such a manner, that the portion of the Group expenses
will be compensated by the increase of the product
prices. Such inflation will also lead to devaluation of
the real price on the ruble bonds.
Movements of the
exchange rate of
US dollar to ruble
medium
It does not produce strong effect, as the main profits
and losses of the Company are denominated in rubles.
Failure of the Group to fulfill its obligations in due
time may entail the payment of penalties, fines, etc.,
which will result in unscheduled expenses and reduce
the Group’s profit. In connection herewith, the Group
carries out the policy of estimating the cash flows.
Liquidity risk
low
LLEEGGAALL RRIISSKKSS
Risks related to the applicable standards of corporate governance
Certain transactions with participation of Group companies may be declared
transactions with the interested parties. Similar transactions may, in particular, include final
products sales and purchase agreements, purchase of shares, service provision. If challenging of
such transactions and actual ratifications to such transactions are approved in favor of the
petitioner, or otherwise the Group companies will be prevented in the future from getting the
approval to the transactions which require special approval under legislation of Russian
Federation, it may limit the flexibility of Group companies in the operating issues and have an
adverse effect on the Group’s operational results.
In practice corporate governance standards remain underdeveloped in many Russian
companies, minority shareholders of such companies may have difficulties in exercising their
legal rights and bear losses. Though the shareholder owning not less than 1% of the company’s
placed shares has the right lodge a complaint against the management, which caused
damages/losses to the company, under the Federal Law “On Joint-Stock Companies”, Russian
courts have poor experience in dealing with such claims. Correspondingly, the real
opportunities of the investor to get the compensation from the issuer are limited. As a result the
protection of minority shareholders rights is limited.
Civil code and Federal Law “On Joint-Stock Companies” provide for that joint-stock
company shareholders are not responsible for its obligations, and are only exposed to risks of
investment losses. However, in case if the legal entity became bankrupt due to the actions of the
72
shareholders (participants), owner of the legal entity property or other bodies which are entitled
to duly instruct or otherwise rule the legal entity, these bodies may be subject to holding
subsidiary liability for obligations of the legal entity in case of insufficiency of legal entity
property. Consequently, the Company being a parent company to its subsidiaries with more
than 50% of the charter capital directly or indirectly owned by the Company, it may be entitled
to the responsibility for the obligations in the foregoing cases. Responsibility for subsidiaries’
obligations may have a material adverse effect on the Company.
Ensuring shareholders with rights under the Russian legislation may entail additional
expenses and may result in the degradation of the Company financial statements. According to
the Russian legislation, shareholders voted against or not participated in voting on certain
issues, have the right to demand from the Company the redemption of their shares at the
market price under the Russian legislation. Such right is provided to the shareholders voted
against or not participated in voting at voting on the following issues:
reorganization;
major transaction which is to be decided on and approved by the general
shareholders meeting;
incorporation of amendments restricting the shareholders rights in the articles of
Association or ratification of the articles of Association as amended;
Company liabilities on redemption of shares may have an adverse material effect on the cash
flows of the Company and its ability to handle Group’s debts.
Risks related to the currency regulation and control:
Russian legislation on the investors’ rights protection is less favorable and developed
than the legislation of other countries with developed market economy. Moreover, the investors
may face in future the risk of adverse changes in legislation. The profit of the foreign investors
received from investments in the Company’s shares may be taxed in accordance with the
Russian legislation. Degradation of the whole economic and political situation in the country
may lead to the toughening of the currency regulation and control norms and limitations of the
operations with the Company’s shares.
Return revenue of the foreign investors from the investments into the Company equities
may be liable for taxes according to the Russian legislation. Deterioration of economic and
political environment may result in tightening of currency regulation and control standards and
in the restrictions on the shares-related business activity of the Company.
Risks related to the changes in currency regulation
Foreign Exchange legislation of Russia is exposed to quite frequent changes. In
connection herewith risks of regulation procedure changes in execution of a number of
exchange operations may occur. Considerable fluctuations in currency regulation and currency
control legislation may impede Company’s performance of obligations under the agreements
with counterparties. The risks herein are considered by the Company management to have the
same effect on the Group as on all other subjects of the market.
Risks related to the changes in tax legislation:
Tax legislation of the Russian Federation is subject to the relatively frequent changes.
The risks herein are considered by the Company management to have the same effect on the
Group as on all other subjects of the market
The following changes may have an adverse effect on the Group’s operation:
73
•
•
Incorporations of amendments on the tax rates increase in legislation acts on taxes and
charges;
Imposing of new types of taxes.
The foregoing substantial and other changes in tax legislation may result in the increase
of the tax payments and consequently in the reduction of the Company net profit. Changes in
the Russian tax legislation may have an adverse material effect on the appeal of investing in the
Company shares.
Russian companies are making substantial payments on a great amount of taxes. These
taxes include, in particular:
•
Income tax
• Value added tax;
• Excise taxes;
• Consolidated social tax;
• Land tax;
• Property tax.
Legislation regulations and by-laws governing the foregoing taxes do not have a big
application practice compared to the other countries; thus, the law enforcement practice is often
ambiguous or has not been formed yet. At the moment we have only a limited number of
commonly accepted interpretations and explanations of tax legislation. Different ministries and
authorities often have different opinions on the interpretation of the tax legislation, thus
creating ambiguity and grounds for the conflict. Tax declarations and some other legal papers,
e.g. customs documents, according to the legislation may be checked and examined by different
inspectors who have the right to charge penalties, fines and interests for the arrears of
payments.
Generally the completeness and accuracy of the tax payment may be verified within
three years upon the tax year expiration. The fact of tax verification for any year leaves open the
possibility of verification of the same declaration again within a three year period. These factors
create the Russian tax risks which are considerably higher than the usual risks in the countries
with a more developed taxation system.
The tax system in Russia changes on a frequent basis, and the tax legislation is
inconsistently applied on the federal, regional and local levels. In some cases new tax rules
cause the retroactive effect. In addition to the material tax burden, these circumstances
complicate the tax planning and making the correspondent decisions. In spite of the ambition of
the Group to comply with the legislation, inaccuracy of the legislation puts the Group at the risk
of payment of considerable penalties and fines and may lead to the tax burden increase. Today
the tax collection system is relatively ineffective, and the government may have to introduce
new taxes to increase its profits. Thus, the Company may have to pay considerably higher taxes
which may negatively affect the business activity of the Company. In recent years the taxation
system of Russian Federation met significant fluctuations under the tax reform. New laws
reduced the number of taxes and the general business tax burden, as well as simplified tax
legislation. However, new tax legislation still gives freedom to the local tax authorities and
creates a number of undecided questions, which complicates the tax planning and making the
correspondent decisions.
Financial statements of the Russian companies for the purpose of tax accounting are not
consolidated. Thus, every Russian legal entity pays Russian taxes separately and cannot use the
losses of other companies within one group to reduce the tax burden.
74
Risk related to the inability of the foreign investors to take out return on shares
Today Russian legislation on dividends payment provides for that dividends on shares
in ruble terms may be distributed to the shareholders without limitations. The ability of foreign
investors to convert rubles into any freely convertible currency (FCC) depends on the
availability of such currency on the Russian exchange markets. Though the market for
conversion of rubles in FCC exist in Russia, including interbank currency exchange, after-
markets and currency futures markets, the future development of this market remains obscure.
At the present time no market for conversion of rubles into the foreign currencies outside
Russia or any viable market outside Russia for hedging investments in rubles and investments
denominated in rubles.
Risks related to the changes of the rules of customs clearance and duties:
Changes of the rules of customs clearance and duties may entail the increase of the
purchasing prices on the imported goods and as a result the reduction of the Group profit.
Risks related to the changes of requirements of licensing of the Company main
activity or licensing of the use rights for the objects the turnover of which is limited:
The primary activity of the Company – the coordination of Group companies’ operation,
the lease of property and retail business - is not a subject to licenses. The companies of the
Group have licenses for retail of alcohol beverages consumed not on the spot of purchase and
pharmaceuticals without manufacturing rights. In case of changes of requirements for license,
the Company will operate under the new requirements including the license conversion and
new licenses receipt.
Risks related to the changes of judicial practice on the issues of the Company activity
(including licensing issues), which may have an adverse effect on the results of the Company
operation as well as on the results of the current legal proceedings to which the Company is
a party:
The Company and other companies of the Group do not participate in legal proceedings
which could have a substantial material effect on the financial and economic activity of the
Group. However, the changes of the judicial practice on the issues of licensing, consumer
protection, property rights protection, taxation and other issues of vital importance for the
Group operation, may adversely affect the results of its operation if the corresponding lawsuits
arise.
RRIISSKKSS RREELLAATTEEDD TTOO TTHHEE CCOOMMPPAANNYY’’SS OOPPEERRAATTIIOONN
Risks peculiar to the Company only
Risks related to the current legal proceedings to which the company is a party
In the last couple of years the Group has not participated in legal proceedings, which
could have an adverse material effect on the Group financial and economic activity.
Risks related to the impossibility of extension of the Company license for
performance of a certain type of activity or for use of objects the turnover of which is limited
(including natural resources)
75
The primary activity of the Company – the coordination of Group companies’ operation,
the lease of property and retail business - is not subject to licenses. The Group encashes a large
mix of products, and today retail of alcohol beverages and pharmaceuticals are subject to
licensing for all the Group enterprises engaged in such an activity. The companies of the Group
have licenses for retail of alcohol beverages consumed not on the spot of purchase and
pharmaceuticals without manufacturing rights. In case of changes of requirements for license,
the Company will operate under the new requirements including the license conversion and
new licenses receipt.
In the last three years no breaches and violations of requirements on licensing by the
Company, which could result in refusal to extend the license term, were fixed.
Risks related to the possible liability of the Company on the third party debts
including the subsidiaries of the OJSC “Magnit”:
The Company together with CJSC “Tander” (the main operating company of the Group
regulating the trade block and the centre for Group profit consolidation) stand security of the
bond loans of LLC “Magnit Finance” at the amount of 2 billion rubles and 5 billion rubles, the
issue aim of which is refinancing of short-term debt of the Group and carrying-out of the Group
investment program on “hypermarket” format expansion. The warrantee is presented in the
amount of the total nominal value of the bonds and aggregate coupon profit on bonds. If LLC
“Magnit Finance” is not able to perform the obligations on the bond loans in full, this will have
negative unfavorable consequences for the Group operation.
Risks related to the possible customer loss, with which the turnover amounts to not
less than 10 percent of the total sales of products (works, services) of the Company:
The consumers of the OJSC “Magnit” services are its subsidiaries. Therefore, the
operation of the Company and the risk of loss of its main consumers are determined by the
financial condition and the position of the Group.
Other risks related to the Group operation
Risks related to the possible restriction of competition:
Russian legislation limits the activity of the bodies which occupy the dominating
position on the market. If any of the Group companies is declared the body occupying the
dominating position, its activity (including pricing activity) may be restricted. Such situation
may have an adverse effect on the economic activity of the Group and its regional expansion
strategy.
Risks related to the implementation of the long-term strategy of the Group:
One of the main components of the long-term strategy of the Group is the expansion of
existing store chain. The expansion of the chain will have the following directions: within the
existing formats, and the introduction of the new formats to the market. From the geographical
position the chain will expand within the traditional framework of the Southern region as well
as in the other regions of Russia.
The strategy success will depend on a number of factors within and out of Company’s
control. The factors include:
-Ability to raise enough funds for the capital investments exercise. If the Group fails to
raise enough funds for trading chain expansion at the estimated scale, the Group may have to
considerably limit the scale of expansion and stay in disadvantageous position against the
76
competitors who will develop their business activity faster, which may lead to the loss of the
market share and deterioration of the operation results;
-Ability of the operating professional team to carry out the projects of business
expansion and subsequently to manage it. The abilities of the operating management team may
turn out to be insufficient for maintenance of the operation productivity in conditions of
dynamic expansion. Business expansion entails the increase of complexity in managing the
Group in operation terms and of the load upon employees. Therefore, the improvement of
operational and financial systems will be required together with control measures and
procedures. Furthermore, the purchasing system, logistics, information technologies,
accounting, financing, marketing and sales will need to be revised. If the Group fails to update
the management system in time, it may adversely affect the business activity, operating results
and financial position;
-Success of the Group regional expansion will largely depend on its ability to identify
attractive opportunities on the markets with the expected growth, on the ability to successfully
implement product mix matrix which is optimal for each region and establish the purchasing
system as well as on ability to manage the operation on the new local markets. Thus, the Group
may not achieve the expected profit and/or lose the part of the funds, invested in the new
projects;
-Carrying out of the effective marketing strategy which will provide not less
effectiveness sales or insignificant decline of sales than the Group faced in the past. Due to the
increase of the industrial competition, the effectiveness of the Group marketing measures may
considerably decrease which will reduce the amount of its customers and consequently reduce
the sales turnover. The chain expansion on the territory of one population centre may result in
the internal competition which will lead to the reduction of the sales turnover in the average
among the stores of the Group;
-The Group growth strategy provides for changes in the business activity model
concerning the ownership rights on the sales areas. With the development of the operating
formats, the Group will carry out the independent construction/acquisition of premises and
purchase the equipment for the stores, which will mainly affect the structure of its assets and
operating results and, therefore, the performance indicators;
Availability of the necessary areas and land plots for new stores opening. The market
may not have the sufficient number of areas suitable for store constructions, which may
slowdown the expansion strategy against the expected tempo and result in the loss of the
Group market share in favor of competitors;
Competition level at the moment of the Group store openings in the corresponding
regions may turn out to be too high for Group to penetrate, which will not allow to achieve the
required profitability level;
Geographical expansion may turn out to be not successful as it was expected, which
may have an adverse effect on the Company business and profitability.
The risk related to management members’ loss and failure to engage the qualified
employees in the future:
The future success of the Group will largely depend on the ongoing cooperation with
the top management of the Group, in particular with the following directors: Vladimir
Gordeychuk, Alexander Prisyazhnyuk, Andrey Arutyunyan, Nikolai Panuli, Eduard Smetanin,
Valeriy Butenko. Under the labor contracts between the Group companies and the bodies
indicated above, they have right to resign office by filing the notification 1 month before the
77
dismissal. The Group is not insured from the damage which can be caused to the Group with
the loss (discharge) of its leading specialists and top managers.
The Company strives to hire the most qualified and experienced personnel, and adjust
its compensation packages according to the changing standards of the Russian labor market.
The loss of one or more managers or failure to attract and motivate extra highly skilled
employees required for effective management of a large-scale business may have material
adverse effect on the business activity, the operating results and financial position of the Group.
Risks related to the accounting and control system:
The system of financial and management reporting of the Group, which is operating, is
based on the volume of operations carried out by the Group within the certain period of time.
In case of substantial business expansion of the Group, the technical level of the accounting and
control system may fail to meet the requirements of the information processing efficiency and
lead to the delays in receiving the adequate data for making tactic and strategic management
decisions and, thus, damage the effective operation of the Group.
The risks related to the computer network failure:
The management and processing of operational and financial information in the Group
is carried out with the use of electronic devices of information transmission and processing
including the network of the personal computers, access to Internet and the system of financial
accounting and automated system of commodity stock management. As a result operational
effectiveness of the Group as well as its ability to display adequate data for making the right
management decisions depend on the correct and stable work of computer and information
networks.
The systems and their functioning may fail to operate, which may be caused by the
human factor, natural disasters, blackouts, computer viruses, premeditated vandalism acts and
similar factors. There is no guarantee from serious breakdowns and delays in the future. Any
blackout in computer network or system breakdowns and delays may lead to the sudden
service interruptions, failures in the commodity stock registration system, the reduction of the
customer service quality and damage to the goodwill of the Company, mistakes in the
management decisions which may result in loss of customers, the growth of operating expenses
and financial losses.
Risks related to the operations with the big cash flows:
The specific character of the Company business activity and the present level of the bank
sector development in Russia presumes that the substantial part of the group operations is
executed with the cash funds. In connection herewith the risk of short payments caused by the
premeditated actions of the Group personnel as well as by deliberate larcenies and robberies
increases.
Risks related to the electronic payments:
Today operations with credit and debit cards of the natural persons are not widely
spread in Russian Federation.
Risks related to the sale of private label products:
As a way of attracting customers and strengthening of the consumer loyalty for private
label, the Group plans to continue the sale of private label products. In connection herewith
probability of potential claims of customers to the quality of the Group private label products
arises. High products quality – one of the most important conditions of the private label, and
78
the chain operators will be exposed to serious risks while promoting poor quality products
under private label. Claims to the quality or other characteristics of such products may
dramatically damage the image of the Company on the whole, damage the brand attractiveness
for the Company customers and lead to considerable financial losses.
Risks related to the quality of the sold products:
There is a risk related to the responsibility of the Group for the quality of products sold
in the Group’s stores as well as the risk of filing a claim due to the damage to life and health.
According to the agreements with the majority of the suppliers, the producer takes the material
liability for quality of the sold products, providing that the Group follows the necessary storage
conditions. Such claims may also be addressed to the seller of the above products at the
complainant option. Any such situation may damage the Company’s image and reputation,
reduce the market share of the Group and negatively affect the financial position of the Group.
Moreover, there is a risk related to the careless attitude of the Group personnel to the storage
conditions of the products, which may lead to material liability of the Group under such claims.
Risks related to the protection of intellectual property:
If the Group fails to protect its rights for the intellectual property or withstand the claims of the
third parties for the intellectual property connected with the violation of their rights, the Group may lose
its rights or bear serious responsibility for damages
For execution and protection of its rights for intellectual property, first of all the Group
relies on the author’s rights, trade marks rights, legislation of the commercial secret information
protection, on its users policy, on the license agreements and the restrictions on the information
disclosure. Despite the above precautionary measures, the third parties may illegally copy or
otherwise receive or use the intellectual property of the group. On the whole Russia does not
provide enough protection of the rights for the intellectual property compared to many other
countries with the developed economy. Failure of the Group to protect the rights for the
intellectual property from violation and misappropriation may adversely affect its financial
position and the ability of the Group to develop its business operation. Moreover, the Group
may be involved in the legal proceedings on protection of its rights for intellectual property or
to establish the validity and the size of the rights of the other parties. Any lawsuit may lead to
substantial expenses, distraction of the management and of the Group resources, which may
negatively affect the operation and financial position of the Group.
Carrying out of the underdeveloped policy on the provision of the interests in the
intellectual property of the Group may seriously complicate future business activity
The Group is on the stage of intensive development and expansion of all its operation
spheres. Measures of securing the rights of the Group to certain objects of intellectual property
have to be taken on the basis of the existing plans of commercial development and go ahead of
any commercial activity. Insufficient experience of the Russian companies in elaborating the
policy on the objects of intellectual property creates the whole group of risks with unfavorable
effect, including the inability of the Group to use the developed trade marks for individual
products (services) in a number of countries, conflicts with employees, involved specialists and
organizations in connection with determination of the rights on jointly created products and
differentiation of the use rights on these products by the Group and other persons.
79
The trade mark “Magnit” is used by other participants of the sales turnover as a
component of the company name, which may have an adverse effect on the operation of the
Group
The Group invested considerable funds in the promotion of its “Magnit” brand on the
Russian market, which is also the part of the company name of the products issued by the
Group under its private label. Due to “Magnit” brand the Group achieved great success in its
operation.
Meanwhile, the trademark “Magnet” in Latin letters is registered in the name of the
third party in the certain classes. Today, the volume of the legal assistance provided by the
Russian trademarks rights for trading organizations is not clarified. A certain risk of interests
conflict between the owners of the trademark “Magnit” (or ‘’Magnet”) definitely exists, in
connection herewith the Group might be forced to re-brand its stores. The expenses for such re-
branding may adversely affect the operation results of the Group.
Moreover, due to the fact that Russian legislation provides the limited protection of the
company names on the market, there exist a number of other organizations using “Magnit” in
their names. Business activity of some of them has the partially similar features to the operation
of the Group. The Group cannot stop these organizations from using such names, and this may
lead to the negative affect of these companies’ activity on the business activity and reputation of
the Group.
Risks related to the development of a new brand:
The expansion strategy of the Group presumes the growth of the sales share of the
products under “Magnit” brand (“for “Magnit” stores”). At the end of the year 2007 this figure
amounted to 12.1% of the turnover. The scheduled growth may turn out to be unachievable if
the commercial expenses for popularization of such brand will considerably exceed the existing
budget of the Group. Alongside with it, the creation of the new brands may weaken the existing
brands and require additional investments for maintaining their market position.
Risks related to the insufficiency of insurance coverage for damages arising in
connection with the interruption of activity, causing damages to the Group’s property or
responsibility to the third parties:
Insurance may turn out to be ineffective
The Group does not implement insurance for cases of the interruption of its business
activity, bringing to responsibility for products quality, fire (except for commodity stocks and
supplies) or changes of key management, and does not enter into insurance agreements on non-
movable assets, warehouse depot, stores or commodity stocks stored at the warehouses (with
rare exception). Moreover, the Group does not establish special reserve or other funds to cover
the possible losses or meet the requirements of the third parties. Thus, such events may
drastically disrupt the Group operation, cause considerable damages and/or require expenses
which will not be compensated. All the foregoing circumstances may have an adverse effect on
the business activity of the Group, its financial position and prospects.
A severe accident may result in substantial property losses and incapability to restore it
If in case of severe accident one or more objects of the Group (e.g. the headquarters in
Krasnodar, wholesale depot or hypermarket) are seriously damaged, the Company may not be
able to resume its activity within the established time period. The Group does not exercise the
insurance or create special funds to cover such accidents. Any such accident may have an
80
adverse effect on the Group business activity, its operation results, financial position and
prospects.
81
1166.. IINNFFOORRMMAATTIIOONN OONN TTHHEE CCOOMMPPLLIIAANNCCEE WWIITTHH TTHHEE FFFFMMSS
CCOODDEE OOFF CCOORRPPOORRAATTEE CCOONNDDUUCCTT OOFF RRUUSSSSIIAANN FFEEDDEERRAATTIIOONN 22
№
Clause of the code of corporate conduct
Complied / not
complied
Note
General Shareholders’ Meeting
1.
2.
3.
4.
5.
is
that
(materials)
Notification of shareholders on holding of
the general meeting not less than 30 days
before the date of a meeting irrespective the
questions placed on the agenda, if the
legislation does not otherwise provide
longer term.
Present shareholders’ ability to study the list
of persons which are entitled to participate
in the general meeting, starting from the
date of notification on holding of the
general meeting up to the closing of general
meeting in praesentia form, in case if the
general meeting is held in absentia form –
up to the closing date of acceptance of
voting papers.
Present shareholders’ ability to study the
to be
information
presented for preparation for the general
shareholders’ meeting by means of
electronic communication facilities, Internet
in particular
Present shareholder’s ability to place a
question on the general meeting agenda or
call the general meeting without delivering
the shareholders’ register extract, if the
registration of his/her share rights
is
recorded in the system of shareholders’
register, in case if his/her right is registered
in the custody account - adequacy of the
custody account extract to exercise the
above rights
Presence in the company Charter or internal
documents of the order on the obligatory
attendance of the general shareholders’
meeting by CEO, management members,
members of the board of directors, members
of the auditing committee and the auditor of
the joint stock company
Complied
Paragraph 13.10 of the OJSC
“Magnit” Charter
Complied
Article 24 of the Regulations on
the OJSC
general
“Magnit
shareholders’ meeting
Article 22 of the Regulations on
the OJSC
“Magnit”.general
shareholders’ meeting.
Paragraph 2 of Article 4 of the
Regulations
the OJSC
on
“Magnit” information policy.
Complied
Paragraph 13.10 of the OJSC
“Magnit” Charter
Complied
Paragraph 4 of article 5 and
paragraph 2 of article 11 of the
the OJSC
on
Regulations
“Magnit” general shareholders’
meeting
Complied upon
the fact
According to paragraph 2 of
article 29 of the Regulations on
“Magnit” general
the OJSC
the
shareholders’ meeting,
all
Company
the
arrangements
general
attendance
of
the
shareholders’ meeting by
members of
the board of
directors, sole executive body,
to provide
the
makes
2 The information is disclosed according to the “Methodical recommendations on the content and form of information
disclosure on compliance with the corporate code of conduct in the annual reports of joint-stock companies”, ratified by the
FFMS of 30.04.2003 № 03-849/р.
82
№
Clause of the code of corporate conduct
Complied / not
complied
Note
of
the
members
auditing
committee and other bodies of
the company. They are liable for
providing qualified answers to
the questions of the meeting
participants.
-
Not complied
Complied
Article 42 of the Regulations on
general
“Magnit
the OJSC
shareholders’ meeting
The obligatory attendance by the candidates
of the general shareholders meetings with
agenda issues on the election of the board
members, CEO, management
body,
members of the auditing committee, and
issues on the appointment of the auditor of
the joint-stock company
Presence in the internal documents of the
the registration
joint-stock company of
procedure of
the general shareholders’
meeting participants
Board of directors
Presence in the Charter of the joint-stock
company of the right of the board members
to annually ratify the business plan of the
joint-stock company
Complied
Paragraph 14.2. of
“Magnit” Charter
the OJSC
6.
7.
8.
9.
Presence of the risk management structure
in the joint-stock company, ratified by the
board of directors
Not complied
Article 5 of the Regulations on
the OJSC “Magnit” Board of
directors
Paragraphs 6.11 and 6.15 of the
Regulations on the Committees of
the board of OJSC “Magnit”,
according to which the analysis
of the management system of
risks related to the financial and
economic
the
activity
Company and arrangement of
the
recommendations
improvement of such system
refer to the competence of the
Audit Committee.
on
of
Paragraph 3.1. and 6 of article 1,
paragraph 2.4. of article 2 of the
Regulations on the internal audit
over
financial and economic
activity of OJSC “Magnit”.
10. Presence in the joint-stock company charter
of the right of the board to decide on
suspension of authority of CEO, appointed
by the general shareholders’ meeting
Not applicable Under paragraph 14.2. of the
OJSC “Magnit” Charter,
the
election of the sole executive
body of the company refers to the
competence of the board of the
Company.
83
Note
Under paragraph 14.2. of the
Charter of OJSC “Magnit”, the
ratification of the agreement with
the person exercising rights of the
company sole executive body
refers to the competence of the
of
OJSC
directors.
“Magnit”
board
“Magnit”
According to article 7 of the
Regulations on the committees of
the OJSC
board,
the eligibility
elaboration of
criteria of candidates for
the
(managing
positions of CEO
company), directors of the main
structural departments of
the
Company, and work-out of the
remuneration procedure to CEO
(managing company) and highly
the
employees
qualified
the
refer
Company,
to
competence of
the HR and
Remuneration Committee.
of
According to paragraph 14.2. of
the OJSC “Magnit” Charter,
ratification of the agreement with
the person exercising the right of
the sole executive body of the
refers
company
the
competence
the OJSC
of
“Magnit” board of directors.
-
to
Complied / not
complied
Complied
№
Clause of the code of corporate conduct
11. Presence in the joint-stock company charter
of the right of the board to set the
requirements for the qualification and the
of CEO,
amount
management members, the directors of the
main structural departments of the joint-
stock company
remuneration
of
12. Presence in the joint-stock company charter
of the right of the board to ratify the
conditions of the agreements with CEO and
management members
Complied
Not complied
in
13. Presence in the joint-stock company charter
or internal documents of the requirement,
that the votes of the board members, which
are CEO and management members, are not
counted
agreement
conditions with CEO (managing company,
manager) and management members
14. Presence in the board of the joint-stock
company of not less than 3 independent
directors eligible for the Code of corporate
conduct.
ratifying
the
Not complied According to paragraph 2 of
article 33 of the Regulations on
the OJSC “Magnit” board of
directors, the board must have
not less than one independent
member.
Westman
Johan Mattias was
voted as an independent director
in the board of the Company
84
Complied / not
complied
Complied
№
Clause of the code of corporate conduct
15. Absence in the joint-stock company board
members who were
found guilty of
committing economic crimes and crimes
against the government, interests of public
service and local authorities, or members
which were enforced administrative penalty
financial crimes,
for entrepreneurial or
crimes related to dues and fees, securities
market.
16. Absence in the joint-stock company board of
directors of members who are the member,
CEO (manager), management member or
the employee of the legal entity which is a
competitor to the joint-stock company.
Complied
Complied
Complied
Complied
17. Presence in the joint-stock company Charter
of the requirement for the election in the
board of directors by cumulative voting
18. Presence in the internal documents of the
joint-stock company of the duty of the board
members to avoid any actions that will lead
or potentially may lead to the conflict
between their interests and interests of the
joint-stock company, and in case such a
conflict arises - the duty to disclose the
information about this conflict to the board
of directors
19. Presence in the internal documents of the
joint-stock company of the duty of the board
members to notify in writing the board on
the intention to make a transaction with
securities of the joint-stock company, being
the member of this company or of its
subsidiary (dependant) companies’, and to
disclose the information on the transactions
with such securities as well.
20. Presence in the internal documents of the
joint-stock company of the requirement to
hold the meetings of the board not less than
once in six weeks
Note
guilty
found
enforced
The company does not hold
information about any members
of the OJSC “Magnit” board of
of
directors
committing economic crimes and
crimes against the government,
interests of public service and
local authorities, or members
were
administrative
penalty for entrepreneurial or
financial crimes, crimes related to
dues and fees, securities market.
The company does not hold
information about any OJSC
“Magnit” board members being
the members, CEO (manager),
management member or
the
legal entity
the
employee of
which is a competitor to OJSC
“Magnit”
Paragraph 14.7. of
“Magnit” Charter
the OJSC
Article
7
Regulations
“Magnit” board of directors.
and
on
the
the OJSC
32 of
Paragraphs 16.1. - 16.2. of the
OJSC “Magnit” Charter.
Paragraph 3.10. of article 7 of the
Regulations on the committees of
the OJSC “Magnit” board of
directors.
Article 7 of the Regulations on
the OJSC “Magnit” board of
directors.
Article 6 and paragraph 6 of
article 10 of the Regulations on
information
OJSC
policy.
“Magnit”
Not complied According to paragraph 1 of
article 22 of the Regulations on
the OJSC “Magnit” board of
directors, board meetings are
held upon necessity but not less
than once in three months
85
№
Clause of the code of corporate conduct
21. Holding of the joint-stock company board
the year under report
meeting within
periodically but not less once in six weeks
Complied / not
complied
Note
Not complied During 2006 the OJSC “Magnit”
board meetings were held not
less than once in a month, except
for July and August when board
meetings were not held
22. Presence in the internal documents of the
joint-stock company of the board meetings
procedure.
Not complied
-
23. Presence in the internal documents of the
joint-stock company of the Regulations on
the obligatory approval by the board of
directors of
company
transactions at the amount of 10 and more
percent of the assets value of the company
excluding transactions entered into on a
regular economic activity basis.
joint-stock
the
of
of
the
indirectly, by
Not complied According to paragraph 14.2. of
the OJSC “Magnit” Charter, the
transactions
approval
(including several
interrelated
deals) on acquisition, alienation,
the
directly or
and possibility of
company
alienation
assets,
amounting to 5 or more percent
of the balance sheet assets of the
company and
its subsidiaries
(“the Group”), defined on the
last consolidated
basis of the
report of the Group, prepared in
IFRS,
accordance with
excluding
the
offering of the common shares of
the company and transactions in
the usual economic activity, is not
advanced by the Charter to the
general
of
competence
shareholders’ meeting but to the
competence of
the board of
directors.
transactions on
the
the
24. Presence in the internal documents of the
joint-stock company of the right of the
board of directors to get from the joint-stock
company executive bodies and directors of
the main structural departments of the
information which is essential for them to
exercise functions, and the responsibility for
failure to submit such information
25. Presence of the board committee of strategic
planning or assignment the functions hereof
to the other committee (except for the audit
committee and HR and remuneration
committee)
26. Presence of the board committee (audit
committee) which advises on the joint-stock
the board, and
to
company auditor
Complied
Article 6 and 9 of the Regulations
on the OJSC “Magnit” board of
directors.
Article 5 of the Regulations on
the OJSC “Magnit information
policy
Not complied
The possibility of establishing the
committee is considered
Complied
The Audit Committee of the
OJSC
is
board
“Magnit”
established in the Company.
86
№
Clause of the code of corporate conduct
cooperates with the board and revision
committee of the joint-stock company.
27. Presence
in
committee of
the audit
independent and non-executive directors
only
Complied / not
complied
Note
The document assigning
the
functions to the audit committee
is the Regulations on the board
committees of OJSC “Magnit”.
the
Not complied According to the article 6 of the
Regulations
board
on
committees of OJSC “Magnit”,
the audit committee must have
an independent director.
The members of
the Audit
Committee of OJSC “Magnit” are:
1) Westman
Johan Mattias
(independent director);
2) Sergey Galitskiy (executive
director);
3) Alexandr Prisyazhnyuk
(non-executive director)
28. Management of the audit committee is
executed by the independent director
Complied
the
in charge of
According to the article 6 of the
Regulations
board
on
committees of OJSC “Magnit”,
the independent director only can
be
the Audit
Committee.
The Chairman of the board Audit
Committee of OJSC “Magnit” is
Westman
t6he
independent director.
Johan Mattias,
29. Presence in the internal documents of the
joint-stock company of the right of all the
audit committee members of access to any
documents and information of the joint-
stock company, provided that the do not
disclosure the confidential information.
Complied
Paragraph 2 of article 36 of the
Regulations
the OJSC
on
“Magnit” board.
Paragraph 10 of article 4 of the
Regulations
board
on
committees of OJSC “Magnit”.
the
Paragraph 8 of article 10 of the
Regulations on OJSC “Magnit”
information policy.
30. Establishment of the board committee (HR
and Remuneration
committee), whose
function is to set the candidates criteria for
the board members and work out the
remuneration policy of
joint-stock
company.
the
Complied
87
and
HR
Remuneration
Committee of the board of OJSC
“Magnit” is established in the
Company.
the
The document assigning
functions
and
to
Remuneration committee is the
Regulations
board
on
committees of OJSC “Magnit”.
the HR
the
№
Clause of the code of corporate conduct
31. Management of the HR and Remuneration
Committee is executed by the independent
director
Complied / not
complied
Not complied
32. Absence of the officials of the joint-stock
company in the HR and Remuneration
Committee
Complied
33. Establishment of the risks committee of the
board or assignment of the functions hereof
to the other committee (except for the audit
committee and the HR and Remuneration
committee).
Not complied
Note
director)
(non-
Vladimir Gordeychuk
the
executive
Chairman of
and
Remuneration Committee of the
OJSC “Magnit” board.
is
the HR
of
and
the HR
Members
Remuneration Committee are:
1) Vladimir Gordeychuk;
2) Andrey Arutyunyan;
3) Dmitriy Chenikov;
The committee establishment is
under consideration.
conflict management
34. Establishment of the board committee of
corporate
or
assignment of the functions hereof to the
other committee
the audit
committee and the HR and Remuneration
committee).
(except
for
Not complied
The committee establishment is
under consideration
35. Absence of the officials of the joint-stock
company in the committee of the corporate
conflict management
36. Management of
the corporate conflict
management committee is executed by the
independent director
Not complied
See clause 34
Not complied
See clause 34
37. Presence of the internal documents of the
joint-stock company ratified by the board,
which
of
for
establishment and operation of the board
committees.
procedure
provide
Complied
The Regulations on the board
committees of OJSC “Magnit” is
ratified by the board of OJSC
“Magnit”.
38. Presence in the charter of the joint-stock
company of the procedure of the board
quorum
the
obligatory participation of the independent
directors in the board meetings
setting, which provides
Not complied
-
Executive bodies
39. Presence of the collegial executive body
joint-stock
the
(governing body) of
company
Not complied According to the Charter of OJSC
“Magnit”, CEO is the executive
body of the Company.
There is no collegial executive
body (governing body) in the
Company.
88
№
Clause of the code of corporate conduct
Complied / not
complied
Note
Not complied
See clause 39
40. Presence
in
the
charter or
internal
documents of the joint-stock company of the
regulations on the obligatory management
approval of the transactions with real estate,
receipt by the joint-stock company of credit,
if the transactions herein do not refer to the
major transactions and do not relate to the
regular economic activity of the joint-stock
company
41. Presence in the internal documents of the
joint-stock company of the coordination
procedure of operations which are outside
the framework of financial and economic
activity of the joint-stock company
Complied
the board
The procedure of
resolutions of
the Company
within its competence is provided
by the internal documents of
OJSC “Magnit” – the Charter of
the Company, the Regulations on
the board of OJSC “Magnit”
42. Absence
in
the
joint-stock
company
executive bodies of members who are the
member, CEO
(manager), management
member or the employee of the legal entity
which is a competitor to the joint-stock
company
43. Absence
in
the
joint-stock
crimes against
company
executive bodies of members who were
found guilty of committing economic crimes
the government,
and
local
interests of public service and
authorities, or members which were
enforced
for
entrepreneurial or financial crimes, crimes
related to dues and fees, securities market
administrative
penalty
by
exercised
If the functions of the sole executive body
the management
are
organization or the manager – compliance
of CEO and management members of the
management organization or the manager
with the requirements, set to CEO and
management members of the joint-stock
company
44. Presence
in
the
charter or
internal
documents of the joint-stock company of the
management
prohibition
to exercise
organization
(the manager)
the
for
Complied
Complied
CEO
The OJSC “Magnit” executive
bodies do not have among its
is a
members a person who
(manager),
member,
management member or
the
legal entity
the
employee of
which is a competitor to the joint-
stock company
The company does not hold
information about any members
of the OJSC “Magnit” executive
bodies
of
committing economic crimes and
crimes against the government,
interests of public service and
local authorities, or members
administrative
were
penalty for entrepreneurial or
financial crimes, crimes related to
dues and fees, securities market
enforced
found
guilty
Not complied No management organization
(manager)
89
№
Clause of the code of corporate conduct
Complied / not
complied
Note
in
the
functions
similar
competing
company, and to be involved in any other
property relations with
joint-stock
company, except for providing services to
the
(the
management organization
manager)
the
45. Presence in the internal documents of the
joint-stock company of the duty of the
executive bodies to avoid any actions that
will lead or potentially may lead to the
conflict between their interests and interests
of the joint-stock company, and in case such
a conflict arises - the duty to disclose the
information about this conflict to the board
of directors
Complied
Paragraphs 16.1. – 16.2. of the
Charter of OJSC “Magnit”
Article 6 of the Regulations on
the sole executive body of OJSC
“Magnit”
46. Presence
in
the
charter or
internal
documents of the joint-stock company of the
selection criteria
the management
for
organization (manager)
47. Executive bodies monthly report on its
work to the board
Not complied
See clause 44
Not complied According to the article 69 of the
Federal Law “On the joint-stock
companies”, the executive bodies
of the joint-stock company are
accountable
the board of
directors, therefore the right of
the management board members
to get the information about the
operation and activity of the
executive bodies is indefeasible
and does not require any special
prescription
to
48.
Fixing in contracts and agreements entered
into by the joint-stock company with CEO
(management organization, manager) and
management members of the responsibility
for breach and violation of regulations on
confidentiality and private information
Complied
-
The Secretary of the company
(the
secretary of
49. Presence in the joint-stock company of the
special official
the
company), whose duty is to provide the
compliance of the bodies and officials of the
joint-stock company with the procedural
requirements which ensure the exercise of
rights and legal interests of the joint-stock
company.
Not complied
-
90
№
Clause of the code of corporate conduct
Complied / not
complied
Note
50. Presence
in
the
charter or
internal
documents of the joint-stock company of the
procedure of appointment (election) of the
secretary of the company and assignment
duties of the secretary of the company.
51. Presence in the charter of the joint-stock
company of
the
candidates for the secretary position of the
company.
the requirements
to
Not complied
-
Not complied
-
Substantial corporate actions
52. Presence
in
the
charter or
internal
documents of the joint-stock company of the
requirement of
transactions
approval.
major
53. The
obligatory
the
independent appraiser for the assessment of
the subject of the major transaction.
involvement
of
Not complied
-
Not complied
-
54. Presence in the charter of the joint-stock
company of the prohibition on any actions
within the acquisitions (mergers) of the
major share holdings of the
joint-stock
company, aimed at the interests protection
of the executive bodies (members of such
bodies) and members of the board of the
joint-stock company, and deteriorating the
position of the shareholders as compared to
the present (particularly, prohibition on the
decision of the board to issue additional
shares, securities convertible into shares or
securities providing the right of acquisition
of shares of the company, before the end of
the presumptive date of shares acquisition,
even if the right to make such a decision is
provided by the Charter).
Since 01.07.2006
the ban on
realization of any
of such actions by
the company
management
authorities is
determined by the
article 84.6 of the
Federal Law “On
joint-stock
companies”,
which makes the
inclusion of such
regulations in the
Charter
inexpedient
91
According to the article 84.6 of
the Federal Law “On joint-stock
companies” upon receipt by the
open company of optional or
obligatory offer, the decisions on
the following issues are taken
only by the general shareholders’
meeting of the open company:
- increase of the charter capital of
the open company through the
offering of the additional shares
within the limits of number and
categories
the
(types)
announced shares;
the open
-
company
securities,
convertible into shares, including
the options of the open company;
- approval of the transaction or
several interrelated transactions
on acquisition, alienation or
possibility of alienation by the
opened company directly or
indirectly of assets with the value
of 10 or more percents of the
the offering by
the
of
of
№
Clause of the code of corporate conduct
Complied / not
complied
Note
to
the
the
open
optional
balance sheet value of the opened
company, determined on
the
basis of its accounting report on
the last reporting date, if only
such transactions are not made in
the process of
the ordinary
economic activity of the opened
company or were not made
before
company
receives optional or obligatory
offer, and if the open company
receives
or
obligatory offer to acquire the
publicly
securities,
circulating
information
the
prior
disclosure of the delivery of the
corresponding offer to the open
company;
- approval of the transactions in
which the party has interest;
-
the open
company of the allocated shares
in cases provided by the present
Federal Law;
- increase of the remuneration to
the
the persons
positions
the management
in
bodies of the open company,
determination of conditions of
their authorities,
cessation of
including
of
increase of the compensations
paid out to these persons in case
of cessation of their authorities
acquisition by
determination
occupying
55. Presence in the charter of the joint-stock
company of the requirement of obligatory
involvement of the independent appraiser
for the assessment of the current market
price of the shares and possible changes of
their market price in the result of a merger.
56. Absence in the charter of the joint-stock
company of exemption of the acquirer from
the obligation to offer the shareholders to
sell the ordinary shares of the company,
owned by them, (securities convertible into
ordinary shares) within a merger.
Not complied
-
Complied
Paragraph 8.7. of the Charter of
OJSC “Magnit”
92
№
Clause of the code of corporate conduct
57. Presence
in
the
charter or
internal
documents of the joint-stock company of the
requirement of obligatory involvement of
the
for
the
assessment of shares conversion
ratio
during reorganization.
independent
appraiser
Complied / not
complied
Not complied
-
Note
Information disclosure
58. Presence of the internal document ratified
by the board, stipulating the rules and
approaches of the joint-stock company to
information disclosure
(Regulations on
information policy).
Complied
is
on
Regulations
ratified by
The
the
information policy of OJSC
“Magnit”
the
resolution of the board of OJSC
“Magnit” on 12 April, 2006,
minutes of meeting w/o N of 12
April, 2006.
59. Presence in the internal documents of the
joint-stock company of the requirement to
disclose the
information on the shares
offering, on persons who intend to acquire
the offered shares, including the major
minority shareholding, and on whether the
top officials of the joint-stock company will
take part in acquisition of the shares offered
by the company
Not complied
Information disclosure is carried
the
in accordance with
out
requirements
actual
of
legislation of Russian Federation.
the
the
company of
60. Presence in the internal documents of the
joint-stock
list of
information, documents and materials
the
which
should be presented
the
shareholders
general
submitted
questions
shareholders’ meeting
to
for consideration of
to
the
61. Presence of the website of the joint-stock
company and regular disclosure of the
information about the joint-stock company
on its website
62. Presence in the internal documents of the
joint-stock company of the requirement to
disclose information about the transactions
of the joint-stock company with persons
referred by the charter to the top officials of
the
about
transactions of joint-stock company with
organizations in which 20 or more percents
of the charter capital of the joint-stock
company directly or indirectly are owned
joint-stock
by
top officials of
joint-stock
company,
and
the
the
Complied
Paragraph 11.13 of the Charter of
OJSC “Magnit”.
Articles 26-27 of the Regulations
on
the general shareholders’
meeting of OJSC “Magnit”.
Complied
http://www.magnit-info.ru
Not complied
Information disclosure is carried
the
out
in accordance with
requirements of
current
legislation of Russian Federation
the
93
№
Clause of the code of corporate conduct
company, or organizations, which can be
otherwise considerably influenced by the
persons hereof
Complied / not
complied
Note
Not complied
Information disclosure is carried
out
the
in accordance with
actual
of
requirements
legislation of Russian Federation
the
Complied
Article 10 of the Regulations on
information policy of OJSC
“Magnit”
63. Presence in the internal documents of the
joint-stock company of the requirement to
the
disclose
transactions which may affect market value
of the shares of the joint-stock company
information about all
the
64. Presence of the internal document ratified
by the board on the use of material
information on the activity of the joint-stock
company, shares and other securities of the
company and transactions with them, which
is not public and the disclosure of which can
considerably affect the market value of
shares and other securities of the joint-stock
company
Control over financial and economic activity
65. Presence of procedures of the
internal
control over the financial and economic
activity of the joint-stock company ratified
by the board
Complied
66. Presence of a special department of the
joint-stock
the
company
compliance with the procedures of the
internal control (supervision and auditing
department)
regulating
67. Presence in the internal documents of the
joint-stock company of the requirement for
the board to determine the structure and
members of supervision and auditing
department of the joint-stock company
Complied
Complied
94
over
ratified by
activity
is
the
financial
Regulations on
internal
control
and
economic
of OJSC
the
“Magnit”
resolution of the board of OJSC
“Magnit” on 24 December, 2007,
24
minutes of meeting of
December, 2007.
Internal control department was
established in the Comp. The
document assigning the functions
to the service – Regulations on
the internal control over financial
and any economic activity of
OJSC “Magnit”
Paragraph 3 of article 3 of the
internal
Regulations on
and
control
economic
of OJSC
“Magnit”
the
financial
activity
over
№
Clause of the code of corporate conduct
68. Absence
in
the revision and auditing
department of members who were found
guilty of committing economic crimes and
crimes against the government, interests of
public service and local authorities, or
members
enforced
administrative penalty for entrepreneurial
or financial crimes, crimes related to dues
and fees, securities market
which
were
69. Absence
in
the revision and auditing
the
department of members who are
member of the executive body of the joint-
stock company or who are the members,
CEO (manager), management member or
the employee of the legal entity which is a
competitor to the joint-stock company
70. Presence in the internal documents of the
joint-stock company of the date of filing the
documents and materials for assessment of
the carried-out
financial and economic
activity with the revision and auditing
department, and
the
officials and employees of the joint-stock
company for not filing them in time.
responsibility of
71. Presence in the internal documents of the
joint-stock company of the obligation of the
revision and auditing department to inform
the audit committee of
the detected
breaches, and in of absence of the audit
committee – to inform the board of the joint-
stock company
72. Presence in the internal documents of the
joint-stock company of the requirement of
preliminary assessment by the revision and
control department of operations not
provided by the economic and financial
plan of the joint-stock company (irregular
operations).
73. Presence in the internal documents of the
joint-stock company of the procedure of
approval of the irregular operation with the
board
Complied / not
complied
Complied
-
Note
Complied
-
Not complied
-
Complied
Paragraph 3 of article 2 of the
internal
Regulations on
and
control
economic
of OJSC
“Magnit”
the
financial
activity
over
Not complied
-
Not complied
-
74. Presence of the internal document ratified
by
the
the board, which determines
procedure of the revision commission’s
inspection of the financial and economic
Complied
the
revision
Regulations on
commission of OJSC “Magnit” is
ratified by the annual general
shareholders’ meeting of OJSC
95
№
Clause of the code of corporate conduct
activity of the joint-stock company
Complied / not
complied
Note
“Magnit” on 8 April, 2006,
minutes of meeting w/o N of 12
April, 2006.
75. The assessment by the audit committee of
the auditors’ conclusion before its filing
the general
with
shareholders’ meeting.
the shareholders on
Complied
Paragraph 6.7. of the Regulations
on the committees of the board of
OJSC “Magnit”.
Dividends
76. Presence of the internal document ratified
by the board, which regulates the board in
adoption of
the
(Regulations on
amount of dividends
dividend policy)
recommendations on
Complied
the dividend
Regulations on
policy of OJSC “Magnit”
is
ratified by the resolution of the
board of OJSC “Magnit” on 12
April, 2006, minutes of meeting
w/o N of 12 April 2006.
77. Presence in the Regulations on dividend
policy of the procedure of determination of
the minimum share of net profit of the joint-
stock company for dividend payment, and
conditions under which the dividends on
privileged shares are not paid out or paid
out partially, the amount of which
is
determined by the charter of the joint-stock
company.
Complied
Paragraphs 4-5 of article 2 of the
Regulations on dividend policy
of OJSC “Magnit”.
There are no privileged shares in
the Company.
it
in
to
78. Release of the information on dividend
joint-stock company and
policy of the
amendments
the periodical,
provided by the charter of the joint-stock
company for release of the announcements
about holding of the general shareholders’
meeting
above
the
information on the
joint-stock company
website.
and placing of
Complied
The Regulations on dividend
is
policy of OJSC “Magnit”
released on the OJSC “Magnit”
website.
96
1177..
IINNFFOORRMMAATTIIOONN OONN TTHHEE AAUUDDIITTOORR AANNDD TTHHEE
CCOONNSSUULLTTAANNTT OOFF TTHHEE CCOOMMPPAANNYY
Under the resolution of the annual general shareholders’ meeting of June 28, 2007
(minutes of 10.07.2007) the auditing firm LLC AF “Faber Lex” was appointed the auditor of the
Company for the year 2007 in accordance with RAS.
Choosing the auditing firm the following factors were considered: operation period of
the firm, the price of services provided, staff and their qualification.
Information on the Company’s Auditor which conducted audit of the Company for
the year 2007 according to the Russian Accounting standards:
Full name of the audit organization
Short name of the audit organization
Limited Liability Company Auditing firm
“Faber Lex”
LLC AF “Faber Lex”
Address
144/2 Krasnikh Partizan str., Krasnodar
Phone number (including city code)
Fax number (including city code)
7(861) 220-03-20, 221-41-42, 226-41-41,
226-45-22, 226-38-15, 226-44-54
7(861) 220-03-20
E-mail
faberlex@mail.ru
License number certifying auditing activity
E 003080
Date of issue
Validation period
27.12.2002
until 27.12.2012
Issuing authority
Ministry of Finance of Russian Federation
Information on the Company’s Auditor which conducted the audit of the Company
reporting over the year 2007 according to IFRS:
Full name of the audit organization
Short name of the audit organization
Close Joint-Stock Company «Deloitte and
Touche CIS»
CJSC «Deloitte and Touche CIS»
Address
Phone number (including city code)
building 2, 4/7 Vozdvizhenka str., Moscow,
Russia
+ 7 (495) 787-06-00
Fax number (including city code)
+ 7 (495) 787-06-01
97
Website
License number certifying auditing activity
Date of issue
Validation period
Issuing authority
www.deloitte.ru
Е 002417
06.11.2002
until 06.11.2012
Ministry of Finance of Russian Federation
Information on financial consultant of the Company on the securities market, which
signed the securities prospectus registered on 06.03.2006:
Full name of organization
Short name of organization
Address
Phone number (including city code)
Fax number (including city code)
Website of the financial consultant to disclose the
information about
the
the
regulations of the Provisions on information
disclosure by the issuer of securities, ratified by
FFMS
Issuer under
License for exercising the activity on securities
market
Date of issue
Validation period
Issuing authority
Open Joint-Stock Company «Federal Fund
Corporation»
OJSC «FFC»
25 Ostozhenka str., Moscow, Russia
+7 (495) 737-86-30
+7 (495) 737-86-32
www.fscorp.ru
License of the professional participant of the
securities market for brokerage activity №
077-06174-100000 License of the professional
participant of the securities market for dealer
activity № 077-06178-010000
August 29, 2003
Non-expiry (for an indefinite term)
Federal Financial Markets Service
Services provided by the financial consultant:
- Preparation of the draft of the prospectus according to the information provided by
the Company;
-
Signing of the prospectus approved by the Company, after adequate verification
based on all the documents provided by the Company, according to the written inquiry of the
Financial advisor and receipt of the proper written certifications of the Company on reliability,
98
adequacy and completeness of the information contained in the above indicated document and
to be included in the prospectus, except the part, verified by the auditor or appraiser;
- Expertise of the documents filed to the registration authority for prospectus
registration;
-
Signing of documentation, which might be required from the Company for
organization of securities floatation with the trade institutor;
- Advice services on securities issue, including information disclosure on the
securities market under the regulations of legislation.
99
ANNEX TO 2007 ANNUAL REPORT OF OJSC “MAGNIT”
ANNEX № 1. Open Joint-Stock Company “Magnit” and its
subsidiaries. Independent Auditors’ Report. Year ended December 31,
2007.
ANNEX № 2. RAS Accounting report of CJSC “Tander” for the
year 2007
CJSC “Tander”. Consolidated balance sheet of December 31, 2007
CJSC “Tander”. Consolidated profit and loss statement for the year 2007
CJSC “Tander”. Consolidated statement of changes in equity for the year 2007
CJSC “Tander”. Consolidated cash flow statement
CJSC “Tander”. Appendix to the consolidated balance sheet for the year 2007
ANNEX № 3. RAS Accounting report of OJSC “Magnit” for the
year 2007
OJSC “Magnit”. Consolidated balance sheet of December 31, 2007
OJSC “Magnit”. Consolidated profit and loss statement for the year 2007
OJSC “Magnit”. Consolidated statement of changes in equity for the year 2007
OJSC “Magnit”. Consolidated cash flow statement
OJSC “Magnit”. Appendix to the consolidated balance sheet for the year 2007
100