UKRPRODUCT GROUP
Annual Report
2008
May, 2009
TABLE OF CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Chairman’s Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Chief Executive’s Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
The Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Directors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Corporate Governance Report . . . . . . . . . . . . . . . . . . . . . . . . .13
Corporate Social Responsibility Report . . . . . . . . . . . . . . . .15
Remuneration Committee Report . . . . . . . . . . . . . . . . . . . . . .17
Statement of Directors’ Responsibility . . . . . . . . . . . . . . . . .19
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . .20
CONSOLIDATED INCOME STATEMENT . . . . . . . . . . . . . . . . .22
CONSOLIDATED BALANCE SHEET . . . . . . . . . . . . . . . . . . . . .23
CONSOLIDATED CASH FLOW STATEMENT . . . . . . . . . . . . .24
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Corporate Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
FINANCIAL HIGHLIGHTS
Revenue GBP 52.3 million
2008 increased 8.7%
2007
2008
Gross Profit GBP 10.8 million
2008 increased 3.4%
2007
2008
Dividends per share GBP 0.8 p
2008 decreased 42.8%
2007
2008
Basic Earnings per share GBP 5.4 p
2008 decreased 30.8%
2007
2008
48.1
52.3
10.5
10.8
0.8
5.4
1.4
7.8
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
1
CHAIRMAN’S STATEMENT
Dear Shareholder
Iam delighted to present you with our Annual Report providing an overview
of Ukrproduct Group’s operating and financial performance in 2008.
Despite challenging market conditions during the period under review,
Ukrproduct has delivered robust growth in branded products’ revenues and
gross profits. In line with our stated strategy we continue to focus on brand(cid:2)
ed products, including processed and hard cheese and packaged butter. We
are well positioned to take advantage of changes in market demand by offer(cid:2)
ing a range of products in relevant price categories and appropriate quality for
the majority of consumer segments. Our skimmed milk powder (“SMP”) seg(cid:2)
ment has reversed its highly positive trend in 2007 and has been impacted by
price volatility in global dairy markets.
It has been the Group’s dividend policy to reward shareholders in line with the
trading performance of the business and financial results whilst maintaining
the cash position of the business and supporting the balance between rein(cid:2)
vesting profits and dividend distributions. In line with this policy the Board is
recommending paying a final dividend of 0.40 pence per ordinary share for
2008, resulting in the total dividend payment of 0.80 pence per ordinary share
for the full year 2008. If approved at the AGM, the final dividend will be paid
on 27 July 2009 to the shareholders on record as at 26 June 2009.
In 2008, Irina Yevets and Dmitry Dragun have stepped down from their
respective roles as Chief Executive Officer and Chief Financial Officer in order
to pursue other business interests. Subsequently, Sergey Evlanchik was
appointed as Chief Executive Officer and Roman Prannichuk was appointed as
Chief Financial Officer of Ukrproduct Group, with immediate effect. Between
February 2005 and June 2006, Sergey served as Chief Executive Officer of the
Group and guided Ukrproduct through a successful flotation on AIM in the
beginning of 2005 and was instrumental in establishing Ukrproduct as a lead(cid:2)
ing Ukrainian dairy producer.
Looking forward, we seek to improve our market share in each product cate(cid:2)
gory and segment of operation. We believe that we have the right strategy for
this market and expect it to see us through this challenging period success(cid:2)
fully. The Group plans to introduce new types and different packaging for
processed cheese in order to address the increasing demand in the low end
and mid market segments, and to further develop its sales to retail regional
outlets. We intend to continue promoting our brands and products through a
series of targeted marketing campaigns and take further steps in increasing
the shelf space in regional chains, developing and optimising our sales and
distribution network. In the second half of 2009, we plan to launch new mar(cid:2)
keting campaign for “Nash Molochnik” and “Molendam” brands. However,
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
2
SMP prices are anticipated to remain weak until there are signs of recovery in
the global economy and commodity markets. In 2009 the Group expects to
continue reducing its cost structure through optimisation of its overhead and
energy costs.
We are optimistic that Ukrproduct will continue to benefit from its strong posi(cid:2)
tion in the domestic dairy market with a brand portfolio that targets a wide
range of consumer segments. We believe that the Ukrainian dairy market
offers growth potential despite the prevailing economic environment. Indeed,
under current market conditions there may be consolidation opportunities
that Ukrproduct will be able to take advantage of provided that they fit the
Group’s strategy.
Ukrproduct’s financial position remains stable. The Group’s cash levels are
sufficient to meet the current debt obligations in the short and medium term.
In addition, the Group has access to additional banking facilities if required.
On behalf of the Board, I would also like to thank our management team and
all our employees for their commitment and achievements during the year.
Jack Rowell
Chairman Ukrproduct Group Ltd
21 May 2009
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
3
CHIEF EXECUTIVE’S STATEMENT
Group structure
Overview of Group operating performance in 2008
In 2008 Ukrproduct generated positive performance
whilst operating in the difficult market environment
driven by constricted retail demand, lack of monetary
liquidity and falling Hryvnia as a result of the broader
global financial crisis. The Group’s main business seg(cid:2)
ment, branded products, increased its production vol(cid:2)
umes by 19.7% year on year. Ukrproduct’s total pro(cid:2)
duction was up by 4% year on year following a 42.6%
year on year decline in the skimmed milk powder
("SMP") segment as a result of the continued price
volatility in global dairy markets.
The Group has further expanded its portfolio of branded
products beyond its core products – soft (processed)
cheese and packaged butter, and continued to increase
the production volume of hard cheese. The capacity util(cid:2)
isation of the Group’s hard cheese production facilities
has increased to over 60% by the year end following the
launch in December 2007.
The Group comprises five dairy plants which are conve(cid:2)
niently located in the Western and Central regions of
Ukraine:
• Molochnik Plant produces processed cheese and
packaged butter
• Starokonstantinovskiy Dairy Plant is engaged in the
production of bulk butter, packaged butter and
skimmed milk powder (SMP)
• Zhmerinka Butter and Cheese Plant manufactures
smoked cheese, processed cheese and butter
• Krasyliv Plant produces bulk and packaged butter
• Letichiv Dairy Plant manufactures butter, fat(cid:2)free
cheese and casein
The Group owns one of the largest logistics and distri(cid:2)
bution networks in Ukraine which operates domestical(cid:2)
ly through AgroSpetsResursy LLC and exports its SMP
products through UkrProdExpo.
Branded products
In 2008 Ukrproduct delivered strong growth in the
branded products segment which comprises processed
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
4
and hard cheeses, butter and spreads. These results
were underpinned by a series of successful marketing
and sales activities during the year targeting domestic
national and regional retail chains, as well as the expan(cid:2)
sion of direct sales network with two new depot branch(cid:2)
es in Donetsk and Dnepropetrovsk.
The branded products segment accounted for 86.8% of
the Group’s total production. In 2008 the Group
increased its market shares in core products – butter
and processed cheese to 8% and 23%, respectively.
Market shares of Ukrproduct’s branded products
improved, whilst prices kept pace with inflation.
The Group has a diversified brand portfolio which is tai(cid:2)
lored to several consumer market niches. In 2008
Ukrproduct responded to shifting consumer demand
towards less expensive dairy products by increasing the
production of processed cheese and spreads. The Group
also grew its sales of butter as a result of the consolida(cid:2)
tion in the market.
Ukrproduct significantly increased the production of
hard cheese following its launch in December 2007.
Ukrproduct’s sales of hard cheese more than tripled in
the second half of 2008, compared to the first half. In
June 2008, Ukrproduct expanded its brand portfolio to
include a new premium brand ‘Molendam’ for middle
class consumers. The Group offered two types of hard
cheese, Dutch and Gouda, packaged butter and
processed cheese under this brand to supermarket
chains throughout Ukraine.
In June 2008, Ukrproduct launched a new design of its
major brand “Nash Molochnik” (Our Dairyman). The
design features provide better visuals aimed at reflecting
market leading quality of the Group’s most successful
brand. The Group markets its cheese and butter products
under this brand. During the year Ukrproduct expanded
its product offering under “Nash Molochnik” brand to
include sausage cheese with different flavours. In August
2008, the Group launched a new marketing campaign in
Ukraine to promote this brand.
Skim Milk Powder (SMP)
In 2008 the skimmed milk powder ("SMP") segment has
reversed its highly positive trend and was impacted by
price volatility in global dairy markets. In addition,
import restrictions on the Ukrainian hard cheese and
SMP exports introduced by the Russian authorities in
August 2008 impacted domestic pricing. The Group’s
production of SMP declined by 42.6% year on year in
2008. In the beginning of 2009, Ukrproduct extended a
number of contracts with several leading international
food companies to supply its SMP products.
Proprietary milk zone
In 2008, the Group’s raw milk consumption share
accounted for around 1% of total raw milk production in
Ukraine. Ukrproduct purchases raw milk from individual
farmers and collective farms located in close proximity
to its production facilities in Western and Central
regions of Ukraine. The Group has established long(cid:2)
term relationships with its suppliers over the last eight
years. As at the end of the reporting period, the Group
had 93 collecting points and 93 cooling tanks.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
5
In the first half of 2008 Ukrproduct enjoyed lower pur(cid:2)
chase prices of raw milk as a result of the falling domes(cid:2)
tic demand for the raw material driven by declining pro(cid:2)
duction volumes of SMP in Ukraine. Ukrproduct has
introduced a set of measures to effectively manage its
cost base.
Sales and Distribution
In 2008 the Group continued to sell the majority of its
products in Ukraine. Ukrproduct considers its own
logistics, sales and distribution network to be a signifi(cid:2)
cant competitive advantage in the market. The Group
has further developed its retail presence throughout the
country whilst operating seven regional depots as well
as a central warehouse. As at 31 December 2008, the
Group’s fleet comprised more than 120 vehicles. In
2008 Ukrproduct has optimised the delivery schedules
of both raw materials and finished goods which enabled
it to have a better control over its distribution costs.
its
leading brand
In September 2008, the Group launched a nationwide
marketing campaign for
‘Our
Dairyman'. The campaign was launched as part of the
Group’s strategy to expand the distribution of its prod(cid:2)
ucts to regional retail outlets and to increase the shelf
space in large national chains throughout Central,
Eastern and Western Ukraine. During the year the Group
appointed three new deputy sales directors to increase
its presence in these regions, opened regional sales
offices in two cities and increased its sales force by 11
people to 387. As at the end of the reporting year, the
number of national and regional retail chains and out(cid:2)
lets, selling Ukrproduct’s dairy products, was 69 and
978, respectively. The Group’s products were sold in
eight out of the top ten Ukrainian supermarket chains.
During September and October 2008, Ukrproduct con(cid:2)
ducted a retail audit to measure the presence of its
branded products in stores across Ukraine. According
to the audit’s findings, ‘Our Dairyman’ branded butter
and cheese was found in 50% and 30%, respectively, of
Ukrainian retail chains.
Sergey Evlanchik
Chief Executive Officer
21 May 2009
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
6
FINANCIAL REVIEW
Revenue
In 2008 Ukrproduct delivered positive performance
with revenue increasing by 8.7% year on year to GBP
52.3 million (GBP 48.1 million). The Group derived the
majority of its revenue from the branded products seg(cid:2)
ment which contributed GBP 38.2 million (2007: GBP
25.2 million) to its results and accounted for 73.0% of
the total sales (2007: 52.3%). Skimmed milk powder
revenues declined 43.4% year on year as a result of the
price volatility in global dairy markets and contributed
GBP 11.6 million (2007: GBP 20.4 million) to total rev(cid:2)
enues.
Sales 2008
£ 000
Share in Sales 2007
Sales 2008
£ 000
Branded
SMP
Other
Total
38,197
11,561
2,554
52,312
73.0%
22.1%
4.9%
100%
25,155
20,410
2,545
48,110
Gross Profit and Selling, Distribution
& Administrative expenses (SG&A)
The current product mix reflects the Group’s strategy to
increase the sales of higher value added branded prod(cid:2)
ucts. The Group’s gross profit increased by 3.4% year
on year and totalled GBP 10.8 million in 2008 (2007:
GBP 10.5 million). The gross profit margin was 20.7%
in 2008, compared to 21.7% in 2007, as a result of the
margin pressure in the skimmed milk powder segment.
The gross profit in branded products segment increased
by 45.9% year on year with gross profit margin of
23.9% compared to 24.9% in the previous year follow(cid:2)
ing the increase in costs associated with the rollout of
hard cheese in 2008. The Group’s gross profit margin
was further impacted by 35% increase year on year in
energy and raw material costs, as well as higher infla(cid:2)
tion in 2008.
Selling, Distribution and Administrative expenses
increased by 22.2% year on year from GBP 5.69 million
to GBP 6.95 million, primarily as a result of the rise in
marketing and distribution expenses.
EBITDA and Profit after tax
Group EBITDA declined by 13.4% year on year and
amounted to GBP 4.8 million in 2008 (2007: GBP 5.5
million) with EBITDA margin of 9.1% compared to
11.4% in the previous period, as a result of the decline
in SMP prices.
Depreciation and amortisation expense increased by
27.6% year on year from GBP 1.4 million to GBP 1.8 mil(cid:2)
Share in
Sales 2007
52.3%
42.4%
5.3%
Gross
Profit
2008
£ 000
9,138
1,274
406
Gross
margin
2008
23.9%
11.0%
15.9%
Gross
Profit
2007
£ 000
6,263
3,804
391
Gross
margin
2007
24.9%
18.6%
15.4%
100%
10,818
20.7% 10,458
21.7%
lion in 2008, following the launch of the hard cheese pro(cid:2)
duction unit and the installation of a smoking chamber.
Profit after tax decreased by 30.2% year on year to GBP
2.3 million in 2008, compared to GBP 3.3 million in
2007.
Earnings per share and dividends
The Group’s basic earnings per share (EPS) declined
30.8% year on year from 7.8 pence to 5.4 pence in
2008. The diluted earnings per share declined 28.0%
year on year from 7.5 pence to 5.4 pence in the same
period.
An interim dividend of 0.40 pence per share was paid on
25 October 2008. In line with the Group’s dividend poli(cid:2)
cy, the Board of Directors proposed to pay a final divi(cid:2)
dend of 0.40 pence per ordinary share for 2008, result(cid:2)
ing in the total dividend payment of 0.80 pence per ordi(cid:2)
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
7
nary share for the full year 2008 (2007: 1.4 pence). The
final dividend is expected to be paid on 27 July 2009 to
shareholders on record as at 26 June 2009, subject to
the approval of the AGM of shareholders.
Cash flow and net debt
Net cash generated by the operating activities totaled
GBP 2.6 million in 2008 (2007: GBP 3.6 million) after
absorbing the increase in working capital given the rise
in sales.
Net cash used in investing activities totaled GBP 1.9 mil(cid:2)
lion in 2008 (2007: GBP 2.5 million), with GBP 1.4 mil(cid:2)
lion spent on capital expenditure (2007: GBP 2.7 mil(cid:2)
lion). During the year, Ukrproduct invested in the
increase of hard cheese production capacity and the
expansion of the milk collection zone. In the second half
of 2008, the Group reduced its capital expenditure going
forward to the level of essential maintenance expense.
Net cash used in financing activities amounted to GBP
0.66 million in 2008 (2007: GBP 0.08 million) following
the redemption of GBP 0.81 million of local bonds.
The Group’s cash balances stood at GBP 0.69 million as
at 31 December 2008, compared to GBP 1.1 million as
at 31 December 2007. The Group’s net debt was GBP
2.99 million as at 31 December 2008, compared to GBP
3.13 million as at 31 December 2007. Further informa(cid:2)
tion is disclosed in note 6.
Bank facilities
The Group maintained a working capital facility in local
currency, Ukrainian Hryvnia, with Ukraine OTP bank
equivalent to up to GBP 4.0 million (2007: GBP 4.0 mil(cid:2)
lion). As at 31 December 2008, Ukrproduct has drawn
GBP 3.2 million of the available facility (GBP 3.4 mil(cid:2)
lion). Ukrproduct also has available additional overdraft
facilities for up to GBP 0.7 million.
Financial reporting
The financial statements included in this report were
prepared in accordance with International Financial
Reporting Standards as adopted by the European Union
(“IFRS”).
Roman Prannychuk
Chief Financial Officer
21 May 2009
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
8
THE BOARD OF DIRECTORS
As of the date of the 2008 Annual Report approval, the names of the Board members are as follows:
Name
Positiom
Date appointed
Jack Rowell
Sergey Evlanchik
Roman Prannichuk
Alexander Slipchuk
Non(cid:2)executive Chairman
November 2004
CEO
CFO
Executive Director
April 2008
September 2008
November 2004
In the first half of 2008, Iryna Yevets resigned as Chief Executive Officer and President of Ukrproduct and left the
Board of Directors. In September 2008, Dmitry Dragun resigned as Chief Financial Officer and left the Board. Roman
Prannichuk was appointed to the Board as his replacement.
The names and other biographical details of the Board members are presented below:
Jack Rowell
Non(cid:2)executive Chairman
Sergey Evlanchik
Chief Executive Officer
Dr. Rowell (70) has acted as
Chairman of a number of
companies in the public and
private sector, mainly within
the food production industry.
He was previously an execu(cid:2)
tive director on the board of
Dalgety plc responsible for the
consumer
foods division.
Jack also serves as Chairman
of Celsis plc, a public company quoted on AIM, and is also
Manager of Bath Rugby Club, the Champion of England’s
Rugby Football Union. Prior to this, Dr. Rowell was CEO of
Golden Wonder Ltd. and Lucas Food Ingredients (also part
of the Dalgety Food Group). He was educated at Oxford
University and is a Chartered Accountant.
Sergey Evlanchik is respon(cid:2)
sible for the Group’s overall
performance and strategy
implementation and is a
founder of Ukrproduct
Group. He studied at
Vladivostok State University
of Economics & Service in
the Russian Federation and
at Oxford University in the
UK, where he received his MBA degree. Together with
Alexander Slipchuk, he established the equity trading
company, Alfa(cid:2)Broker in 1994 in the Far East of the
Russian Federation. After the recess of the Russian and
Ukrainian equity markets in 1998, Mr Evlanchik refo(cid:2)
cused his activities on business development in the
industrial sector of Ukraine, particular within the dairy
industry, where he joined the companies that would
subsequently form Ukrproduct Group in 2004. Sergey
then led the Group to its successful listing on London
Stock Exchange in 2005.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
9
Roman Prannichuk
Chief Financial Officer
Alexander Slipchuk
Executive Director
of
Roman Prannichuk was
appointed Chief Financial
Officer in August 2008 and
prior to this he has served
Finance
as Head
Department of Ukrproduct
Group. Roman joined the
Company in 2001 as an
auditor. From 2005 until his
most recent appointment,
he held the position of Head of Internal Audit. Mr.
Prannichuk is a certified auditor with qualifications con(cid:2)
ferred by the Ukrainian Audit Chamber, as well as a
holder of CAP certificate. Roman’s career as an
accountant and auditor is now in its 15th year. Within
the Group he is responsible for the operational financial
controls and the internal audit in Ukraine.
Alexander Slipchuk studied at
Far(cid:2)Eastern High Engineering
Marine School in Russia and
graduated as a maritime navi(cid:2)
gator in 1989. Together with
his partner Sergey Evlanchik,
Alexander established
the
securities house Alfa(cid:2)Broker
in 1994, developed the equity
trading business in the far
east of the Russian Federation, and acquired initial stakes in
the companies that later became part of Ukrproduct Group.
Later in 1998, Alexander took the executive positions at the
Molochnik and the Starakonstantinovskiy Dairy plants,
Ukrproduct’s two main operating assets. He serves as the
Group’s Executive Director in advisory capacity.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
10
DIRECTORS’ REPORT
The Directors present their report and the audited
consolidated financial statements of Ukrproduct
Group Ltd for the year ended 31 December 2008.
Principal Activities and business review
Ukrproduct Group Ltd (the Company) is a holding com(cid:2)
pany for a group of dairy based FMCG (fast moving con(cid:2)
sumer goods) businesses located in Ukraine. The prin(cid:2)
cipal activities of Ukrproduct Group are the production
and distribution of highly branded dairy foods in Ukraine
and the export of milk powder. The Group is one of the
leading branded food producers in Ukraine with its own
nationwide distribution network. More detailed com(cid:2)
performance in 2008, the Board of Directors proposed
to pay a final dividend of 0.40 pence per ordinary share
for 2008, which would lead to 0.80 pence per ordinary
share for the full year (2007: 1.4 pence). The final divi(cid:2)
dends will be paid on 27 July 2009 to shareholders on
the register as at 26 June 2009, subject to shareholders’
approval at the 2009 Annual General Meeting.
Directors
Details of members of the Board of Directors are shown
on page 9.
The Directors’ interests in the share capital of the
Company as at 31 December 2008 and 31 December
2007 are shown below:
Shares
Share options
2008
2007
2008
2007
14,422,383
14,487,383
14,422,383
14,487,383
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
234,299
117,149
18,690
18,690
130,290
130,290
Executive
Sergey Evlanchik
Alexander Slipchuk
Iryna Yevets (resigned)
Dr Dmitry Dragun
(resigned)
Non(cid:2)executive
Dr Jack Rowell
mentary on the Group’s activities during the year, its
financial performance, future plans, and prospects are
outlined in the Chairman’s and Chief Executive’s
Statements and in the Financial Review.
Results and Dividends
The results of the Group for the period are set out on
page 22 and show a profit for the period of GBP 2.277
million (2007: GBP 3.262 million).
An interim dividend of 0.40 pence per share was paid on
25 October, 2008. The shares are quoted ‘ex dividend’
from 1 October 2008. Based on the Group’s financial
Powers of the Directors
Subject to the Company’s Memorandum and Articles of
Association, the Law and any directions given by special
resolution, the business of the Company shall be man(cid:2)
aged by the Directors who may pay all expenses
incurred in setting up and registering the Company and
who may exercise all such powers of the Company. The
rules in relation to the appointment and replacement of
Directors are set out in the Company’s Article’s of
Association.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
11
Financial Risks Facing the Group
Going concern
The principal risks of the business is the credit risk, liq(cid:2)
uidity risk and market risk, including fair value or cash
flow interest(cid:2)rate risk and foreign exchange risk. The
main purpose of the Group’s risk management pro(cid:2)
gramme is to evaluate, monitor and manage these risks
and to minimise potential adverse effects on the Group’s
financial performance and shareholders. The Chief
Financial Officer of the Group is in charge of risk man(cid:2)
agement and introduction of all policies as approved by
the Board of Directors.
Following a review of the Group’s financial position and
its budgets and plans, the directors have concluded that
the Group has sufficient financial resources to meet
working capital requirements for a period of up to 12
months from the date of these financial statements.
Annual General Meeting
Ukrproduct’s AGM will be held on 26 June 2009. The
Notice of AGM and agenda will be sent to shareholders
no less than 25 days prior to the date of the meeting.
For further details of the Group’s risk management
please see note 5 on page 36.
Auditors
BDO Stoy Hayward LLP was reappointed as the Group’s
auditors for 2008 financial year at the Annual General
Meeting of Shareholders held on June 24, 2008.
All of the current Directors have taken the necessary
steps to make themselves aware of any information
needed by the Company’s auditors for the purposes of
their audit and to establish that the auditors are aware of
that information. The directors are not aware of any rel(cid:2)
evant audit information of which the auditors are
unaware.
Sergey Evlanchik
Chief Executive Officer
21 May 2009
Employees
The Group is committed to ensuring provision of equal
opportunities for all employees, which is reflected by its
selection, recruitment and training policies. The Group
considers its employees to be one of its most valuable
assets and rewards high performance through compet(cid:2)
itive remuneration and incentive schemes. The Directors
also consider it a priority to give employees the oppor(cid:2)
tunity to communicate their ideas and opinions to all
levels of management, both directly and through various
surveys. Ukrproduct Group had a total of 2,089 employ(cid:2)
ees as at 31 December 2008 (2007: 2,014).
Payment Policy
The Group has a general set of guidelines for paying its
suppliers based on specific criteria. However, it is nor(cid:2)
mal practice to agree payment terms with a specific
supplier when entering into a purchase contract. The
Group seeks to abide by the payment terms agreed
whenever it is satisfied that the goods or services have
been provided in accordance with the agreed terms and
conditions.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
12
CORPORATE GOVERNANCE
REPORT
Corporate Governance Policy
Effective corporate governance is a priority of the Board
and outlined below are details of how the Company has
applied the principles set out in The Combined Code on
Corporate Governance (the “Code”) revised in July 2006
by the Financial Reporting Council. Under the rules of
AIM, a market operated by the London Stock Exchange,
the Company is not required to comply with the Code and
the Board considered that the size of the Group does not
warrant compliance with all of the Code’s requirements.
The Board fully supports the principles on which the Code
is based and seeks to comply with best practice in such
respects as they consider appropriate for a Group of its
size and nature. The Board has a wide range of experi(cid:2)
ence directly relevant to the Group and its activities and
its structure ensures that no one individual or Group
dominates the decision making process.
The Board
The Board consists of one non(cid:2)executive and three
Executive Directors. The roles of the Chairman of the
Board and the Chief Executive of the Group are held sep(cid:2)
arately with a clear division of responsibility between
them. The Chairman of the Board is an independent
non(cid:2)executive Director.
Within the scope of the corporate governance proce(cid:2)
dures, the Board meets regularly to consider the finan(cid:2)
cial results, budgets, and major items of capital expen(cid:2)
diture of all the Group’s companies. This body is also
responsible for formulating, reviewing and approving
the Group’s strategy and the phases of its development.
The meetings of the Board of Directors take place in
Ukraine or Jersey, or any other suitable jurisdiction as
decided by the Board. Teleconference calls are also a
possibility, when Directors are present in either (or
both) Jersey or Ukraine.
The Board met seven times during 2008 and all the
directors, then current, attended all meetings, with the
exception of Mr Jack Rowell, who attended six of seven
meetings, missing one by prior arrangement.
Board Committees
The Board is assisted by Audit and Remuneration
Committees.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
13
Audit Committee
The Audit Committee consists of one non(cid:2)executive
Director, Jack Rowell. The member of the Audit
Committee has relevant financial experience. This
Committee, inter alia, is responsible for reviewing the
Annual and Interim financial statements, in addition to
the systems of internal control and risk management,
and also for ensuring the integrity of the financial infor(cid:2)
mation reported to the shareholders.
The Audit Committee meet with the external auditors
twice during the year.
Remuneration Committee
The Remuneration Committee comprises one non(cid:2)exec(cid:2)
utive Director, Jack Rowell. This Committee is sched(cid:2)
uled to meet at least twice per annum to advise the
Board on the Group’s remuneration strategy and to
determine the terms of employment and total remuner(cid:2)
ation of the Executive Directors, including the granting
of share options. Among others, the objective of this
Committee is to attract, retain and motivate Executives
capable of delivering the Group’s objectives. The
Remuneration Committee is also responsible for the
evaluation of the performance of Executive Directors.
Relations with shareholders
The Group maintains regular contact with its institution(cid:2)
al and private shareholders, fund managers, financial
analysts and brokers through a series of presentations,
conference calls and meetings. All corporate materials,
including annual reports, financial results statements
and other information, are available on the Group’s web(cid:2)
site www.ukrproduct.com
Chief Executive Officer and Chief Financial Officer hold
conference calls and meetings with shareholders on a
regular basis. The Board believes that it is essential to
discuss with its shareholders and keep them updated
with regards to the Group’s financial performance, strat(cid:2)
egy and business developments. The Chairman is also
accessible to major shareholders, if such meetings are
required.
The Board invites all shareholders to attend the Company’s
Annual General Meeting and encourage them to exercise
their voting right and participate with questions.
Internal Control
The Group adheres to comprehensive and strictly regu(cid:2)
lated budgeting and reporting procedures that are aimed
at more efficient internal control and risk management.
The Board is responsible for the Group’s system of inter(cid:2)
nal control and for reviewing its effectiveness, however, it
is recognised that any control system can only provide
reasonable and not absolute assurance against material
misstatement or loss.
The principal elements of the internal control system are
as follows:
• documented policies, procedures and authorisation
levels;
• clearly defined lines of responsibility in the organisa(cid:2)
tional structure of the Group;
• a management structure which facilitates ease of com(cid:2)
munication both vertically and horizontally;
• annual budgeting and monthly reporting procedures.
The annual budgets consist of monthly budgets, which
are updated each month once actual figures become
available. Due to the dynamic development of the
macroeconomic environment of the country the Group
operates in, variances in actual figures for sales, prices
and other underlying assumptions from those forecast(cid:2)
ed may occur. Hence, the budget is flexed to better
reflect the future of the Group. Such variances by each
company within the Group are discovered and recom(cid:2)
mendations for further actions are formulated.
The internal control system is further enforced by the
Group’s internal audit department. The main objectives of
the internal audit function are to ensure the safety of the
Company’s assets and the reliability of accounting records.
The internal audit department is responsible for auditing
the financial statements and accounting procedures of the
companies within the Group, as well as for disclosing and
reducing various types of risks related to Group operations.
Each company within the Group has a designated auditor,
who systematically performs the audits.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
14
Employees
The Group is committed to ensuring equal opportunities
to all its employees, both current and prospective. Each
employee’s efforts are highly valued and the Board
believes that a diverse mix of the workforce facilitates
innovation, efficiency and teamwork. As a matter of cor(cid:2)
porate policy, regular training and development work(cid:2)
shops are conducted for Ukrproduct’s staff. These are
aimed at all employee groups, including managerial,
technical and production personnel. The training pro(cid:2)
grammes encourage staff to progress up the career lad(cid:2)
der and are central to the Group’s continuing growth
and success.
CORPORATE SOCIAL
RESPONSIBILITY REPORT
Corporate Social Responsibility
The Board is committed to developing and implementing
corporate social responsibility (CSR) policies aimed at:
• Promoting equality and fairness among employees,
partners and suppliers
• Ensuring safe working conditions
• Maintaining the Group’s corporate reputation and
dedication to business ethics
• Supporting the communities in which the Group oper(cid:2)
ates
• Establishing long(cid:2)term and healthy relationships with
the Group’s partners, customers and other affiliated
parties.
The main elements of the Group’s approach towards ful(cid:2)
filling the above objectives are as follows:
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
15
Health and safety
Environment
Management at business units within the Group are
responsible for developing and maintaining the underly(cid:2)
ing practices that provide for a safe working environ(cid:2)
ment. Special attention is given to the production facili(cid:2)
ties, where the equipment, including lighting, air condi(cid:2)
tioning, workspace and other constituents, undergo
constant reviews and improvements. Regular monitor(cid:2)
ing is carried out to ensure that the required standards
are met and that employees use the provided communi(cid:2)
cation channels to further improve their surrounding
working conditions.
Customers
Customer satisfaction is at the core of the Group’s busi(cid:2)
ness model. Therefore, the Board is keen to continue
supplying the customers with high quality, affordable
products required by current market demands. The
Group’s segmentation practices are aimed at segregat(cid:2)
ing various customer groups in order to meet their
respective needs with maximum efficiency. In addition,
regular market research and surveys are conducted to
ensure maximum value is consistently offered to cus(cid:2)
tomers.
The Group recognises the importance of good environ(cid:2)
mental practices and seeks to minimise a negative
impact that its operations or products might have on the
production sites and surrounding areas. The Group
adopted the environmental laws and regulations of
Ukraine to reduce, control and eliminate various types
of pollution and
to protect natural resources.
Ukrproduct monitors and controls all its production
facilities regularly in order to ensure that air quality is
not adversely impacted by its operations. The Group
focuses on cutting water and energy consumption, as
well as reducing the volumes of waste. Collection and
processing of waste have been organised through the
local waste collection plants. The Group’s development
programme of 2008(cid:2)2012 puts specific emphasis on
acquiring and installing only the most advanced and
environmentally(cid:2)friendly production and auxiliary equip(cid:2)
ment.
Food safety
in compliance with
Food safety is one of key priorities for the Group.
Ukrproduct is committed to produce high quality and
safe food and ensures that high standards are main(cid:2)
tained within its supplier base. The certified food safety
management system
ISO
22000:2005 was implemented by the Group. This sys(cid:2)
tem provides the possibility to fully monitor all produc(cid:2)
tion stages – from forage control and sound health of
the cattle to the final product distribution. During 2008,
food safety standards were audited at all Group’s pro(cid:2)
duction facilities by the leading international food pro(cid:2)
ducers.
Community support
The Group is keen to further enhance and maintain its
partnership with local communities by supporting their
initiatives and charitable events. The Group contributes
cash donations and gifts, as well as employee time, by
encouraging staff to participate as volunteers.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
16
REMUNERATION
COMMITTEE REPORT
This report
is prepared by the Remuneration
Committee of the Board and sets out the Company’s
policy on the remuneration of the Directors, with a
description of service agreements and remuneration
packages for each Director.
Remuneration Committee
The Remuneration Committee comprises one non(cid:2)
executive Director, Jack Rowell. This Committee is
scheduled to meet at least twice per annum to advise
the Board on the Group’s remuneration strategy and to
determine the terms of employment and total remu(cid:2)
neration of the Executive Directors, including the
granting of share options. Among others, the objective
of this Committee is to attract, retain and motivate
Executives capable of delivering the Group’s objec(cid:2)
tives. The Remuneration Committee is also responsi(cid:2)
ble for the evaluation of the performance of Executive
Directors.
the Executive concerned. Consideration is also given to
the cost of living and the Director’s professional experi(cid:2)
ence. While determining the base salaries, the
Committee also considers general aspects of the
employment terms and conditions of employees else(cid:2)
where in the Group.
Incentive bonus plans and equity arrangements
The Committee plans to consider developing long(cid:2)term
equity incentive arrangements to make the overall
Executive Remuneration structure more performance(cid:2)
related, more competitive and aligned with sharehold(cid:2)
ers’ interests.
Service contracts
The appointments of executive Directors are valid for
an indefinite period and may be terminated with three
months notice given by either party at any time. The
Company’s provision for compensation for loss of
office is to provide compensation which reflects the
Company’s contractual obligations.
Remuneration Policy
Bonus Scheme
The Company’s remuneration policy is to provide remu(cid:2)
neration packages which:
• are designed to attract, motivate and retain high cal(cid:2)
ibre Executives;
The Committee has established a cash bonus scheme
for Executive Directors based on the overall perform(cid:2)
ance of the Company and attainment of the operating
profit targets.
• are competitive and in line with comparable busi(cid:2)
Non(cid:2)executive directors
nesses;
• are rooted in practices exercised in countries where
•
the Group operates;
intend to align the interests of the Executives with
those of the shareholders by means of fixed and per(cid:2)
formance related remuneration;
• and set challenging performance targets and moti(cid:2)
vate Executives to achieve those targets both in the
short and long(cid:2)term.
Base salary
The appointments of non(cid:2)executive Directors are valid
for an indefinite period and may be terminated with
three months notice given by either party at any time.
The decision to re(cid:2)appoint, as well as the determination
of the fees of the non(cid:2)executive Directors, rests with the
Board. The non(cid:2)executive Directors may accept
appointments with other companies, although any such
appointment is subject to the Board’s approval and
terms and conditions of Service Agreements.
Directors’ remuneration
The Committee reviews base salaries of the Executive
Directors annually taking into account job responsibili(cid:2)
ties, competitive market rates and the performance of
Details of the Directors’ cash remuneration are outlined
below:
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
17
Dr Dmitry Dragun (resigned)
40,000
GBP
Executive
Iryna Yevets (resigned)
Roman Prannychuk
Alexander Slipchuk
Sergey Evlanchik
Non(cid:2)executive
Dr Jack Rowell
Share based payments
Annual
Salary/fee
2008
22,500
14,445
70,000
83,889
2007
60,000
40,000
(cid:2)
45,000
45,000
45,000
37,500
Bonus
2008
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Total cash
remuneration
2008
22,500
40,000
14,445
70,000
83,889
2007
120,000
90,000
(cid:2)
67,500
67,500
2007
60,000
50,000
22,500
22,500
(cid:2)
45,000
37,500
Remuneration disclosed above does not include any
amounts for the value of options to acquire shares of
the Company.
These options were not exercised.
In 2005 the Company granted share options to the
Directors. Details of the options outstanding at 31
December 2008 are shown below. The Directors’
Directors
Jack Rowell
Share Option
Exercise Price, pence
Exercise Period
130,290
57.0
to 11/02/2009
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
18
STATEMENT OF DIRECTORS’
RESPONSIBILITY
The directors are responsible for keeping proper
accounting records which disclose with reasonable
accuracy at any time the financial position of the compa(cid:2)
ny, for safeguarding the assets, for taking reasonable
steps for the prevention and detection of fraud and other
irregularities and for the preparation of financial state(cid:2)
ments which comply with the requirements of the
Companies (Jersey) Law 1991 as amended.
The directors are responsible for preparing the annual
report and the financial statements in accordance with
the Companies (Jersey) Law 1991. The directors are
also required to prepare financial statements for the
Group in accordance with International Financial
Reporting Standards as adopted by the European Union
(IFRSs) and the rules of the London Stock Exchange for
companies trading securities on the Alternative
Investment Market.
International Accounting Standard 1 requires that finan(cid:2)
cial statements present fairly for each financial year the
company’s financial position, financial performance and
cash flows. This requires the faithful representation of
the effects of transactions, other events and conditions
in accordance with the definitions and recognition crite(cid:2)
ria for assets, liabilities, income and expenses set out in
International Accounting Standards Board’s
the
‘Framework for the preparation and presentation of
financial statements’. In virtually all circumstances, a
fair presentation will be achieved by compliance with all
applicable International Financial Reporting Standards.
A fair presentation also requires the directors to:
• select and apply appropriate accounting policies;
• present information, including accounting policies, in
a manner that provides relevant, reliable, comparable
and understandable information;
• and provide additional disclosures when compliance
with the specific requirements in IFRS is insufficient
to enable users to understand the impact of particular
transactions, other events and conditions on the enti(cid:2)
ty’s financial position and financial performance.
Financial statements are available on the Group’s web(cid:2)
site in accordance with the applicable legislation gov(cid:2)
erning the preparation and dissemination of financial
statements. The maintenance and integrity of the
group’s website is the responsibility of the directors.
The directors’ responsibility also extends to the ongoing
integrity of the financial statements contained therein.
Jack Rowell
Chairman Ukrproduct Group Ltd
21 May 2009
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
19
INDEPENDENT
AUDITORS’ REPORT
To the shareholders of Ukrproduct Group Ltd
We have audited the Group financial statements (the
“financial statements”) of Ukrproduct Group Ltd for the
year ended 31 December 2008 which comprise the con(cid:2)
solidated income statement, the consolidated balance
sheet, the consolidated cash flow statement, the con(cid:2)
solidated statement of changes in equity and the related
notes. These financial statements have been prepared
under the accounting policies set out therein.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the annual
report and financial statements in accordance with
applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union
are set out in the statement of directors’ responsibilities.
Our responsibility is to audit the financial statements in
accordance with relevant legal and regulatory require(cid:2)
ments and International Standards on Auditing (UK and
Ireland).
We report to you our opinion as to whether the financial
statements give a true and fair view and have been prop(cid:2)
erly prepared in accordance with the Companies
(Jersey) Law 1991 as amended and whether the infor(cid:2)
mation given in the directors’ report is consistent with
those financial statements. We also report to you if, in
our opinion, the company has not kept proper account(cid:2)
ing records, if we have not received all the information
and explanations we require for our audit, or if informa(cid:2)
tion specified by law regarding directors’ remuneration
and other transactions is not disclosed.
We read other information contained in the Annual
Report and consider whether it is consistent with the
audited financial statements. The other information
comprises only the Directors’ Report, the Chairman’s
Statement, the Chief Executive’s Statement, Financial
Review, Corporate Governance Report and Corporate
Social Responsibility Report. We consider the implica(cid:2)
tions for our report if we become aware of any apparent
misstatements or material inconsistencies with the
financial statements. Our responsibilities do not extend
to any other information.
Our report has been prepared pursuant to the require(cid:2)
ments of our engagement letter and for no other pur(cid:2)
pose. No person is entitled to rely on this report unless
such a person is a person entitled to rely upon this
report by virtue of and for the purpose of our engage(cid:2)
ment letter or has been expressly authorised to do so by
our prior written consent. Save as above, we do not
accept responsibility for this report to any other person
or for any other purpose and we hereby expressly dis(cid:2)
claim any and all such liability.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
20
Basis of audit opinion
We conducted our audit
in accordance with
International Standards on Auditing (UK and Ireland)
issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence rele(cid:2)
vant to the amounts and disclosures in the financial
statements. It also includes an assessment of the sig(cid:2)
nificant estimates and judgments made by the directors
in the preparation of the financial statements, and of
whether the accounting policies are appropriate to the
group’s circumstances, consistently applied and ade(cid:2)
quately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evi(cid:2)
dence to give reasonable assurance that the financial
statements are free from material misstatement,
whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the
financial statements.
Opinion
In our opinion:
•
•
the group financial statements give a true and fair
view, in accordance with IFRSs as adopted by the
European Union, of the state of the group’s affairs as
at 31 December 2008 and of its profit for the year then
ended;
the group financial statements have been properly
prepared in accordance with the Companies (Jersey)
Law 1991 as amended;
• and the information given in the directors’ report is
consistent with the financial statements.
BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
55 Baker Street
London
21 May 2009
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
21
CONSOLIDATED INCOME STATEMENT
Notes
Year ended
31 December 2008
£ ‘000
Year ended
31 December 2007
£ ‘000
Revenue
Cost of Sales
Gross profit
Administrative expenses
Selling and distribution expenses
Other operating expenses
Profit from operations
Finance income
Finance expense
Profit before taxation
Income tax expense
Profit for the year
Attributable to:
Equity holders
Minority interest
Earnings per share:
Basic
Diluted
7
21
21
21
21
22
22
24
29
26
52,312
(41,494)
10,818
(3,221)
(3,729)
(837)
3,031
(cid:2)
(592)
2,439
(162)
2,277
2,320
(43)
2,277
5.4
5.4
48,110
(37,652)
10,458
(2,770)
(2,919)
(619)
4,150
20
(493)
3,677
(415)
3,262
3,256
6
3,262
7.8
7.5
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
22
CONSOLIDATED BALANCE SHEET
Notes
As at
31 December 2008
£ ‘000
As at
31 December 2007
£ ‘000
Assets
Non(cid:2)Current Assets
Property, Plant and equipment
Intangible assets
Available for sale investments
Deferred tax assets
Total non(cid:2)current assets
Current assets
Inventories
Trade and other receivables
Current taxes
Other financial assets
Cash and cash equivalents
Total Current assets
Total assets
Equity and liabilities
Equity attributable to equity holders
Share capital
Other reserves
Retained earnings
Total equity attributable
to equity holders of the parent
Minority interest
Total equity
Liabilities
Non(cid:2)Current Liabilities
Deferred tax liabilities
Promissory notes
Total Non(cid:2)Current Liabilities
Current Liabilities
Bank loans and overdrafts
Trade and other payables
Taxes payable
Bonds
Current income tax liabilities
Total Current Liabilities
Total equity and liabilities
8
9
10
11
12
13
14
14
15
19
20
11
16
16
18
18
16
10,527
1,155
557
117
12,356
3,511
5,643
267
35
691
10,147
22,503
4,282
823
10,814
15,919
82
16,001
697
285
982
3,400
2,011
79
(cid:2)
30
5,520
22,503
11,903
1,093
108
51
13,155
4,008
5,139
247
29
1,087
10,510
23,665
4,164
4,060
7,031
15,255
131
15,386
752
(cid:2)
752
3,407
3,211
28
811
70
7,527
23,665
These financial statements were approved and authorised for issue by the Board of Directors on May 21, 2009 and
were signed on its behalf by:
Sergey Evlanchik
Chief Executive Officer
21 May 2009.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
23
CONSOLIDATED CASH FLOW STATEMENT
Year ended
31 December 2008
£ ‘000
Year ended
31 December 2007
£ ‘000
Cash flows from operating activities
Profit for the year
Adjustments for:
Exchange difference
Depreciation and amortisation
Loss on disposal of property, plant and equipment
Interest expense
Interest income
Income tax expense
Decrease / (increase) of inventories
Increase in trade and other receivables
(Decrease) / increase in trade and other payables
Cash generated from operations
Interest received
Income tax paid
Net cash generated by operating activities
Cash flows from investing activities purchase
of loans and receivables
Payments for property, plant and equipment
Proceeds from sale of property, plant and equipment
Proceeds from sale of available for sale investments
Purchase of available for sale investments
Net cash used in investing activities
Cash flows from financing activities
Gross repayments from long term borrowing
(Repayments) / proceeds from issue
of bonds net of issue costs
Proceeds from issue of shares, net of issue costs
Dividends paid
Interest paid
Net proceeds from short(cid:2)term borrowing
Proceeds from issue of promissory notes
Net cash used in financing activities
Net increase in cash and cash equivalents
Effect of exchange rate changes
on cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
2,277
192
1,750
13
592
(cid:2)
162
139
(1,236)
(984)
2,905
(cid:2)
(264)
2,641
(1,384)
62
(cid:2)
(530)
(1,852)
(cid:2)
(811)
628
(523)
(629)
348
329
(658)
131
(527)
1,087
691
3,262
15
1,371
64
493
(20)
415
(1,444)
(1,884)
1,649
3,921
20
(384)
3,557
(2,712)
28
176
(25)
(2,533)
(100)
463
241
(459)
(493)
267
(cid:2)
(81)
943
(15)
159
1,087
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
24
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity holders
Share
capital
Other
Retained
reserves earnings
£ ‘000
£ ‘000
£ ‘000
Total
attributable
to equity
holders of
the parent
£ ‘000
Balance at 1 January 2007
4,121
4,181
4,141
12,443
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
43
(cid:2)
4,164
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Depreciation on revaluation
of non(cid:2)current assets
Reduction of revaluation reserve
Exchange differences on translation
to presentation currency
Decrease of minority interest
Net expense recognised
directly in equity
Profit for the year
Total recognised income
and expense for the year
Dividends paid
Issue of shares (net of issue cost)
Reduction of options reserve
Balance at 31 December 2007
Depreciation on revaluation
of non(cid:2)current assets
Reduction of revaluation reserve
Exchange differences on translation
to the presentation currency
Net expense
recognised directly in equity
Profit for the year
Total recognised income
and expense for the year
Dividends paid
Issue of shares (net of issue cost)
Reduction of options reserve
Balance at 31 December 2008
(122)
(2)
(124)
(cid:2)
(248)
(cid:2)
(248)
(cid:2)
198
(71)
4,060
(124)
(2)
122
(cid:2)
(90)
(10)
22
3,256
3,278
(459)
(cid:2)
71
7,031
124
8
(cid:2)
(2)
(214)
(10)
(226)
3,256
3,030
(459)
241
(cid:2)
15,255
(cid:2)
6
(3,503)
1,736
(1,767)
(3,629)
(cid:2)
1,868
2,320
(cid:2)
(cid:2)
118
(cid:2)
4,282
(3,629)
(cid:2)
510
(118)
823
4,188
(523)
(cid:2)
118
10,814
(1,761)
2,320
559
(523)
628
(cid:2)
15,919
Minority
interest
£ ‘000
199
(cid:2)
(cid:2)
(4)
(70)
(74)
6
(68)
(cid:2)
(cid:2)
(cid:2)
131
(cid:2)
(cid:2)
(6)
(6)
(43)
(49)
(cid:2)
(cid:2)
(cid:2)
82
Total
Equity
£ ‘000
12,642
(cid:2)
(2)
(218)
(80)
(300)
3,262
2,962
(459)
241
(cid:2)
15,386
(cid:2)
6
(1,773)
(1,767)
2,277
510
(523)
628
(cid:2)
16,001
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
25
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
1. Group and principal activities
The Company is a public limited liability entity regis(cid:2)
tered in Jersey with a registered office at 26 New Street,
St Helier, Jersey, JE2 3RA, Channel Islands.
The Group’s overall management and production facili(cid:2)
ties are based in Ukraine, with the HQ in Kyiv. The Group
commands leading positions in the Ukrainian processed
cheese and packaged butter markets and owns a range
of widely recognisable trademarks in Ukraine, including
“Nash Molochnik” (translated as Our Dairyman),
“Narodniy Product” (People’s Product) “Molendam”
and “Vershkova Dolina” (Creamy Valley). The average
number of employees of the Group during the year
ended 31 December 2008 was 2,089 (2007: 2,014).
2. Significant accounting policies
The principal accounting policies adopted in the prepa(cid:2)
ration of the financial information are set out below. The
policies have been consistently applied to all the years
presented, unless otherwise stated.
a) Basis of preparation
These consolidated financial statements have been pre(cid:2)
pared in accordance with International Financial
Reporting Standards,
International Accounting
Standards and Interpretations (collectively IFRS) issued
by the International Accounting Standards Board (IASB)
as adopted by European Union.
The majority of companies making up the Group main(cid:2)
tain their accounting records in accordance with
Ukrainian regulations. The financial information has been
prepared from those accounting records and adjusted as
considered necessary in order to comply with IFRS.
Accounting records of the Operating Group are main(cid:2)
tained in Ukrainian Hryvnia ("UAH"). The Hryvnia has also
been adopted as the functional currency for the purpose
of the consolidated financial statements. Since the
Ukrainian Hryvnia is not a major convertible or recognis(cid:2)
able currency outside of Ukraine, and also because the
Group’s public shareholder base has been located most(cid:2)
ly in the UK, the financial information has been translat(cid:2)
ed into British pounds sterling (hereinafter “GBP” or £)
as the Group’s presentational currency. The preparation
of financial statements in conformity with IFRS requires
the use of certain critical accounting estimates. It also
requires management to exercise its judgment in the
process of applying the Group’s accounting policies.
b) Changes in accounting policies
In preparing these financial statements, the following
amendments to published standards and interpretations
to existing standards effective in 2008 were adopted by
the Group.
(cid:2) IFRIC 11, IFRS 2 – Group and Treasury Share
Transactions (effective for accounting periods
beginning on or after 1 March 2007). Share(cid:2)based
payment transactions in which an entity receives
services as consideration for its own equity instru(cid:2)
ments shall be accounted for as equity(cid:2)settled. This
applies regardless of whether the entity chooses or
is required to buy those equity instruments from
another party to satisfy its obligations to its employ(cid:2)
ees under the share(cid:2)based payment arrangement. It
also applies regardless of whether: (a) the employ(cid:2)
ee’s rights to the entity’s equity instruments were
granted by the entity itself or by its shareholder(s);
or (b) the share(cid:2)based payment arrangement was
settled by the entity itself or by its shareholder(s).
Management is currently assessing the impact of
IFRIC 11 on the accounts.
The following standards, amendments and interpreta(cid:2)
tions to published standards are mandatory for account(cid:2)
ing periods beginning on or after 1 January 2008 but are
currently not relevant to the Group.
(cid:2) IFRIC 12, Service Concession Arrangements (effec(cid:2)
tive for accounting periods beginning on or after 1
January 2008). IFRIC 12 gives guidance on the
accounting by operators for public(cid:2)to(cid:2)private service
concession arrangements. IFRIC 12 is not relevant to
the Group operations due to absence of such
arrangements.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
26
(cid:2) IFRIC 14, IAS 19 – The Limit on a Defined Benefit
Asset, Minimum Funding Requirements and their
Interaction Interaction (effective for accounting peri(cid:2)
ods beginning on or after 1 January 2008). IFRIC 14
clarifies when refunds or reductions in future contri(cid:2)
butions should be regarded as available in accor(cid:2)
dance with paragraph 58 of IAS 19, how a minimum
funding requirement might affect the availability of
reductions in future contributions and when a mini(cid:2)
mum funding requirement might give rise to a liabil(cid:2)
ity. IFRIC 14 is not relevant to the Group operations
due to absence of such arrangements.
(cid:2) IAS 39 – Reclassification of Financial Instruments
(effective for accounting periods beginning on or
after 1 July 2008). This Amendment permits an enti(cid:2)
ty to reclassify non(cid:2)derivative financial assets (other
than those designated at fair value through profit or
loss by the entity upon initial recognition) out of the
fair value through profit or loss category in particular
circumstances. The Amendment also permits an enti(cid:2)
ty to transfer from the available(cid:2)for(cid:2)sale category to
the loans and receivables category a financial asset
that would have met the definition of loans and
receivables (if the financial asset had not been desig(cid:2)
nated as available for sale), if the entity has the inten(cid:2)
tion and ability to hold that financial asset for the
foreseeable future. IAS 39 is not relevant to the Group
operations due to absence of such arrangements
The following standards, interpretations and amend(cid:2)
ments to published standards are mandatory for
accounting periods beginning on or after 1 January
2009 or later periods and which the Group has decided
not to adopt early.
(cid:2) IFRS 8, Operating Segments (effective for account(cid:2)
ing periods beginning on or after 1 January 2009).
This standard sets out requirements for the disclo(cid:2)
sure of information about an entity’s operating seg(cid:2)
ments and also about the entity’s products and serv(cid:2)
ices, the geographical areas in which it operates, and
its major customers. It replaces IAS 14, Segmental
Reporting. The Group expects to apply this standard
in the accounting period beginning on 1 January
2009. As this is a disclosure standard it will not have
any impact on the results or net assets of the Group.
(cid:2) IFRIC 13, Customer Loyalty Programmes (effective
for accounting periods beginning on or after 1 July
2008). IFRIC 13 addresses sales transactions in which
the entities grant their customers award credits that,
subject to meeting any further qualifying conditions,
the customers can redeem in future for free or dis(cid:2)
counted goods or services. Management is currently
assessing the impact of IFRIC 13 on the accounts.
(cid:2) IAS 23 Borrowing Costs (revised) ) (effective from
1 January 2009). The main change from the previous
version is the removal of the option of immediately
recognising as an expense borrowing costs that
relate to assets that take a substantial period of time
to get ready for use or sale. The Group is currently
assessing its impact on the financial statements.
(cid:2) Revised IFRS 3, Business Combinations and com(cid:2)
plementary Amendments to IAS 27, Consolidated and
separate financial statements (both effective for
accounting periods beginning on or after 1 July
2009). This revised standard and amendments to is
still to be endorsed by the EU. The revised IFRS 3 and
amendments to IAS 27 arise from a joint project with
the Financial Accounting Standards Board (FASB),
the US standards setter, and result in IFRS being
largely converged with the related, recently issued,
US requirements. There are certain very significant
changes to the requirements of IFRS, and options
available, if accounting for business combinations.
The revision to IFRS 3 will be relevant to the Group
as and when such transactions falling into the scope
of the review standard occur.
(cid:2) Amendment to IFRS 2, Share(cid:2)based payments:
vesting conditions and cancellations (effective for
accounting periods beginning on or after 1 January
2009). The Amendment to IFRS 2 is of particular rel(cid:2)
evance to companies that operate employee shares
save schemes. This is because it results in an imme(cid:2)
diate acceleration of the IFRS 2 expense that would
otherwise have been recognised in future periods
should an employee decide to stop contributing to
the savings plan, as well as a potential revision to the
fair value of the awards granted to factor in the prob(cid:2)
ability of employees withdrawing from such a plan.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
27
Management will continue to assess the impact of
the amendment prior to adoption.
(cid:2) Amendments to IAS 27, Consolidated and Separate
Financial Statements (both effective for accounting
periods beginning on or after 1 July 2009). This
Amendment relates in particular to acquisitions of
subsidiaries achieved in stages and disposals of inter(cid:2)
ests, with significant differences in the accounting
depending on whether control is gained or not, or a
transaction simply results in a change in the percent(cid:2)
age of the controlling interest. The Amendment does
not require the restatement of previous transactions.
(cid:2) Amendments to IFRS 1 and IAS 27, Cost of an
Investment in a subsidiary, jointly(cid:2)controlled entity
or associate (both effective for accounting periods
beginning on or after 1 January 2009). This
Amendment allows a first(cid:2)time adopter that, in its
separate financial statements, elects to measure its
investments in subsidiaries, jointly controlled enti(cid:2)
ties or associates at cost to initially recognise these
investments either at cost determined in accordance
with IAS 27 or deemed cost (being either its fair
value at the date of transition to IFRSs or its previous
GAAP carrying amount at that date).
(cid:2) Amendments to IAS 39, Financial Instruments:
Recognition and Measurement: Eligible Hedged
Items (both effective for accounting periods begin(cid:2)
ning on or after 1 January 2009). This Amendment
clarifies how the principles that determine whether a
hedged risk or portion of cash flows is eligible for
designation should be applied in the designation of a
one(cid:2)sided risk in a hedged item, and inflation in a
financial hedged item.
(cid:2) IFRIC 16, Hedges of a Net Investment in a Foreign
Operation (both effective for accounting periods
beginning on or after 1 October 2008). IFRIC 16
clarifies that: (a) The presentation currency does not
create an exposure to which an entity may apply
hedge accounting. Consequently, a parent entity
may designate as a hedged risk only the foreign
exchange differences arising from a difference
between its own functional currency and that of its
foreign operation. (b) The hedging instrument(s)
may be held by any entity or entities within the
group, other than the entity being hedged. (c) While
IAS 39 Financial Instruments: Recognition and
Measurement must be applied to determine the
amount that needs to be reclassified to profit or loss
from the foreign currency translation reserve in
respect of the hedging instrument, IAS 21 The
Effects of Changes in Foreign Exchange Rates must
be applied in respect of the hedged item. IFRIC 16
applies prospectively from its effective date.
(cid:2) IFRIC 17, Distributions of Non(cid:2)cash Assets to
Owners (both effective for accounting periods begin(cid:2)
ning on or after 1 July 2009). Prior to this interpre(cid:2)
tation, IFRSs did not address how an entity should
measure distributions of assets other than cash
when it pays dividends. Dividends payable were
sometimes recognised at the carrying amount of the
assets to be distributed and sometimes at their fair
value. The Interpretation clarifies that: a dividend
payable should be recognised when the dividend is
appropriately authorised and is no longer at the dis(cid:2)
cretion of the entity; that an entity should measure
the dividend payable at the fair value of the net
assets to be distributed; and, that an entity should
recognise the difference between the dividend paid
and the carrying amount of the net assets distributed
in profit or loss. The Interpretation also requires an
entity to provide additional disclosures if the net
assets being held for distribution to owners meet the
definition of a discontinued operation. IFRIC 17
applies to pro rata distributions of non(cid:2)cash assets
except for common control transactions. It does not
have to be applied retrospectively.
(cid:2) IFRIC 18, Transfer of Assets from Customers (both
effective for accounting periods beginning on or after
1 July 2009). The interpretation clarifies the treat(cid:2)
ment of agreements in which an entity receives from
a customer an item of property, plant and equipment
(or cash which must be used only to acquire or con(cid:2)
struct an item of property, plant and equipment) that
the entity must then use either to connect the cus(cid:2)
tomer to a network or to provide the customer with
ongoing access to a supply of goods or services. The
interpretation clarifies whether and when an asset
should be recognised, and how it should be meas(cid:2)
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
28
ured. It also clarifies how revenue arising from such
a transaction should be recognised.
c) Revenue recognition
Revenues arising to the Group as a result of the sale of
goods and the rendering of services are recognised in
the period to which they relate and measured at the fair
value of the consideration received or receivable.
Revenue comprises the invoiced value of sales of goods
and services net of value added tax, rebates and dis(cid:2)
counts after eliminating sales within the Group.
d) Principles of consolidation
Where the Company has the power, either directly or
indirectly, to govern the financial and operating policies
of another entity or business so as to obtain benefits
from its activities, it is classified as a subsidiary. The
consolidated financial statements present the results of
the company and its subsidiaries ("the Group") as if they
formed a single entity. Intercompany transactions and
balances between Group companies are therefore elim(cid:2)
inated in full.
e) Translation from functional to presentation currency
Management has considered what would be the most
appropriate functional and presentational currencies for
these financial statements. As a result of this review
management has concluded that:
•
•
the Ukrainian Hryvnia is the currency of the primary
economic environment in which the Group operates.
Consequently the Ukrainian Hryvnia is the most
appropriate functional currency for the Group;
the Group should use British pounds sterling as the
presentational currency for its consolidated IFRS
financial statements.
Consequently, management has used the following
basis for the translation of Ukrainian Hryvnia figures to
British pounds for presentation purposes:
•
for current year figures all assets and liabilities are
translated at the rate effective at the balance sheet
date. Income and expense items are translated at
•
rates approximating to those ruling when the transac(cid:2)
tions took place.
for comparative figures all assets and liabilities are
translated at the closing rate existing at the relevant
balance sheet date. Income and expense items are
translated at rates approximating to those ruling when
the transactions took place.
• all exchange differences resulting from the applica(cid:2)
tion of the translation methods described above are
recognised directly in equity as a separate component
of equity (IAS 21.39 (c))
Actual exchange rates applied in the translation are
detailed in note 2(o) below.
f) Segment reporting
A business segment is a group of assets and operations
engaged in providing products or services that are sub(cid:2)
ject to risks and returns that are different from those of
other business segments. A geographical segment is
engaged in providing products or services within a par(cid:2)
ticular economic environment that are subject to risks
and returns different from those of segments operating
in other economic environments.
The Group has recognised business segments as pri(cid:2)
mary format of segment reporting. The secondary for(cid:2)
mat was chosen to be the geographical segment.
g) Property, plant and equipment
Figures calculated using Ukrainian statutory accounting
rules, have been adopted as deemed depreciated histor(cid:2)
ical cost for property, plant and equipment as at 1
January 2004. Subsequent additions have been record(cid:2)
ed at cost.
With effect from 1 January 2004, the Group adopted the
revaluation model (as defined in IAS 16: Property, Plant
and Equipment) for all classes of assets. The Group’s
assets were revalued in January 2004. This change of
accounting policy was made on the grounds that man(cid:2)
agement believe that this policy provides more reliable
and relevant financial information because it better
reflects the value in use of such assets to the Group. In
accordance with the provisions of that standard, the
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
29
revaluation model has not been applied retrospectively.
method (7 years). The amortisation expense is included
within Administrative expenses in the Income Statement.
All categories of property, plant and equipment are sub(cid:2)
sequently carried at fair value at the date of revaluation,
less any subsequent accumulated depreciation and sub(cid:2)
sequent accumulated impairment losses. Changes in fair
value are recognised in equity (the “revaluation reserve”).
An appropriate transfer is made from the revaluation
reserve to the retained earnings when freehold land and
buildings are expensed through the income statement
(e.g. through depreciation, impairment or sale).
Depreciation is applied to all items of property, plant
and equipment with the exception of land. Depreciation
is calculated using the straight(cid:2)line method to allocate
their cost or revalued amounts to their residual values
over their estimated useful lives, as follows:
Buildings
Plant and machinery
Equipment and motor vehicles
20 – 40 years;
7 – 15 years;
3 – 10 years.
Gains and losses on disposals are determined by com(cid:2)
paring proceeds with the carrying amount and are
included in operating profit.
h) Assets under construction
Assets under construction are reported at their cost of
construction including costs charged by third parties and
the capitalisation of the Group’s material costs incurred.
No depreciation is charged on assets during construc(cid:2)
tion. Upon the completion, the Group assess whether
there is any indication that an asset may be impaired. If
any such indication exists, the Group performs impair(cid:2)
ment testing as described in note 2 (k). In case no indi(cid:2)
cation exists that the asset may be impaired, all accu(cid:2)
mulated costs of the asset are transferred to the relevant
fixed asset category and depreciated at applicable rates
from the time the asset is completed and ready for use.
i) Intangible assets
Acquired computer software licences are capitalised on
the basis of the costs incurred to acquire and bring to
use the specialised software. These costs are amortised
over their estimated useful lives using the straight(cid:2)line
Trademarks are shown at historical cost. Trademarks
have finite useful lives and are carried at cost less accu(cid:2)
mulated amortisation. Amortisation is calculated using
the straight(cid:2)line method to allocate the cost of trade(cid:2)
marks over their estimated useful lives (20 years). The
amortisation expense is included within Selling &
Distribution expenses in the Income Statement.
Customer list is shown at fair value at the date of revalu(cid:2)
ation obtained by using the estimates of the independent
valuers, less any subsequent accumulated depreciation
and subsequent accumulated
losses.
Amortisation is calculated using the straight(cid:2)line method
to allocate the cost of the customer list over its estimat(cid:2)
ed useful lives (20 years). The amortisation expense is
included within Other expenses in the Income Statement.
impairment
j) Goodwill
Goodwill is an excess of acquisition costs above the fair
value of assets, liabilities and contingent liabilities
acquired at the acquisition date. Goodwill is reported in
intangible assets with any impairment being charged to
the Income Statement within Administrative expenses.
Goodwill is assessed annually with respect to the
impairment of value and reported at cost net of total
loss from impairment of value. Gains or losses on dis(cid:2)
posal of a subsidiary include the carrying value of good(cid:2)
will related to the subsidiary sold.
k) Impairment of assets
Assets with indefinite useful life are not amortised and are
annually assessed with respect to the impairment of their
value. Assets subject to amortisation are assessed with
respect to the impairment of their value whole business
whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recov(cid:2)
ered. Whenever the carrying amount of an asset exceeds
its recoverable value, an impairment loss is recognised in
income. The recoverable amount is the higher of an
asset’s net selling price and value in use. The net selling
price is the amount obtainable from the sale of an asset
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
30
in an arm’s length transaction while value in use is the
present discounted value of estimated future cash flows
expected to arise from the continuing use of an asset and
from its disposal after the end of its useful life.
Recoverable amounts are estimated for individual assets
or, if it is not possible, for a cash generating unit.
Impairment charges are included in the Administrative
expenses line item in the Income Statement, except to
the extent they reverse gains previously recognised in
the Statement of Changes in Equity.
l) Inventories
Inventories are stated at the lower of cost and net real(cid:2)
isable value. Cost is determined using the first(cid:2)in, first(cid:2)
out method. The cost of finished and unfinished goods
comprises raw materials, direct labour, other direct
costs and related production overheads (based on nor(cid:2)
mal operating capacity) but excludes borrowing costs.
m) Share(cid:2)based payments
Where share options are awarded to employees, the fair
value of the options at the date of grant is charged to the
income statement over the vesting period. Where the
terms and conditions of options are modified before
they vest, the increase in the fair value of the options,
measured immediately before and after the modifica(cid:2)
tion, is also charged to the income statement over the
remaining vesting period. Where equity instruments are
granted to persons other than employees, the income
statement is charged with the fair value of goods and
services received. Where fair value of goods and servic(cid:2)
es received from persons other than employees is diffi(cid:2)
cult to identify, the fair value of the instruments granted
is charged to income statement over the vesting period.
n)
Income taxes
Taxation has been provided for in the financial state(cid:2)
ments in accordance with relevant legislation currently
in force. The charge for taxation in the Income
Statement for the year comprises current tax and
changes in deferred tax. Current tax is calculated on the
basis of the taxable profit for the year, using the tax
rates in force at the balance sheet date. Taxes, other
than on income, are recorded within Operating expens(cid:2)
es in the Income Statement.
Deferred income tax is provided, using the balance
sheet liability method, for all temporary differences aris(cid:2)
ing between the tax basis of assets and liabilities and
their carrying values for financial reporting purposes
except for those difference permanently disallowed. A
deferred tax asset is recorded only to the extent that it is
probable that taxable profit will be available against
which the deductible temporary differences can be
utilised. Deferred tax assets and liabilities are measured
at tax rates that are expected to apply to the period when
the asset is realised or the liability is settled, based on
tax rates that have been enacted or substantively enact(cid:2)
ed at the balance sheet date.
o) Short(cid:2)term employee benefits
Short(cid:2)term employee benefits are recognised in the
period in which an employee has rendered service to the
Group. The Group recognises the undiscounted amount
of short(cid:2)term employee benefits a liability (accrued
expense), after deducting any amount already paid.
p) Foreign currency translation
Transactions denominated in currencies other than the
Hryvnia ("foreign currencies") are recorded in Hryvnia at
the exchange rate effective on the transaction date.
Exchange differences resulting from the settlement of
transactions denominated in foreign currency are
included in the income statement using the effective
exchange rate on that date.
Monetary assets and liabilities denominated in foreign
currency are translated into Hryvnia at the official
exchange rate at the balance sheet date. Foreign curren(cid:2)
cy gains and losses arising from the translation of assets
and liabilities are reflected in the Income Statement as
foreign exchange translation gains and losses.
Income and expense figures have been converted to
British pounds for presentation purposes at rates
approximating to those ruling when the transactions
took place. The resulting exchange differences are
recognised as a separate component of equity.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
31
For translation of the financial data, the exchange rates
of Ukrainian Hryvnia to GBP and USD officially set by the
National Bank of Ukraine were used. The weighted aver(cid:2)
age rate for the year was calculated based on the daily
exchange rates officially set by the Bank of Ukraine.
Impairment provisions are recognised when there is
objective evidence (such as significant financial difficul(cid:2)
ties on part of the counterparty or default or significant
delay in payment) that the Group will be unable to col(cid:2)
lect all of the amounts due under the terms receivable,
Official rate as at December 31, 2008
Official rate as at December 31, 2007
Weighted average rate for 2008
Weighted average rate for 2007
q) Pension costs
The Group contributes to the Ukrainian mandatory state
pension scheme, social insurance and employment
funds in respect of its employees. The Group’s pension
scheme contributions are expensed as incurred and are
included in staff costs. The Group doesn’t operate any
other pension schemes.
r) Financial assets
The Group classifies its financial assets into one of the
following categories, depending on the purpose for
which the asset was acquired:
Fair value through profit or loss: This category compris(cid:2)
es only in(cid:2)the(cid:2)money derivatives. They are carried in the
balance sheet at fair value with changes in fair value
recognised in the income statement. The Group does
not have any assets held for trading nor does it volun(cid:2)
tarily classify any financial assets as being at fair value
through profit or loss.
Loans and receivables: These assets are non(cid:2)derivative
financial assets with fixed or determinable payments
that are not quoted in an active market. They arise prin(cid:2)
cipally through the provision of goods and services to
customers (trade receivables), but also incorporate
other types of contractual monetary asset. They are car(cid:2)
ried at amortised cost using the effective interest
method less any provision for impairment.
Hryvnia for
1 GBP (£)
11.1430
10.0973
9.6613
10.1124
Hryvnia for
1 USD ($)
7.0700
5.0500
5.2842
5.0500
the amount of such a provision being the difference
between the net carrying amount and the present value
of the future expected cash flows associated with the
impaired receivable. For trade receivables, which are
reported net, such provisions are recorded in a separate
allowance account with the loss being recognised with(cid:2)
in administrative expenses in the income statement. On
confirmation that the trade receivable will not be col(cid:2)
lectable, the gross carrying value of the asset is written
off against the associated provision.
From time to time, the Group may renegotiate the terms
of trade receivables due from customers with which it
has previously had a good trading history. Such rene(cid:2)
gotiations will lead to changes in the timing of payments
rather than changes to the amounts owed and, in con(cid:2)
sequence, the new expected cash flows are discounted
at the original effective interest rate.
Cash and cash equivalents comprise cash on hand,
deposits held at call with banks and other short(cid:2)term
highly liquid investments with original maturities of
three months or less. Bank overdrafts are included in
current liabilities on the balance sheet.
The Group has not classified any of its financial assets
as held to maturity.
Available for sale investment. Non(cid:2)derivative financial
assets not included in the above categories are classified
as available(cid:2)for(cid:2)sale and comprise principally the Group’s
investments in entities not qualifying as subsidiaries as
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
32
well as investment certificates. They are carried at fair
value with changes in fair value recognised directly in a
separate component of equity (available(cid:2)for(cid:2)sale reserve).
Where there is a significant or prolonged decline in the fair
value of an available for sale financial asset (which consti(cid:2)
tutes objective evidence of impairment), the full amount of
the impairment, including any amount previously charged
to equity, is recognised in the Income statement.
action costs include costs of preparing the prospectus,
accounting, tax and legal expenses, underwriting fees and
valuation fees in respect of the shares and of other assets.
v) Borrowing costs
Borrowing costs are recognised as an expense in the
period in which they are incurred.
s) Financial liabilities
w) Operating leases
The Group classifies its financial liabilities into cate(cid:2)
gories depending on the purpose for which the liability
was acquired. The Group has not classified any of its lia(cid:2)
bilities at fair value through profit and loss.
Financial liabilities held at amortised cost include the
following items:
Trade payables and other short(cid:2)term monetary liabili(cid:2)
ties, which are recognised at amortised cost.
Bank borrowings, overdrafts, promissory notes and
bonds issued by the Group are initially held at the
amount advanced net of any transaction costs directly
attributable to the issue of the instrument. Such inter(cid:2)
est bearing liabilities are subsequently measured at
amortised cost using the effective interest rate method,
which ensures that any interest expense over the period
to repayment is at a constant rate on the balance of the
liability carried in the balance sheet. “Interest expense”
in this context includes initial transaction costs and
interest payable on redemption, as well as any interest
or coupon payable while the liability is outstanding.
t) Dividends
Equity dividends are recognised when they become legal(cid:2)
ly payable. In the case of interim dividends are recognised
when they are paid. In the case of final dividends, this is
when approved by the shareholders at the AGM.
u) Share issue costs
All qualifying transaction costs in respect of the issue of
shares are accounted for as a deduction from share pre(cid:2)
mium, net of any related tax deduction. Qualifying trans(cid:2)
Operating leases and the corresponding rental charges
are charged to the income statement on a straight(cid:2)line
basis over the life of the lease.
3. Critical accounting estimates and judgments
The Group makes certain estimates and assumptions
regarding the future. Estimates and judgments are con(cid:2)
tinually evaluated based on historical experience and
other factors, including expectations of future events that
are believed to be reasonable under the circumstances.
In the future, actual experience may deviate from these
estimates and assumptions. The estimates and assump(cid:2)
tions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabil(cid:2)
ities within the next financial year are discussed below.
• Estimates of fair value of property, plant and equip(cid:2)
ment based on revaluation. The Group is required,
periodically as determined by the management, to
conduct revaluation on its property, plant and equip(cid:2)
ment. Such revaluations are conducted by the inde(cid:2)
pendent valuers and employ the valuation methods in
accordance with International Valuation Standards
such as cost method, comparison (market) method
and revenue (income) method.
Impairment of goodwill. The Group is required to test,
on an annual basis, whether goodwill has suffered any
impairment. The recoverable amount is determined
based on value in use calculations. The use of this
method requires the estimation of future cash flows
and the choice of a discount rate in order to calculate
the present value of the cash flows. Actual outcomes
may vary. Further information is contained in note 9.
• Useful lives of intangible assets and property, plant
and equipment. Intangible assets and property, plant
•
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
33
•
•
and equipment are amortised or depreciated over
their useful lives. Useful lives are based on the man(cid:2)
agement’s estimates of the period that the assets will
generate revenue, which are periodically reviewed for
continued appropriateness. Due to the long live
assets, changes to the estimates used can result in
significant variations in the carrying value. Further
information is contained in notes 8 and 9.
Inventory. The Group reviews the net realisable value
of and demand for its inventory on a quarterly basis to
ensure recorded inventory is stated at the lower of
cost or net realisable value. Factors that could impact
estimated demand and selling prices are the timing
and success of future technological innovations, com(cid:2)
petitor actions, supplier prices and economic trends.
Further information is contained in note 12.
Income taxes. The Group is subject to income tax in
several jurisdictions and significant judgement is
required in determining the provision for income taxes.
During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax
determination is uncertain. As a result, the company
recognises tax liabilities based on estimates of whether
additional taxes and interest will be due. These tax lia(cid:2)
bilities are recognised when, despite the company’s
belief that its tax return positions are supportable, the
company believes that certain positions are likely to be
challenged and may not be fully sustained upon review
by tax authorities. The company believes that its accru(cid:2)
als for tax liabilities are adequate for all open audit
years based on its assessment of many factors includ(cid:2)
ing past experience and interpretations of tax law. This
assessment relies on estimates and assumptions and
may involve a series of complex judgments about
future events. To the extent that the final tax outcome
of these matters is different than the amounts record(cid:2)
ed, such differences will impact income tax expense in
the period in which such determination is made.
Further information is contained in notes 10 and 24.
• Legal proceedings. In accordance with IFRS the Group
only recognises a provision where there is a present
obligation from a past event, a transfer of economic
benefits is probable and the amount of costs of the
transfer can be estimated reliably. In instances where
the criteria are not met, a contingent liability may be dis(cid:2)
closed in the notes to the financial statements.
Realisation of any contingent liabilities not currently
recognised or disclosed in the financial statements
could have a material effect on the Group’s financial
position. Application of these accounting principles to
legal cases requires the Group’s management to make
determinations about various factual and legal matters
beyond its control. The Group reviews outstanding legal
cases following developments in the legal proceedings
and at each balance sheet date, in order to assess the
need for provisions in its financial statements. Among
the factors considered in making decisions on provi(cid:2)
sions are the nature of litigation, claim or assessment,
the legal process and potential level of damages in the
jurisdiction in which the litigation, claim or assessment
has been brought, the progress of the case (including
the progress after the date of the financial statements
but before those statements are issued), the opinions or
views of legal advisers, experience on similar cases and
any decision of the Group’s management as to how it
will respond to the litigation, claim or assessment.
• Quality claims. The Group supplies the consumers and
industrial customers in Ukraine with dairy products
manufactured in accordance with the current laws,
food safety standards and technical requirements of
the relevant Ukrainian authorities. The Group voluntari(cid:2)
ly applies non(cid:2)domestic standards – ISO and HASSP –
to some of the Group’s operations. For the industrial
customers both domestically and outside of Ukraine,
the food products are manufactured to the technical
specifications agreed with the buyers in advance of the
sale. In instances where the quality criteria and/or tech(cid:2)
nical specifications are not met or the delivery of prod(cid:2)
ucts are made close to expiry date, a quality claim may
arise and the corresponding contingent liability may be
disclosed in the notes to the financial statements.
Realisation of any such contingent liabilities not cur(cid:2)
rently recognised or disclosed in the financial state(cid:2)
ments could have a material effect on the Group’s
financial position. Application of these accounting prin(cid:2)
ciples to quality claims requires the Group’s manage(cid:2)
ment to make determinations about the future matters
that may, at the time of determination, be beyond man(cid:2)
agement’s control. Among the factors considered in
making decisions on quality claims provisions are: the
nature of the claim, the quantifiable variances in quali(cid:2)
ty giving rise to a claim, the potential loss from satisfy(cid:2)
ing the claim and any decision of the Group’s manage(cid:2)
ment as to how it will respond to the claim.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
34
4. Subsidiaries
The consolidated financial statements include the results of the companies set out in table below.
Country of
incorporation
Molochnik OJSC**
Starokonstantinovskiy Molochniy Zavod SC**
Starkon(cid:2)Moloko LLC**
Ukraine
Ukraine
Ukraine
Krasilovsky Molochny Zavod Private Enterprise SC**
Ukraine
Jmerinsky Maslosyrzavod LLC**
Letichevsky Maslozavod OJSC***
Teofipolskiy Dairy Plant Private Enterprise SC**
Podilskiy Dairy Plant Private Enterprise SC****
Avtopark Starokonstantinov LLS***
Ukrprodexpo SC**
Ukrprodexport Private Enterprise SC**
Ukrproduct(cid:2)Logistic LLC **
Agrospetsresursy LLC**
Nash Molochnik Private Enterprise SC*
Ukreuroprodukt SC*
Agrospetsresursy Dnipro SC*
Torgoviy Dom Maslayana SC*
Torgoviy Dom Milko SC*
Agrospetsresursy Lviv SC*
Ukrproduct – Kharkov SC*
Ukrproduct Group CJSC
LinkStar Limited
Dairy Trading Corporation Limited
Ukrproduct Group LTD
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Cyprus
BVI
Jersey
Proportion of
the Group’s
ownership interest
2008
2007
Method of
consolidation
97.6%
97.6%
Acquisition
100%
100%
100%
100%
100%
100%
100%
100%
Acquisition
Acquisition
Acquisition
Acquisition
92.7%
92.7%
Acquisition
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Acquisition
(cid:2)
(cid:2)
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Merger
Merger
Merger
Parent
* Subsidiaries of Agrospetsresursy LLC, the Group’s specialised distribution companies.
** The companies are held through Ukrproduct Group CJSC which is a 100%(cid:2)owned subsidiary of the Company
*** The company is held through Ukrproduct Group CJSC and LinkStar Limited which are 100%(cid:2)owned subsidiaries of the Company
**** The company is held through Starkon(cid:2)Moloko LLC which is 100% (cid:2) owned subsidiarie of the Company
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
35
5. Financial instruments – Risk Management
The principal risks facing the Group’s business are cred(cid:2)
it risk, liquidity risk and market risk, including fair value
or cash flow interest(cid:2)rate risk and foreign exchange risk.
The main purpose of the Group’s risk management pro(cid:2)
gramme is to evaluate, monitor and manage these risks
and to minimise potential adverse effects on the Group’s
financial performance and shareholders. The Chief
Financial Officer of the Group is in charge of risk man(cid:2)
agement and introduction of all policies as approved by
the Board of Directors.
Principal financial instruments
The principal financial instruments used by the Group,
from which financial instrument risk arises, are as follows:
•
trade and other receivables;
Financial assets
Loans and receivebles:
(cid:2) trade and other receivables
(cid:2) cash and cash equialents
(cid:2) loans issued
Availlable for sale investments:
(cid:2) unquoted investments
Financial liabilities
Held at amortised cost:
(cid:2) bank loans
(cid:2) overdrafts
(cid:2) promissory notes
(cid:2) other financial liabilities
(cid:2) bonds
(cid:2) trade and other payables
investments in unquoted equity securities in Ukraine;
loans issued;
•
•
• cash and cash equivalents;
• bank overdrafts;
• promissory notes;
•
trade and other payables;
• other financial liabilities;
• bonds;
•
fixed rate bank loans.
General objectives, policies and processes
The Group’s overall risk management programme recog(cid:2)
nises the unpredictability of financial markets and seeks
to minimise potential adverse effects on the Group’s
financial performance. Risk management is carried out
by the Group Chief Financial Officer (CFO) under policies
approved by the Board of Directors. The Group CFO iden(cid:2)
tifies and evaluates financial risks in close co(cid:2)operation
As at December 2008
£ ‘000
As at December 2007
£ ‘000
5,129
691
35
557
6,412
3,200
165
285
35
(cid:2)
1,475
5,160
4,707
1,087
26
108
5,928
3,407
(cid:2)
(cid:2)
26
811
1,621
5,865
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
36
with the Group’s operating units. The management board
provides broad guidance and operating principles for
overall risk management, as well as written policies cov(cid:2)
ering specific areas, such as foreign exchange risk, inter(cid:2)
est(cid:2)rate risk, credit risk, and investing excess liquidity.
The Board has overall responsibility for the determination
of the Group’s risk management objectives and polices
and, whilst retaining ultimate responsibility for them, it
has delegated the authority for designing and operating
processes that ensure the effective implementation of the
objectives and policies to the group’s finance function.
The Board receives monthly updates from the Group CFO
and Head of Internal Audit through which it reviews the
effectiveness of the processes put in place and the appro(cid:2)
priateness of the objectives and policies it sets. The
Group’s internal operating auditors review the risk man(cid:2)
agement policies and processes and report their findings
to CEO and the Audit Committee, if and when necessary.
The overall objective of the Board is to set polices that
seek to reduce risk as far as possible without unduly
affecting the Group’s competitiveness and flexibility.
Further details regarding these policies are laid out below.
Credit risk
Credit risk is the risk that a counterparty will not be able
to meet its obligations in full when due. Ukrproduct
Group is mainly exposed to credit risk from credit sales
to the customers in Ukraine. The Group manages its
credit risk through the Group’s risk assessment policy
by evaluating each new customer before signing a con(cid:2)
tract using the following criteria: trading history and the
strength of own balance sheet. The Group attempts to
reduce credit risk by conducting periodic review which
includes obtaining external ratings and in certain cases
bank references.
According to the Group’s risk assessment policy, imple(cid:2)
mented locally, every new customer is appraised before
entering contracts; trading history and the strength of
the own balance sheet being the main indicators of
creditworthiness. While starting the commercial rela(cid:2)
tionship with the Group, a new customer is offered the
terms that are substantially tighter than those for the
existing customers and stipulate, as a rule, the cash(cid:2)on(cid:2)
delivery payments terms and no(cid:2)returns policy (quality(cid:2)
related claims exempted). If the relationship progresses
successfully, the terms are gradually relaxed to fall in
line with the Group’s normal business practices and
local specifics as required by the market. The Group’s
periodic review includes external ratings, when avail(cid:2)
able, and in some cases bank references. Purchase lim(cid:2)
its are established for each customer, which represents
the maximum open amount without requiring approval
from CEO. These limits are reviewed quarterly.
Customers that fail to meet the Group’s benchmark
creditworthiness may transact with the Group on a pre(cid:2)
payment basis only.
Quantitative discloses of the credit risk exposure in rela(cid:2)
tion to Trade and other receivables, which are neither
past due nor impaired, are made in note 13. The Group
does not rate trade receivables by category or recover(cid:2)
ability as the Group’s historical default rates have been
negligible in the past (less than 0.01%); essentially all
trade receivables due to the Group had been recovered.
In the future, the default rate on trade receivables over(cid:2)
due is expected to remain stable or even fall because in
Ukraine the Group deals increasingly with the modern(cid:2)
format retailers whose creditworthiness is conducive to
the payment discipline.
Maximum exposure to the Trade and other receivables
component of credit risk at the reporting date is the fair
value of Trade and other receivables. There is no collat(cid:2)
eral held as security or other credit enhancements.
The Group’s credit controllers monitor the utilisation of the
credit limits on a daily basis by customer and apply the
delivery stop orders immediately if the individual limits are
exceeded. The Group’s procedure for recovery of the trade
receivables past due includes the following steps:
•
identification of the date and exact amount of the
receivable past due, termination of all further deliver(cid:2)
ies and forwarding to the customer of the details of
the amount due and the notice of the failure to pay –
3 days after the past due date;
• delivery to the customer of the formal claim for the
amount overdue and the visit of the representative of
the commercial credit control department to the cus(cid:2)
tomer premises(cid:2) 2 weeks thereafter;
filing a claim to the commercial court for repayment
•
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
37
of the amount overdue and late payment fees – 2
weeks thereafter;
rates and hence cash flows on substantially all of its
long(cid:2)term borrowings.
• obtaining a court order for repayment of the amount
due and collaboration with bailiff – 2 weeks thereafter.
As a result of the credit control and risk assessment
procedures, the Group does not expect any losses from
non(cid:2)performance by the counterparties at the reporting
date from any of the financial instruments currently
employed in the business.
Credit risk also arises from cash and cash equivalents
and deposits with banks and financial institutions. The
Group reviews the banks and financial institutions it
deals with to ensure that standards of credit worthiness
are maintained.
Maximum exposure to the cash and cash equivalents
and deposits with banks and financial institutions com(cid:2)
ponent of credit risk at the reporting date is the fair
value of the cash balances due from such banks and
financial institutions. There is no collateral held as secu(cid:2)
rity or other credit enhancements.
The Group does not enter into derivatives to manage cred(cid:2)
it risk, although in certain isolated cases may take steps to
mitigate such risks if it is sufficiently concentrated.
CEO (and the Board, if requested) receives rolling quar(cid:2)
terly cash flow projections on a monthly basis as well as
information regarding the daily cash balances at each
plant and overall. In the ordinary course of business, the
Group relies on a combination of the available overdraft
facilities and cash balances to fund the on(cid:2)going liquid(cid:2)
ity needs. Capital expenditures are usually funded
though longer(cid:2)term bank loans. In case of the inade(cid:2)
quate cash balances and the overdraft facilities close to
the agreed ceilings, the Group is expected to revert to
the emergency funding made available through tempo(cid:2)
rary freeze to the current portion of capital spending,
immediate operating cost reductions, postponement of
payments to the third parties, and expansion of the
overdraft ceilings. Although undesirable and never
occurring in the past, such emergency funding is the
last resort on which the Group may have to draw while
ensuring the ongoing continuity of the business.
Maturities of the Group’s financial instruments are dis(cid:2)
closed further in the notes to these financial statements.
Market risk
Liquidity risk
Liquidity risk is a function of the possible difficulty to be
encountered in raising funds to meet financial obliga(cid:2)
tions. The Group’s policy is to ensure that it will always
have sufficient cash to allow it to meet its liabilities when
they become due by maintaining the minimum cash bal(cid:2)
ances and agreed overdraft facilities. The Group also
seeks to reduce liquidity risk by fixing interest rates and
hence cash flows on substantially all of its borrowings.
The Group’s operating divisions (plants) have different
liquidity requirement profiles. As Group’s products have
short(cid:2) and long(cid:2)cycled production, the liquidity risk of
each plant is monitored and managed centrally by the
Group Treasury function. Each plant has a cash facility
based on cash budgets with the Group Treasury. The
cash budgets are set locally and agreed by the CFO in
advance. The main element of the Group’s liquidity
management is to reduce liquidity risk by fixing interest
Market risk may arise from the Group’s use of interest
bearing, tradable and foreign currency financial instru(cid:2)
ments. Market risk comprises fair value interest rate
risk, foreign exchange rates and commodity price risk.
Cash flow and fair value interest(cid:2)rate risk
As the Group has no significant interest(cid:2)bearing assets,
the Group’s income and operating cash flows are sub(cid:2)
stantially independent of changes in market interest
rates. The Group’s interest(cid:2)rate risk arises only from
overdrafts, and considered to be insignificant. The
Group analyses the interest rate exposure on a monthly
basis. As at 31 December 2008 and 2007, all Group’s
borrowings were at fixed rates (note 16).
The Group analyses the interest rate exposure on a month(cid:2)
ly basis. A sensitivity analysis is performed by applying
various interest rate scenarios to the borrowings at fixed
rates. Various methods and assumptions are used in the
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
38
analysis, in particular the likelihood of the change in inter(cid:2)
est rates, supplementary (alternative) funding and the cost
of arranging the back(cid:2)up funding facilities. Based on the
sensitivity analysis performed, the maximum exposure
(impact on profit or loss and net assets) of a 700 basis(cid:2)
point shift (being the maximum reasonably possible
expectation of changes in interest rates) would be an
increase of GBP 80,000 (2007: GBP 79,000) or a decrease
of GBP 80,000 (2007: GBP 79,000).
Foreign exchange risk
All of the Group’s production facilities are located in
Ukraine and the Board believes that the foreign exchange
risk is minimal. The Group’s international operations
consist primarily of the export of milk powders to the
various markets around the world. The primary currency
for export sales is the US Dollar. The Group’s established
corporate policy towards minimising the potential for(cid:2)
eign exchange risk is to require the customers to pay for
the export shipments of the skimmed milk powders in
full and in advance. The Group’s purchases of the raw
milk, semi(cid:2)processed materials and other components
of the manufacturing cost are made in Ukraine and are
entirely Hryvnia(cid:2)denominated. All outstanding balances
of trade payable by the Group are in Hryvnia. Currency
analysis is provided in Note 30
The management believes that the foreign exchange risk
is immaterial at present and is likely to remain so in the
future. No sensitivity analysis is required under circum(cid:2)
stances.
Commodity price risk
The Ukraine economy has been characterized by high
rates of inflation. As we tend to experience inflation(cid:2)driv(cid:2)
en increase in certain of our costs, including salaries and
rents, which are sensitive to rises in the general price level
in Ukraine. In this situation, due to competitive pressures,
we may not able to raise the prices we charge for products
and services sufficiently to preserve operating margins.
Accordingly, high rates of inflation in Ukraine could
increase our cost and decrease our operating margins.
The Group is also exposed to commodity price risk for
skimmed milk powder. The price for this product is pre(cid:2)
dominately determined by the world market and the
activities of large international trading companies in this
market. Since the beginning of 2008 global prices for
skimmed milk powder have fallen. The Group took
measures in order to reduce its dependence on volatile
commodity prices by increasing production of other
products, which were less volatile.
The Group controls the prices for branded products
through timely changes of sales prices according to the
market situation and competition. The prices for SMP in
Ukraine tend to grow or decrease depending on the
world SMP prices and if in 2008 the prices had not
halved the Group would have received an additional
gross profit amounting to GBP 1.0 million but if the
decrease had been 15(cid:2)20% more significant that could
have led to receiving the profit of GBP 0.2 million less
than due.
6. Capital management policies
The Group’s definition of the capital is an ordinary share
capital, share premium, accumulated retained earnings
and other equity reserves. The Directors view their role
as that of corporate guardians responsible for preserva(cid:2)
tion and growth of the capital, as well as for generation
of the adequate returns to shareholders.
The Group’s objectives when maintaining and growing
capital are:
•
•
•
to safeguard the Group’s ability to continue as a going
concern, so that it can continue to provide returns for
shareholders and benefits for other stakeholders;
to identify the appropriate mix of debt, equity and
partner sharing opportunities in order to balance the
highest returns to shareholders overall with the most
advantageous timing of investment flows;
to provide an adequate return to shareholders by
delivering the products in demand by the customers
at prices commensurate with the level of risk and
expectations of shareholders.
The Group sets the amount of capital it requires in pro(cid:2)
portion to risk. The Group manages its capital structure
and makes adjustments to it in the light of changes in eco(cid:2)
nomic conditions and the risk characteristics of the cur(cid:2)
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
39
rent trading environment. The Group’s core assets consist
predominantly of the property, plant and equipment – the
resources that have proven their ability to withstand the
competitive erosion and inflationary pressure.
In order to maintain or adjust the capital structure, the
Group may issue new shares, adjust the amount of divi(cid:2)
dends paid to shareholders, repay the debt, return capital
to shareholders or sell assets to improve the cash position.
Historically, the first three methods were used to achieve
and support the desired capital structure. The Group mon(cid:2)
itors capital on the basis of the net debt to equity ratio (D/E
ratio). This ratio is calculated as net debt to shareholder
equity. Net debt is calculated as total debt (as shown in the
balance sheet) less cash and cash equivalents.
Traditionally, the Group’s conservative strategy was to
maintain the D/E ratio at 0.6 (60%) maximum. In 2008,
as well as in the prior years, the D/E ratio did not exceed
this level. The Directors believe that for the Group, as an
operating company and a public entity, the maintenance
of the prudent debt policy is crucial in preserving the
capital of the business. Excessive leverage – defined by
the Group as D/E ratio in excess of 0.6 – could be justi(cid:2)
fied only under exceptional circumstances and requires
the full Board’s consent.
The D/E ratios at 31 December 2008 and at 31
December 2007 were as follows.
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
Total debt
Less: Cash and cash equivalents
Net debt
Total equity
D/E ratio
3,685
691
2,994
15,919
18,8%
4,218
1,087
3,131
15,255
20,5%
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
40
7. Segment information
At 31 December 2008, the Group was organised internationally into three main business segments:
1. Branded product – (processed cheese, hard cheese, butter, packaged butter and packaged spreads)
2. Skimmed milk powders.
3. Other (transport services and resale of third(cid:2)party goods).
The segment results for the year ended 31 December 2008 are as follows:
Branded
products
Skimmed
milk
powder
£ 000
Sales, Total
Sales to internal customers
Sales to external customers
Gross profit
Administrative expenses
Selling and distribution expenses
Other operating expenses
Loss from exchange differences
93,388
55,191
38,197
9,138
(2,310)
(3,364)
(cid:2)
(cid:2)
Profit before interest and taxation
3,464
Finance expenses
Profit before taxation
Taxation
Profit for the year
Segment assets
Unallocated corporate assets
Unallocated deferred tax
Consolidated total assets
Segment Liabilities
Unallocated corporate liabilities
Unallocated deferred tax
Consolidated total liabilities
Other segment information:
Depreciation and amortisation
Capital expenditure
(cid:2)
3,464
(cid:2)
3,464
16,662
(cid:2)
(cid:2)
16,662
794
(cid:2)
(cid:2)
794
1,379
1,204
20,106
8,545
11,561
1,274
(241)
(53)
(cid:2)
(cid:2)
980
(cid:2)
980
(cid:2)
980
2,026
(cid:2)
(cid:2)
2,026
363
(cid:2)
(cid:2)
363
279
319
Other
9,278
6,724
2,554
406
(49)
(46)
(cid:2)
(cid:2)
311
(cid:2)
311
(cid:2)
311
822
(cid:2)
(cid:2)
822
311
(cid:2)
(cid:2)
311
17
12
The unallocated corporate liabilities represent bank loans, overdrafts and accruals.
Un(cid:2)
allocated
Total
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(621)
(266)
(645)
(192)
(1,724)
(592)
(2,316)
(162)
(2,478)
(cid:2)
2,876
117
2,993
(cid:2)
4,337
697
5,034
75
20
122,772
70,460
52,312
10,818
(3,221)
(3,729)
(645)
(192)
3,031
(592)
2,439
(162)
2,277
19,510
2,876
117
22,503
1,468
4,337
697
6,502
1,750
1,555
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
41
The basis of pricing of the inter(cid:2)segment transfers is the current market price at which the goods could be bought on
the spot market externally but not lower than the full production costs plus the accompanying transport expenses.
The segment results for the year ended 31 December 2007 are as follows:
£ 000
Sales, Total
Sales to internal customers
Sales to external customers
Gross profit
Administrative expenses
Selling and distribution expenses
Other operating expenses
Loss from exchange differences
Branded
products
Skimmed
milk
powder
72,974
47,819
25,155
6,263
(1,813)
(2,051)
(cid:2)
(cid:2)
35,805
15,395
20,410
3,804
(335)
(75)
(cid:2)
(cid:2)
Profit before interest and taxation
2,399
3,394
Finance expenses
Finance income
Profit before taxation
Taxation
Profit for the year
Segment assets
Unallocated corporate assets
Unallocated deferred tax
Consolidated total assets
Segment Liabilities
Unallocated corporate liabilities
Unallocated deferred tax
(cid:2)
(cid:2)
2,399
(cid:2)
2,399
16,846
(cid:2)
(cid:2)
16,846
1,133
(cid:2)
(cid:2)
(cid:2)
(cid:2)
3,394
(cid:2)
3,394
3,780
(cid:2)
(cid:2)
3,780
1,288
(cid:2)
(cid:2)
Consolidated total liabilities
1,133
1,288
Other segment information:
Depreciation and amortisation
Capital expenditure
998
2,043
274
444
Other
15,060
12,515
2,545
391
(49)
(51)
(cid:2)
(cid:2)
291
(cid:2)
(cid:2)
291
(cid:2)
291
518
(cid:2)
(cid:2)
518
271
(cid:2)
(cid:2)
271
31
119
Un(cid:2)
allocated
Total
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(573)
(742)
(604)
(15)
(1,934)
(493)
20
(2,407)
(415)
(2,822)
(cid:2)
2,470
51
2,521
(cid:2)
4,835
752
5,587
68
70
123,839
75,729
48,110
10,458
(2,770)
(2,919)
(604)
(15)
4,150
(493)
20
3,677
(415)
3,262
21,144
2,470
51
23,665
2,692
4,835
752
8,279
1,371
2,676
The unallocated corporate liabilities represent bank loans, overdrafts, bonds and accruals.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
42
Secondary reporting format – geographical segments:
Sales by country
(consignees)
Year ended 31
December 2008
£ 000
Sales by country
(consignees)
Year ended 31
December 2008
£ 000
Ukraine
Germany
Nigeria
Azerbaijan
Other countries
Total
42,937
1,676
1,461
1,458
4,780
52,312
Ukraine
Denmark
Holland
Japan
Germany
Other countries
Total
32,127
3,658
3,432
2,322
1,085
5,486
48,110
The majority of the Group’s assets and liabilities are in Ukraine. Sales to the countries in Europe represent sales to
international traders of milk powders located in Europe. These traders consequently resell the milk powders to other
countries worldwide.
In 2008 the Group expanded the geography of milk powder sales and continues to increase the sales of butter and
processed cheeses to Eastern Asia.
8. Property, plant and equipment
Assets under
Construction
£ ‘000
Land and
Buildings Machinery
£ ‘000
£ ‘000
Plant and Vehicles and
equipment
Total
£ ‘000 £ ‘000
Cost or valuation
Opening balance at 1 January 2007
Additions
Transfers from AUC
Disposals
Exchange differences on translation
to the presentation currency
Closing balance
Accumulated depreciation
Opening balance at 1 January 2007
Depreciation charge
2,841
2,611
(4,816)
(cid:2)
(58)
578
(cid:2)
(cid:2)
6,012
4,027
3,096
15,976
(cid:2)
2,040
(45)
(112)
7,895
1,929
262
(cid:2)
1,847
(51)
(75)
5,748
1,489
551
61
929
2,672
(cid:2)
(260)
(356)
(56)
(301)
3,770
17,991
1,693
5,111
496
1,309
cont. on page 44
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
43
Assets under
Construction
£ ‘000
Land and
Buildings Machinery
£ ‘000
£ ‘000
Plant and Vehicles and
equipment
Total
£ ‘000 £ ‘000
Disposals
Exchange differences on translation
to the presentation currency
Closing balance at 31 December 2007
Cost or valuation
Opening balance at 1 January 2008
Additions
Transfers from AUC
Disposals
Exchange differences on translation
to the presentation currency
Closing balance at 31 December 2008
Accumulated depreciation
Opening balance at 1 January 2008
Depreciation charge
Disposals
Exchange differences on translation
to the presentation currency
Closing balance at 31 December 2008
Net book amount at 31 December 2008
Net book amount at 31 December 2007
Net book amount at 31 December 2006
(cid:2)
(cid:2)
(cid:2)
578
1,350
(1,734)
(cid:2)
(3)
191
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
191
578
2,841
(4)
(41)
(192)
(237)
(36)
2,151
(28)
1,971
(31)
(95)
1,966
6,088
7,895
5,748
3,770
17,991
(cid:2)
477
(100)
(787)
7,485
2,151
327
(35)
(288)
2,155
5,330
5,744
4,083
4
369
(238)
(555)
5,328
1,971
713
(43)
(373)
2,268
3,060
3,777
2,538
12
888
1,366
(cid:2)
(110)
(448)
(457)
(1,802)
4,103
17,107
1,966
6,088
644
(98)
1,684
(176)
(355)
(1,016)
2,157
6,580
1,946
10,527
1,804
11,903
1,403
10,865
Fixed assets with a net book value of GBP 5,837,414 at 31 December 2008 (GBP 7,189,696 at 31 December 2007)
were pledged as collateral for loans.
The assets of the Group were last revalued in 2005 at the effective valuation date of 31 December 2004. The valu(cid:2)
ation included a combination of different methods used by two independent appraisers: by “Podilia(cid:2)Expert” LLC
(Ukraine), who valued the assets using the cost and comparables method, and by “BGS(cid:2)Aktiv” LLC (Ukraine), who
used the asset cash generating method.
In accordance with IAS16 the Group carries out revaluations on a regular basis and conducts a full valuation exer(cid:2)
cise if there is an indication of impairment. An impairment review was conducted at the balance sheet date and no
impairment was identified. The Group’s business is a single cash generating unit.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
44
9. Intangible assets
Cost or valuation
At 1 January 2007
Additions
Reduction in goodwill corresponding to
decrease in external minority equity stakes
Exchange differences on translation
to the presentation currency
At 31 December 2007
Accumulated amortisation
At 1 January 2007
Amortisation charge for the year
Exchange differences on translation
to the presentation currency
At 31 December 2007
Cost or valuation
At 1 January 2008
Additions
Exchange differences on translation
to the presentation currency
At 31 December 2008
Accumulated amortisation
At 1 January 2008
Amortisation charge for the year
Exchange differences on translation
to the presentation currency
At 31 December 2008
Net book amount at 31 December 2008
Net book amount at 31 December 2007
Net book amount at 31 December 2006
Computer
software
£ ‘000
Trade
marks
£ ‘000
Customer
list
£ ‘000
Goodwill
Total
£ ‘000 £ ‘000
25
4
(cid:2)
(cid:2)
29
14
6
1
21
29
15
(2)
42
21
5
(2)
24
18
8
11
369
752
184
1,330
(cid:2)
(cid:2)
(7)
362
35
18
(1)
52
362
(cid:2)
138
500
52
20
25
97
403
310
334
(cid:2)
(cid:2)
(cid:2)
(cid:2)
4
(80)
(80)
(cid:2)
(7)
752
104
1,247
44
38
(1)
81
(cid:2)
(cid:2)
(cid:2)
(cid:2)
93
62
(1)
154
752
104
1,247
(cid:2)
(cid:2)
(cid:2)
(cid:2)
15
136
752
104
1,398
81
41
(cid:2)
122
630
671
708
(cid:2)
(cid:2)
(cid:2)
(cid:2)
104
104
184
154
66
23
243
1,155
1,093
1,237
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
45
The remaining amortisation periods of the intangible
assets are as follows:
Computer software
Trademarks
Customer list
4 – 9 years;
17 years;
17 years.
Acquired intangible assets and Goodwill
At the year end, the carrying value(cid:2)in(cid:2)use was deter(cid:2)
mined by discounting the expected future cash flows of
the Group’s business to their present value. The key
assumptions for the value(cid:2)in(cid:2)use calculations were
those regarding discount rate and growth rates of the
business. The Directors estimate discount rates that
current market assessments of the time value of money
and risks appropriate to the Dairy business. The dis(cid:2)
count rate that is considered by the Directors to be
appropriate is a discount rate of 25% being the Group’s
specific weighted average cost of capital.
In estimating the future cash flows the Group has used
conservative estimates in respect in revenues generated
and costs incurred. An annual growth rate of 2% was
used for 2009, 7% for 2010 and 11% for 2011(cid:2)2012.
The Group regularly monitors the carrying value of its
acquired intangible assets and goodwill, or when such
events or changes in circumstances indicate that there
may be impaired. The result of the review, undertaken at
31 December 2008, was that no impairment needs to be
recognised and the carrying value of the acquired intan(cid:2)
gible assets and goodwill is considered appropriate.
After having analyzed all key factors the Group’s
Management decided that as of December 31, 2008 the
Goodwill of Letichiv Diary Plant did not suffer any
impairment. Besides, this asset has unlimited useful life
duration and has been tested as part of Group’s single
generating unit.
Group’s production plans are based on the established
practice of production and distribution of dairy products
in the raw material zone of Letichiv Diary Plant and fore(cid:2)
see the use of this asset during an unlimited period of
time.
Maintenance of Goodwill does not require considerable
costs and the Group does not plan such inputs in the
future.
Taking info consideration all the factors mentioned
above the Group’s Management does not see any
impairment in goodwill as of December 31, 2008 and
considers that the amount of GBR 0.1 million approxi(cid:2)
mates to its fair value.
10. Available for sale investments
The currency profile of the Group’s available for sale investments is as follows.
UAH
USD
EUR
Floating rate
assets
£ ‘000
Fixed rate
assets
£ ‘000
Total as at 31
December 2008
£ ‘000
Total as at 31
December 2007
£ ‘000
(cid:2)
(cid:2)
(cid:2)
(cid:2)
557
(cid:2)
(cid:2)
557
557
(cid:2)
(cid:2)
557
108
(cid:2)
(cid:2)
108
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
46
Fair values
The book value and fair value of available for sale investments are as follows.
Book value as at
Fair value as at
31 December 2008 31 December 2008 31 December 2007 31 December 2007
£ ‘000
Book value as at
Fair value as at
£ ‘000
£ ‘000
£ ‘000
Investment certificates
Other
unquoted investments
(less than 5(cid:2)% holding)
152
405
557
152
405
557
108
108
108
108
Details of investments, including the percentage of the share capital owned by the Operating Group, are as follows.
Investment certificates
Other unquoted investments (less than 5(cid:2)% holding)
11. Deferred tax
Deferred tax asset at the beginning of the period
Deferred tax liability at the beginning of the period
Deferred tax recognised
in income statement during the year
Reduction in deferred tax due to decrease
in property, plant and equipment revaluation
reserve because of amortisation
Exclusion from Group
Exchange differences on translation
to the presentation currency
Deferred tax asset at the end of the period
Deferred tax liability at the end of the period
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
152
405
557
(cid:2)
108
108
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
(51)
752
21
(78)
(cid:2)
(64)
(117)
697
(42)
767
40
(57)
6
(13)
(51)
752
The tax rate used in deferred tax calculations is 25% (2007: 25%)
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
47
12. Inventories
Raw materials
Finished goods
Other inventories
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
636
2,128
747
3,511
1,053
2,299
656
4,008
As at 31 December 2008 no inventories were pledged as collateral (GBP 1,013,268 at 31 December 2007).
Amounts of inventories recognised as an expense during both periods are disclosed in note 21.
13. Trade and other receivables
Trade receivables
Other receivables
Prepayments
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
4,738
391
514
5,643
3,771
936
432
5,139
The Group’s management believes that carrying value is a reasonable approximation of fair value for trade and other
receivables.
There is no concentration of credit risk with respect to trade receivables as the Group has large number of cus(cid:2)
tomers, primarily in Ukraine.
Maturity of trade and other receivables
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
In less than 1 year
5,643
5,139
In more than one year but not more than two years
In more than two years but not more than five years
In more than five years
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
5,643
5,139
As at 31 December 2008 there were no trade and other receivables past due not impaired (2007: nil).
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
48
14. Other assets
VAT receivable
Prepaid profit tax
Loans issued to employees
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
267
(cid:2)
35
302
247
3
26
276
Loans issued are denominated in Hryvnia, are short term in nature, and are interest free. Loans are issued to Group
employees.
15. Cash and cash equivalents
Cash – in UAH
Bank – in UAH
Bank – in foreign currency
16. Financial liabilities – borrowings
Bank loans and promissory notes
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
12
368
311
691
10
234
843
1,087
Bank loans include a secured 3(cid:2)year credit line of up to UAH 40,000,000 (?4,000,000) from OTP Bank CJSC denom(cid:2)
inated in Ukrainian Hryvnia (UAH). As at 31 December 2008 an amount of GBP 3,199,551 was drawn from this cred(cid:2)
it line (2006: GBP 3,406,868). The average interest rate as at 31 December 2008 was 17.0% (2007: 14.5%). This
loan is secured by the assets of OJSC Molochnik, Starokonstantinovskiy Molochniy Zavod SC and Starkon(cid:2)Moloko
LLC.
At December 31, 2008 there was a debt connected to the promissory notes issued amounting to UAH 3,178,739
(GBP 285,000) with the maturity date of 2011.
Maturity of financial liabilities.
The carrying amounts of financial liabilities are reported in the following table.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
49
On demand
In less than 1 year
In more than one year but not more than two years
In more than two years but not more than five years
Interest rate profile of financial liabilities
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
165
3,235
(cid:2)
285
3,685
(cid:2)
4,218
(cid:2)
(cid:2)
4,218
The Group’s has borrowing facilities available at 31 December 2008 in which all conditions have been met
Floating rate
£ ‘000
Fixed rate
£ ‘000
Total as at 31
December 2008
£ ‘000
Total as at 31
December 2007
£ ‘000
On demand
Expiry within 1 year
Expiry within 1 and 2 years
Expiry in more than 2 years
165
(cid:2)
(cid:2)
165
(cid:2)
3,235
(cid:2)
285
3,520
165
3,235
(cid:2)
285
3,685
(cid:2)
4,218
(cid:2)
4,218
Currency profile of financial liabilities
The currency profile of the Group’s financial liabilities is as follows.
UAH
USD
EUR
Floating rate
liabilities
£ ‘000
Fixed rate
liabilities
£ ‘000
Total as at 31
December 2008
£ ‘000
Total as at 31
December 2007
£ ‘000
165
(cid:2)
(cid:2)
165
3,520
3,685
4,218
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
3,520
3,685
4,218
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
50
The book value and fair value of financial liabilities are as follows:
Book value as at
31 December 2008
£ ‘000
Fair value as at
31 December 2008
£ ‘000
Book value as at
Fair value as at
31 December 2007 31 December 2007
£ ‘000
£ ‘000
Bank loans
Bank overdrafts
Promissory notes
Bonds
Other financial liabilities
3,200
165
285
(cid:2)
35
3,685
3,200
165
285
(cid:2)
35
3,685
3,407
(cid:2)
811
(cid:2)
4,218
3,407
(cid:2)
811
(cid:2)
4,218
Current portion of long(cid:2)term liabilities
Bonds
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
(cid:2)
285
811
811
On 6 March 2008 Agrospetsresursy LLC redeemed the bonds in full, and as of December 31, 2008 the Group does
not have any liabilities related to the long(cid:2)term loans and bonds.
17. Non(cid:2)cancellable lease commitments
As at 31 December 2008, the operating lease commitments on non(cid:2)cancellable leases for all the companies includ(cid:2)
ed into the consolidation totalled GBP 485,000 (2007: GBP 38,500).
The total future value of minimum lease payments are due as follows
Not later than 1 year
Later than one year but not later than five years
Later than five years
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
404
81
(cid:2)
485
39
(cid:2)
(cid:2)
39
Non(cid:2)cancellable lease commitments represent rent of offices and warehouses.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
51
18. Trade and other payables
Trade payables
Other payables
Prepayments
Accruals
VAT and other taxation payable
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
1,235
160
372
244
79
2,090
1,395
385
1,033
398
28
3,239
The Group’s management believes that fair value is a reasonable approximation of carrying value for trade and other
payables.
19. Share capital
As at 31
December
2008
Number
‘000
50,000
Authorised
As at 31
December
2008
£ ‘000
As at 31
December
2007
Number
‘000
As at
December
2007
£ ‘000
50,000
5,000
5,000
Issued and fully paid at beginning and end of the year
2008
Number
‘000
41,645
1,173
42,818
2008
£ ‘000
2007
Number
‘000
2007
£ ‘000
4,164
118
4,282
41,215
430
41,645
4,121
43
4,164
Ordinary shares of 10p each
Ordinary shares of 10p each
At beginning of the year
Issues during the year
At end of the year
The average share price at the date of exercise of the warrants in 2008 was 74 pence.
In January – February of 2008 WH Ireland exercised warrants granted at the date of the Company’s initial public
offering with an exercise price of 53.5 pence. The total consideration received was GBP 628,000.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
52
20. Other reserves
Share Merger Share option Translation Revaluation
premium reserve
£ 000
£ 000
reserve
£ 000
reserve
£ 000
reserve
£ 000
Total
other reserves
£ 000
Balance at 1 January 2007
3,918
(1,427)
Issue of shares
198
Reduction of options reserve
Depreciation on revaluation
of property, plant and equipment
Reduction of revaluation reserve
Exchange differences on translation
to the presentation currency
(cid:2)
(cid:2)
(cid:2)
1
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Balance at 31 December 2007
4,117
(1,427)
Issue of shares
Depreciation on revaluation of
property, plant and equipment
Reduction of revaluation reserve
Reduction of options reserve
510
(cid:2)
(cid:2)
(cid:2)
Exchange differences on translation
to the presentation currency
(5)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Balance at 31 December 2008
4,622
(1,427)
216
(cid:2)
(71)
(cid:2)
(cid:2)
(1)
144
(cid:2)
(cid:2)
(cid:2)
(118)
(2)
24
(370)
1,844
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(89)
(459)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(3,365)
(3,824)
(cid:2)
(cid:2)
(122)
(2)
(35)
1,685
(cid:2)
(124)
(2)
(cid:2)
(131)
1,428
4,181
198
(71)
(122)
(2)
(124)
4,060
510
(124)
(2)
(118)
(3,503)
823
The reduction in revaluation reserve is due to sale of property, plant and equipment which have previously been
revalued.
The following describes the nature and purpose of each reserve within owners’ equity.
Reserve
Description and purpose
Share capital
Amount subscribed for share capital at nominal value.
Share premium
Amount subscribed for share capital in excess of nominal value.
Revaluation
Gains arising on the revaluation of the Group’s property. The balance on this reserve is whol(cid:2)
ly undistributable.
Merger
Losses arising on the application of the pooling of interests method of consolidation used to
account for the merger of Ukrproduct Group Ltd and its subsidiaries.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
53
Share option
Amount arising from share based payments (issue of share options).
Retained earnings
Cumulative net gains and losses recognised in the consolidated income statement.
Translation
Amount of all foreign exchange differences arising from the translation of the financial infor(cid:2)
mation of foreign subsidiaries.
Minority interest
Portion of the profit or loss and net assets of the subsidiary attributable to equity interests that
are not owned, directly or indirectly through the subsidiaries, by the parent.
21. Expenses by nature
Raw materials and consumables used, cost of goods sold
Wages and salaries
Social security costs
Deprecation of property, plant and equipment
Amortisation of intangible assets
Operating lease expense (Property)
Other (sale of equity stake)
Loss on disposal of fixed assets
Audit fees
Exchange difference
Other expenses
As at
31 December 2008
£ ‘000
As at
31 December 2007
£ ‘000
33,580
4,218
1,355
1,684
66
536
(cid:2)
13
72
192
7,565
31,991
3,460
1,112
1,309
62
352
22
42
94
15
5,501
Total cost of goods sold, marketing and distribution costs
and administrative expenses
49,281
43,960
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
54
22. Finance income and expense
Recognised in income statement
Finance income
Interest income on loans to related parties
Total interest income calculated using effective interest method
Finance expense
Interest expense on bank loans
Interest expense on bonds
Other finance expense
Total finance expense
Net finance expense recognised in income statement
23. Employee benefit expense
As at
31 December 2008
£ ‘000
As at
31 December 2007
£ ‘000
(cid:2)
(cid:2)
(563)
(27)
(2)
(592)
(592)
20
20
(407)
(84)
(2)
(493)
(473)
Wages and salaries
(including key management personnel)
Social security costs
Remuneration of key management personnel
Salaries
Bonuses
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
4,218
1,355
5,573
3,460
1,112
4,572
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
276
(cid:2)
276
227
155
382
The key management personnel are all of directors of the Company (Ukrproduct Group Ltd).
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
55
24. Income tax expense
Income tax comprised the following:
Current tax charge – Ukraine
Current tax charge – non(cid:2)Ukraine
Deferred tax relating to the origination
and reversal of temporary differences
Income tax charge for the year
Year ended 31
December 2008
£ ‘000
Year ended 31
December 2007
£ ‘000
208
11
(57)
162
426
6
(17)
415
Differences in treatment of certain elements of financial statements by IFRS and Ukrainian statutory taxation regu(cid:2)
lations give rise to temporary differences. The tax effect of the movement on these temporary differences is recog(cid:2)
nised at the rate of 25% (2006: 25%).
Profit before tax – Ukraine
Profit before tax – non(cid:2)Ukraine
Tax calculated at domestic tax rates applicable
to profits in the relevant countries
Expenses not deductible for tax purposes
Tax charge
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
(898)
3,337
2,439
102
60
162
1,058
2,619
3,677
271
144
415
The numerical reconciliation between tax charge and the product of accounting profit multiplied by the applicable
tax rate(s) is provided in the following table.
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
Profit before tax:
Ukraine
Cyprus
Other (BVI, Jersey)
Profit before tax, total
(898)
1,017
2,320
2,439
1,058
65
2,554
3,677
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
56
Tax calculated at domestic tax rates applicable
to profits in the relevant countries
Ukraine (25%)
Cyprus (10%)
BVI, Jersey (0%)
Net income not subject to tax and expenses
not deductible for tax purposes
Ukraine
Cyprus
BVI, Jersey
Tax charge
Ukraine
Cyprus
BVI, Jersey
The weighted average applicable tax rate
Ukraine
Cyprus
BVI, Jersey
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
(cid:2)
102
(cid:2)
102
150
(90)
(cid:2)
60
151
11
(cid:2)
162
Nil
10%
Nil
4.2%
265
6
(cid:2)
271
144
(cid:2)
(cid:2)
144
409
6
(cid:2)
415
25%
10%
Nil
7.4%
The weighted average applicable tax rate was 4.2% (2007: 7.4%). The charge is due to the changes in profitability
of the companies comprising the Group in the respective countries.
Ukraine currently has a system of taxation broadly similar in scope to those of the developed market economies.
There are a number of laws related to various taxes imposed by both central and regional governmental authorities.
Although laws related to these taxes have not been in force for significant periods, the practice of taxation and
implementation of regulations are well established, documented with a sufficient degree of clarity and adhered to
by the taxpayers. Nevertheless, there remain certain risks in relation to the Ukrainian tax system: few court prece(cid:2)
dents with regard to tax related issues exist; different opinions regarding legal interpretation may arise both among
and within government ministries and regulatory agencies; tax compliance practice is subject to review and inves(cid:2)
tigation by a number of authorities with overlapping responsibilities.
Generally, tax declarations remain subject to inspection for an indefinite period. In practice, however, the risk of
retroactive tax assessments and penalty charges decreases significantly after three years. The fact that a year has
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
57
been reviewed does not preclude the Ukrainian tax service performing a subsequent inspection of that year.
The Group’s management believes that it has adequately provided for tax liabilities in the accompanying financial
statements; however, the risk remains that those relevant authorities could take different positions with regard to
interpretive issues.
During the period under review, the Ukrainian companies within the Group paid royalties and interest charge on the
outstanding credits and bonds to another Group company – Linkstar Limited (Cyprus). These payments were not
taxable in Ukraine due to the existing Double Taxation Treaty between Ukraine and Cyprus.
25. Share(cid:2)based payments
The Company operates an equity(cid:2)settled share based remuneration scheme for employees. During the period under
review the Company did not grant share options to the Directors. All options granted to the Directors in the prior
periods and outstanding as at 31 December 2008 vested on 11 February 2006 and expired on February 11, 2009.
2008
Weighted
average exercise
price (£)
2008
Number
2007
Weighted
average exercise
price (£)
2007
Number
Outstanding at beginning of the year
0.570
612,028
0.570
912,028
Granted during the year
Forfeited during the year
Exercised during the year
Lapsed during the year
Outstanding at the end of the year
Exercisable at the end of the year
(cid:2)
(cid:2)
0.570
481,738
(cid:2)
(cid:2)
0.570
0.570
(cid:2)
(cid:2)
130,290
130,290
(cid:2)
(cid:2)
(cid:2)
(cid:2)
0.570
300,000
(cid:2)
0.570
0.570
(cid:2)
612,028
612,028
The fair value of the options granted in 2005 was GBP 95,336. No income statement charge was recognised in
respect of share based payments in 2008 and 2007 due to that fact that all options vested in 2006.
The fair value of options granted in 2005 has been calculated based on the following data.
Item
Option pricing model used
Weighted average share price at the grant date
Exercise price
Weighted(cid:2)average contractual life, years
Expected volatility
Expected dividend yield
Expected dividend growth rate
Weighted(cid:2)average risk(cid:2)free interest rate
2005
Adjusted Black(cid:2)Scholes
0.545
0.535
3.947
25%
5%
0%
4.44%
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
58
To account for dividend yield in the Black(cid:2)Scholes model, the modified current stock prices were calculated at
option grant dates by subtracting present value of future dividend payments from the actual stock price at those
dates. Dividends were assumed to be paid in two half(cid:2)yearly instalments. Expected volatility was approximated by
an average historical volatility of the peer group companies. The latter was calculated from daily standard devia(cid:2)
tions of the peer group stock returns during last 4 years.
26. Earnings per share
Basic earnings per share has been calculated by dividing net profit attributable to the ordinary shareholders by the
weighted average number of shares in issue.
31 December 2008
31 December 2007
Net profit attributable to ordinary shareholders, £'000
Weighted number of ordinary shares in issue
2,320
3,256
42,817,849
41,644,953
Basic earnings per share, pence
Weighted number of WH Ireland warrants in the money
Weighted number of Directors’ option shares in the money
Diluted average number of shares
Diluted earnings per share, pence
5.4
(cid:2)
(cid:2)
7.8
1,172,896
612,028
42,817,849
43,429,877
5.4
7.5
As at 31 December 2008, there were no warrants in issue (2007: 1,172,896).
27. Warrants
The Company granted warrants to the broker WH Ireland at the admission to the Alternative Investment Market of
the London Stock Exchange on 11 February 2005. They were exercised on 11 February 2008. During the period
under review the Company did not grant warrants to any parties.
2008
Weighted
average
exercise
price (£)
2008
Number
2007
Weighted
average
exercise
price (£)
2007
Number
Outstanding at beginning of the year
0.535
1,172,896
0.535
1,302,896
Granted during the year
Forfeited during the year
Exercised during the year
Lapsed during the year
Outstanding at the end of the year
(cid:2)
(cid:2)
0.535
(cid:2)
0.535
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
1,172,896
0.535
130,000
(cid:2)
(cid:2)
(cid:2)
(cid:2)
0.535
1,172,896
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
59
The average share price at the date of exercise of the warrants in 2008 was 74 pence (2007: 90 pence).
At 31 December 2008, no warrants were exercisable (2007: 1,172,896).
28. Dividends
As at 27 April 2009, the Board of Directors proposed the final dividend payment of 0.40 pence per ordinary share
for the year ended 31 December 2008 which would lead to 0.80 pence per ordinary share for the full year. If
approved at the AGM, the final dividend will be paid on 27 July 2009 to the shareholders on the register as at 26
June 2009. No tax consequences for the Group will arise out of this transaction as the Group’s parent company is
an entity registered under the Jersey laws.
Final dividend for 2007 of 0.82 pence (2006 – 0.51 pence)
per ordinary share proposed and paid during the year relating
to the previous year’s results
Interim dividend of 0.40 pence (2007 – 0.60 pence)
per ordinary share paid during the year
Total
Year ended 31
December 2008
£ ‘000
Year ended 31
December 2007
£ ‘000
351
172
523
210
249
459
The directors are proposing a final dividend of 0.40 pence (2007 – 0.82 pence) per share totalling GBP 172,000
(2007: GBP 351,000). This dividend has not been accrued at the balance sheet date.
29. Minority interest
Balance at 1 January
Net profit for the period
Decrease of minority interest
Exchange differences on translation to the presentation currency
Balance at 31 December
Year ended 31
December 2008
Year ended 31
December 2007
131
(43)
(cid:2)
(6)
82
199
6
(70)
(4)
131
As at 31 December 2008 a minority interest of 2.4% (2007: 2.4%) was held in Molochnik OJSC, and 7.3% was held
in Letichevsky Maslozavod OJSC (2007: 7.3%).
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
60
30. Related party transactions
Parties are considered to be related if one party has the ability to control the other party or exercise significant influ(cid:2)
ence over the other party in making financial or operational decisions as defined by IAS 24 “Related Party
Disclosures". In considering each possible related party relationship, attention is directed to the substance of the
relationship, not merely the legal form.
Transactions and balances between the Group companies and other related parties are set out below. Remuneration
of key management personnel is disclosed in note 23.
Sales of goods and services to related parties and purchases from related parties are summarised below. All sales
and purchases were with related parties under common control of the ultimate beneficiaries of the Company.
Sales
Purchases
Interest received
Loans
Repayment of loans
Year ended 31
December 2008
Year ended 31
December 2007
71
69
(cid:2)
(cid:2)
(cid:2)
374
370
20
405
405
Balances due from/(to) related parties at each period end are shown below.
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
Receivables and prepayments
Trade and other payable
131
(59)
190
(31)
Trade and other payable include payables to the shareholders of the Company.
In 2008, the Group’s commercial relationships with the related parties comprised sales, purchases, provision and
repayment of loans. The terms and conditions for the contracts with the related parties were similar to the terms
and conditions applied in dealings with unrelated parties. There were no guarantees given to or provided by from
the Group to related parties and vice versa.
The ultimate controlling owners and beneficiaries of the related parties were Messrs Alexander Slipchuk and Sergey
Evlanchik.
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
61
31. Currency analysis
Currency analysis for the period ended 31 December 2008 is set out below:
£ ‘000
UAH
USD
RUR
GBP
ЕUR
Total
Non(cid:2)Current Assets
Property, Plant and equipment
10,495
Intangible assets
Available for sale investments
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Current taxes
Other financial assets
Cash and cash equivalents
Total assets
Non(cid:2)Current Liabilities
Deferred tax liabilities
Promissory notes
Current Liabilities
Bank loans and overdrafts
Trade and other payable
Taxes payable
Current income tax liabilities
Total Liabilities
18
535
117
3,511
4,613
267
35
130
19,721
697
285
3,400
1,909
79
30
6,400
32
403
22
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
766
264
(cid:2)
(cid:2)
258
1,481
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
264
(cid:2)
(cid:2)
(cid:2)
12
(cid:2)
(cid:2)
12
(cid:2)
734
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
303
1,037
(cid:2)
(cid:2)
(cid:2)
90
(cid:2)
(cid:2)
90
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
10,527
1,155
557
117
3,511
5,643
267
35
691
22,503
697
285
3,400
2,011
79
30
6,502
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
62
Currency analysis for the period ended 31 December 2007 is set out below:
£ ‘000
UAH
USD
RUR
GBP
ЕUR
Total
Non(cid:2)Current Assets
Property, Plant and equipment
11,880
Intangible assets
Available for sale investments
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Current taxes
Other financial assets
Cash and cash equivalents
Total assets
Non(cid:2)Current Liabilities
Deferred tax liabilities
Current Liabilities
Bank loans and overdrafts
Trade and other payable
Taxes payable
Current income tax liabilities
Total Liabilities
Total Liabilities
10
83
51
4,008
4,951
247
29
244
21,503
752
3,407
1,807
28
811
70
23
309
25
(cid:2)
(cid:2)
170
(cid:2)
(cid:2)
197
724
(cid:2)
(cid:2)
937
(cid:2)
(cid:2)
6,875
937
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
13
(cid:2)
(cid:2)
13
(cid:2)
774
(cid:2)
(cid:2)
(cid:2)
7
(cid:2)
(cid:2)
645
1,426
(cid:2)
(cid:2)
454
(cid:2)
(cid:2)
454
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
11
(cid:2)
(cid:2)
1
12
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
11,903
1,093
108
51
4,008
5,139
247
29
1,087
23,665
752
3,407
3,211
28
811
70
8,279
32. Notes supporting the consolidated cash flow statement
Cash and cash equivalents for purposes of the cash flow statement comprise:
Cash available on demand
As at 31 December 2008
£ ‘000
As at 31 December 2007
£ ‘000
691
691
1,087
1,087
In the period under consideration, there were no major non(cid:2)cash transactions (2007 – nil).
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
63
33. Post balance sheet events
There are no significant post balance sheet events.
CORPORATE ADVISERS
Company secretary
Jersey legal advisers
Bedell Secretaries Limited
PO Box 75
26 New Street
St Helier
Jersey JE2 3RA
Bedell Cristin
PO Box 75
26 New Street
St Helier
Jersey JE4 8PP
Nominated adviser and broker
Principal bankers
W H Ireland Limited
11 St James’s Square
Manchester M2 6WH
Registered accountants and auditors
Deutsche Bank International Limited
PO Box 727
St. Paul’s Gate
New Street
St Helier
Jersey JE4 8ZB
BDO Stoy Hayward LLP
55 Baker Street
London W1U 7EU
UK legal advisers
Cobbetts
70 Gray’s Inn Road
London WC1X 8BT
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
64
SHAREHOLDER INFORMATION
Registered office
26 New Street
St Helier
Jersey JE4 8PP
Registered number 88352 in Jersey
Financial Calendar
31 December 2008
29 April 2009
26 June 2009
27 July 2009
End of September 2009
31 December 2009
Financial year end
Preliminary Announcement of full year 2008 results
Annual General Meeting
Final Dividend Payment
Announcement of first half of 2009 results
Financial year end
Analysis of shareholding – at 31 December 2008
Size of shareholdings
Number of holders
% of total
Total holdings, ‘000
% of total
Up to 5000 shares
5001 to 50000 shares
50001 to 200000 shares
Over 200000 shares
Total
43
33
11
15
102
42,2%
32,4%
10,8%
14,7%
100%
73 898,00
559 910,00
1 279 979,00
40 904 062,00
42 817 849,00
0,17%
1,31%
2,99%
95,53%
100,00%
The ultimate controlling parties of Ukrproduct Group Ltd are Messrs Sergey Evlanchik and Alexander Slipchuk who
collectively controlled, as of 31 December 2008, 67.5% of the common shares of the company.
Share price (pence) (cid:2) year to 31 December 2008
At end of year: 17 p
Lowest: 16.5 p
Highest: 80.5 p
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
65
Administrative enquiries
All enquiries relating to individual shareholder matters should be made to the registrar at: Capita Registrars
Shareholders Services Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU. The registrar
will assist with enquiries regarding any change of circumstances (e.g. name, address, bank account details,
bereavement, lost certificates, dividend payment and transfer of shares). All correspondence should be clearly
marked “Ukrproduct Group Ltd” and quote the full name and address of the registered holder of the shares.
Shareholder information, together with a range of online services for Ukrproduct Group Ltd shareholders is also
available at the registrar’s website www.capitaregistrars.com.
Investor Relations
Shared Value Ltd
20 Garrick Street
London WC2E 9BT, UK
Tel: +44 20 7321 5010
Email: ukrproduct@sharedvalue.net
UKRPRODUCT GROUP LTD
ANNUAL REPORT 2008
66