UkrProduct
Annual Report 2009

Plain-text annual report

UKRPRODUCT GROUP Annual Report 2009 TABLE OF CONTENTS CEO Comment and Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Chairman and Chief Executive Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Directors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Corporate Governance Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Corporate Social Responsibility Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Remuneration Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Statement of Directors’ Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 CONSOLIDATED INCOME STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 CONSOLIDATED STATEMENT OF FINANCIAL POSITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 CONSOLIDATED STATEMENT OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Corporate advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 CEO COMMENT AND FINANCIAL HIGHLIGHTS In 2009 the Group experienced a challenging trading environment. The Company management recognised the changing market conditions and optimised the prod- uct portfolio in response, focusing on growth in the more affordable market segments. The Company adjust- ed its output and production facilities to take advantage of growth in these segments, whilst also focusing on reducing costs and keeping bad debts at a low level. The Company expects the situation is likely to remain chal- lenging in 2010. We will continue to pursue our adopted strategy and seek to reduce costs and improve prof- itability. KEY FIGURES (Figures in brackets are for the twelve months ended 31 December, 2008) • Ukrainian economy has slowed during the year with real GDP declining 14.8% and the Ukrainian Hryvnia (“UAH”) depreciating against GBP by 23.9% on aver- age compared to 2008 • Group revenue declined by 16.9% YoY to GBP 43.2 million (GBP 51.9 million) but was up by 5.2% YoY in local currency to UAH 527.9 million (UAH 501.6 mil- lion) • Revenue in branded products segment declined by 21% YoY to GBP 29.9 million (GBP 37.8 million) but was flat in local currency at UAH 365.2 million • Market share in packaged butter segment increased to 13.5% (12%) and in processed cheese segment to 23.1% (21.6%) • Gross profit for branded products declined by 25.9% YoY to GBP 6.5 million (GBP 8.8 million) with Gross profit margin of 21.7% (23.1%) • Global market conditions for skimmed milk powder segment improved in second half of 2009. Revenue from SMP increased by 4% YoY to GBP 12 million (GBP 11.6 million) and by 31.7% YoY in local curren- cy to UAH 147.1 million (UAH 111.7 million) • Gross profit declined by 33.6% YoY to GBP 6.9 million (GBP 10.4 million) with gross profit margin of 16.1% (20.1%), following the unexpected increase in raw milk prices in the fourth quarter and a significant rise in energy costs • Earnings per share declined by 53.7% YoY to 2.5 p (5.4p) • Positive cash flow with cash balance standing at GBP 0.2 million (GBP 0.7 million at 2008 YE) and bank facilities in place for any future needs • Proposed final dividend payment of 0.20 per ordinary share for 2009FY (interim dividend of 0.20p), making a total dividend for the year of 0.40p per share. Sergey Evlanchik Chief Executive Officer 21 April 2010 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 1 CHAIRMAN AND CHIEF EXECUTIVE STATEMENT Dear Shareholder Please receive our annual report which provides an overview of Ukrproduct Group’s operating and finan- cial performance in 2009. In this year the Group witnessed a significant slowdown in the Ukrainian economy accompanied by 14.8% decline of real GDP. This led to a 9.2% decrease in per- sonal income and a 20.6% drop in retail turnover. The Ukrainian dairy market was impacted by the decline in consumers’ purchasing power and the subsequent switch of consumer demand to cheaper dairy products. Overall, the Ukrainian dairy market capacity has con- tracted across our key product categories in 2009. At the same time, Ukrproduct achieved market share increases in the butter and processed cheese segments. en its relationships with existing customers. The Group consolidated its customer base and focused on working only with solvent customers thus allowing it to maintain its level of bad debt at below 1% of total revenue in 2009. Throughout the year Ukrproduct carried out a number of marketing campaigns for its leading brands “Our Dairyman”, “Creamy Valley” and “Molendam”. Following these campaigns, the Group expanded its products pres- ence in several regions, including Southern and Central Ukraine. Sales volumes were broadly in line with the pre- vious year, declining by only 2% year on year. In 2009 Ukrproduct maintained its leading position in the packaged butter segment and increased its market share by 1.5% year on year to 13.5%. The Group also benefited from consumer preferences shift back into processed cheese from hard cheese due to higher prices of hard cheese in the second half of the year. As a result, the Group leveraged its strong distribution network to increase its share in the processed cheese segment by 1.5% year on year to 23.1% Facing challenging market conditions Ukrproduct under- took a number of initiatives in order to maintain its sales volumes in 2009. The Group optimised its product port- folio by focusing on higher margin products in butter, sliced soft cheese and cheese spreads categories, and introducing incentives to retailers for prepayments. This enabled Ukrproduct to attract new clients and to strength- In line with our stated strategy, we continued to look for opportunities to optimise our costs. As a result we have consolidated our manufacturing activities at four plants and shut down operations at the Zhmerinka plant. We have transferred the production of processed cheese and butter to other plants and achieved annualised cost savings amounting to approximately GBP300,000. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 2 Branded products We remained focused on further developing the brand- ed product segment. Specifically, we have strengthened our position in the premium market segment by expand- ing the product range and launched new high margin products under the premium “Molendam” brand, includ- ing cheese in bricks, sausage cheese and cheese spreads aimed at import substitution. At the same time our flexible production model allowed us to adjust our output to take advantage of the growth in consumer demand in more affordable market seg- ments. As a result, we increased sales volumes of pack- aged butter and processed cheese spreads under the “Creamy Valley” brand. During the year Ukrainian hard cheese producers responded to the weakening domestic demand by cut- ting prices and over saturating the market. As a result, the difference between the price of hard and processed cheeses narrowed leading to a partial shift in consumer demand from processed to hard cheese. Ukrprodut’s sales volumes and margins were impacted by this change. Hard cheese prices started to recover in the second half but profitability still remains low. Skimmed Milk Powder (SMP) Following the recovery in the global soft commodities mar- kets starting from Q2’09 Ukrproduct has leveraged its export operations to increase sales volumes (in tonnes) of SMP by nearly 64% year on year. The Group signed new sales contracts and started shipments of SMP in Ukraine to such companies as Danone, Wimm-Bill-Dann and others. Outlook Looking forward, we plan to grow sales in all product categories and segments of the Group, as well as to increase the capacity utilisation of both our production and distribution facilities. We intend to continue pro- moting our brands and products through a series of tar- geted marketing campaigns. Furthermore, we will explore the opportunities to broaden the range of exported products under our flagship brand “Our Dairyman” and our premium brand “Molendam”, as well as to expand into new export markets in the CIS. Following the recent elections in Ukraine we look forward to stability in the economy. Nevertheless the trading environment will likely remain challenging. We will there- fore continue to pursue our strategy of realigning prod- uct to different market segments, ensuring the product offering is appropriate for this market situation, seeking to reduce costs and improve profitability. Meanwhile the cash position of the Group is stable. On behalf of the Board, we would like to thank all our employees for all their hard work for the Company in what is a very challenging economic environment.” Jack Rowell Chairman Sergey Evlanchik Chief Executive Officer 21 April 2010 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 3 Gross Profit 2008 £ ‘000 8,750 1,274 Gross margin 2008 23.1% 11.0% 15.9% FINANCIAL REVIEW Revenue Ukrproduct consolidated revenues decreased by 16.9% year on year in 2009. The branded products segment continued to account for the majority of the Group’s revenues, respectively 69.2% in 2009 (72.8% in 2008). Branded products segment revenues declined 21% year on year. Skimmed milk powder revenues increased by 4.0% year on year following the recovery in global soft commodities markets. production to other parts of the Group which have gen- erated sizable savings. EBITDA and Profit after tax Group EBITDA declined by 27.5% year on year in 2009. Depreciation and amortisation expense declined by 19.8% year on year from GBP 1.8 million in 2008 to GBP 1.4 million in 2009. Profit after tax decreased by 54.3% year on year in 2009. Sales 2009 £ ‘000 Share in Sales 2008 Sales 2009 £ ‘000 Share in Sales 2008 Gross Profit 2009 £ ‘000 Gross margin 2009 Branded SMP Other Total 29,864 12,026 1,277 43,167 69.2% 27.9% 2.9% 100% 37,811 11,561 2,553 51,925 72.8% 22.3% 4.9% 100% 6,480 21.7% 267 182 2.2% 14.2% 406 6,929 16.1% 10,430 20.1% Gross Profit and Selling, Distribution & Administrative expenses (SG&A) Earnings per share and dividends The Group’s gross profit declined by 33.6% year on year in 2009 with gross profit margin of 16.1% in 2009, com- pared to 20.1% in 2008, as a result of the margin pres- sure in the processed cheese categories and skimmed milk powder segment. SMP gross profit margin declined to 2.2%, compared to 11% in 2008. SMP prices started to recover only towards the end of the year, in October. The branded products segment gross profit margin remained relatively stable at 21.7%, compared to 23.1% in the previous year. The Group’s gross profit margin was further impacted by 82.3% year on year increase in gas costs, 23.3% rise in electricity costs, as well as the increase in packaging costs. The Group’s Administrative, Selling and Distribution expenses decreased by 21.1% year on year from GBP 6.6 million in 2008 to GBP 5.2 million in 2009 due to cost optimisation measures. The Group’s cost reduction measures introduced in the second half of 2009 includ- ing the closure of the Zhmerinka plant and shifting of The Group’s basic earnings per share (EPS) declined 53.7% year on year from 5.4 pence to 2.5 pence in 2009. The diluted earnings per share declined 52.8% year on year from 5.3 pence to 2.5 pence in the same period. Ukrproduct paid an interim dividend of 0.20 pence per share on October 30, 2009. In line with the Group’s div- idend policy, the Board of Directors proposed to pay a final dividend of 0.20 pence per ordinary share for 2009, resulting in the total dividend payment of 0.40 pence per ordinary share for the full year 2009 (2008: 0.8 pence). The final dividend is expected to be paid on 16 July 2010 to shareholders of record as at 11 June 2010, subject to the approval of the AGM of shareholders. Cash flow and net debt Net cash generated by the operating activities totalled GBP 2.2 million in 2009 (2008: GBP 2.6 million). UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 4 Net cash used in investing activities totalled GBP 0.1 million in 2009 (2008: GBP 1.9 million), with GBP 0.6 million spent on capital expenditure (2008: GBP 1.4 mil- lion). During the year, Ukrproduct invested in maintain- ing its production capacities. In the second half of 2009, the Group reduced its capital expenditure to the level of essential maintenance expense. Net cash used in financing activities amounted to GBP 2.35 million in 2009 (2008: GBP 0.66 million). In the first half of the year, the Group repaid its debt to OTP Bank in the amount of GBP 1.4 million The Group’s cash balances stood at GBP 0.24 million as at 31 December 2009, compared with GBP 0.69 million as at 31 December 2008. The Group’s net debt was GBP 1.35 million as at 31 December 2009, compared with GBP 2.99 million as at 31 December 2008. The Group maintained a working capital facility in Ukrainian Hryvnia with OTP Bank equivalent to up to GBP 3.2 mil- lion (2008: GBP 4.0 million). As at 31 December 2009, Ukrproduct has drawn down GBP 1.6 million of the available facility (2008: GBP 3.2 million). The Group’s cash levels are sufficient to meet current debt obliga- tions in the short and medium term. Further information is disclosed in note 6 Bank facilities The Group maintained a working capital facility in Ukrainian Hryvnia with OTP Bank equivalent to up to GBP 3.2 million (2008: GBP 4.0 million). As at 31 December 2009, Ukrproduct has drawn down GBP 1.6 million of the available facility (2008: GBP 3.2 million). Ukrproduct also has available additional overdraft facil- ities for up to GBP 0.6 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 April 2010 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 5 THE BOARD OF DIRECTORS As of the date of the 2009 Annual Report approval, the Board members are as follows: Name Position Date appointed Jack Rowell Sergey Evlanchik Roman Prannichuk Alexander Slipchuk Non-executive Chairman November 2004 CEO CFO Executive Director April 2008 September 2008 November 2004 Jack Rowell (71) Non-executive Chairman Sergey Evlanchik (34) Chief Executive Officer Dr. Rowell has acted as Chairman of a number of companies in the public and private sector, mainly within the food production indus- try. He was previously an executive director on the board of Dalgety plc respon- sible for the consumer foods division. Jack also served as Chairman of Celsis plc. He has also been Manager of Bath Rugby, then the Champions of England and the English national team. 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- sible for the Group’s overall performance and strategy implementation and is a of Ukrproduct founder Group. He at studied 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-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- cused his activities on business development in the industrial sector of Ukraine, particularly 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 AIM mar- ket of the London Stock Exchange in 2005. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 6 Roman Prannichuk (35) Chief Financial Officer Alexander Slipchuk (43) Executive Director of Roman Prannichuk was appointed Chief Financial Officer in September 2008 and prior to this he 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- ferred by the Ukrainian Audit Chamber, as well as a holder of CAP certificate. Roman’s career as an account- ant and auditor is now in its 16th year. Within the Group he is responsible for the operational financial controls and the internal audit in Ukraine. Alexander Slipchuk studied High Far-Eastern at Engineering Marine School in Russia and graduated as a maritime navigator in 1989. Together with his partner Sergey Evlanchik, Alexander established the securities house Alfa-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 plants, the Starokonstantinovskiy Dairy Ukrproduct’s two main operating assets. He serves as the Group’s Executive Director in an advisory capacity. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 7 DIRECTORS’ REPORT The Directors present their report and the audited con- solidated financial statements of Ukrproduct Group Ltd for the year ended 31 December 2009. Principal Activities and business review Ukrproduct Group Ltd (the Company) is a holding com- pany for a group of dairy based FMCG (fast moving con- sumer goods) businesses located in Ukraine. The prin- 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 for the full year (2008: 0.80 pence). The final dividends will be paid on 16 July 2010 to shareholders on the reg- ister as at 11 June 2010, subject to shareholders’ approval at the 2010 Annual General Meeting. Directors Details of members of the Board of Directors are shown on page 6. The Directors’ interests in the share capital of the Company as at 31 December 2009 and 31 December 2008 are shown below: Shares Share options 2009 2008 2009 2008 14,422,383 14,487,383 14,422,383 14,487,383 - - - - 38,690 38,690 130,290 130,290 Executive Sergey Evlanchik Alexander Slipchuk Non-executive Dr Jack Rowell leading branded food producers in Ukraine with its own nationwide distribution network. More detailed com- mentary on the Group’s activities during the year, its financial performance, future plans, and prospects are outlined in the Chairman and Chief Executive Statement and in the Financial Review. Results and Dividends The results of the Group for the period are set out on page 19 and show a profit for the period of GBP 1.041 million (2008: GBP 2.277 million). An interim dividend of 0.20 pence per share was paid on 30 October, 2009. The shares are quoted ‘ex dividend’ from 7 October 2009. Based on the Group’s financial performance in 2009, the Board of Directors proposed to pay a final dividend of 0,20 pence per ordinary share for 2009, which would lead to 0,40 pence per ordinary share 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- 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. Financial Risks Facing the Group The principal risks of the business are credit risk, liquid- ity risk and market risk, including fair value or cash flow interest-rate risk and foreign exchange risk. The main purpose of the Group’s risk management programme is to evaluate, monitor and manage these risks and to min- UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 8 imise potential adverse effects on the Group’s financial performance and shareholders. The Chief Financial Officer of the Group is in charge of risk management and introduction of all policies as approved by the Board of Directors. Annual General Meeting Ukrproduct’s AGM will be held on 24 June 2010. The Notice of AGM and agenda will be sent to shareholders no less than 18 days prior to the date of the meeting. For further details of the Group’s risk management please see note 5 on page 37. Auditors 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- itive remuneration and incentive schemes. The Directors also consider it a priority to give employees the oppor- tunity to communicate their ideas and opinions to all levels of management, both directly and through various surveys. Ukrproduct Group had a total of 1,925 employ- ees as at 31 December 2009 (2008: 2,089). Payment Policy The Group has a general set of guidelines for paying its suppliers based on specific criteria. However, it is nor- 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. Going concern 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 month from the date of these financial statements. Baker Tilly Channel Islands Limited was appointed as the Group’s auditors for the 2009 financial year by the Board resolution following the Annual General Meeting of Shareholders held on June 26, 2009. Statement as to disclosure of information to the auditor 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- evant audit information of which the auditors are unaware. Jack Rowell Chairman 21 April 2010 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 9 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 experience directly relevant to the Group and its activities and its structure ensures that no one individual or Group domi- nates the decision making process. The Board Within the scope of the corporate governance proce- dures, the Board meets regularly to consider the finan- cial results, budgets, and major items of capital expen- 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 possibile, when Directors are present in either (or both) Jersey or Ukraine. The Board met four times during 2009 and all the direc- tors attended all meetings, with the exception of Mr Alexander Slipchuk, who attended three of four meet- ings, missing one by prior arrangement. Board Committees The Board is assisted by Audit and Remuneration Committees. Audit Committee The Board consists of one non-executive and three Executive Directors. The roles of the Chairman of the Board and the Chief Executive of the Group are held sep- arately with a clear division of responsibility between them. The Chairman of the Board is an independent non- executive Director. The Audit Committee consists of one non-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 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 10 the systems of internal control and risk management, and also for ensuring the integrity of the financial infor- mation reported to the shareholders. The Audit Committee met twice during 2009. Remuneration Committee The Remuneration Committee comprises one non-exec- utive Director, Jack Rowell. This Committee is sched- 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- 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. The Remuneration Committee held two meetings during 2009. Relations with shareholders The Group maintains regular contact with its institution- 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- site www.ukrproduct.com The Chief Executive Officer and Chief Financial Officer hold conference calls and meetings with major share- holders on a regular basis. The Board believes that it is essential to discuss with its major shareholders and keep them updated with regards to the Group’s financial performance, strategy 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 encourages them to exercise their voting right and participate with questions. Internal Control The Group adheres to comprehensive and strictly regu- 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- 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- tional structure of the Group; • a management structure which facilitates ease of communication 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- 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- 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 2009 11 CORPORATE SOCIAL RESPONSIBILITY REPORT Corporate Social Responsibility T he Board is committed to developing and imple- menting corporate social responsibility (CSR) poli- cies aimed at: • Promoting equality and fairness among employees, partners and suppliers • Ensuring safe working conditions • Maintaining the Group’s corporate reputation and ded- Employees The Group is committed to ensure 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- porate policy, regular training and development work- shops are conducted for Ukrproduct’s staff. These are aimed at all employee groups, including managerial, tech- nical and production personnel. The training programmes encourage staff to progress up the career ladder and are central to the Group’s continuing growth and success. ication to business ethics Health and safety • Supporting the communities in which the Group oper- ates • Establishing long-term and healthy relationships with the Group’s partners, customers and other parties. The main elements of the Group’s approach towards ful- filling the above objectives are as follows: Management at business units within the Group are responsible for developing and maintaining the underly- ing practices that provide for a safe working environment. Special attention is given to the production facilities, where the equipment, including lighting, air conditioning, workspace and other constituents, undergo constant reviews and improvements. Regular monitoring is carried out to ensure that the required standards are met and that employees use the provided communication channels to further improve their surrounding working conditions. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 12 Customers Customer satisfaction is at the core of the Group’s busi- 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- 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- tomers. Environment The Group recognises the importance of good environ- 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 — 2012 puts specific emphasis on acquiring and installing only the most advanced and environmentally-friendly production and auxiliary equipment. Food safety 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- tained within its supplier base. The certified food safe- ty management system in compliance with ISO 22000:2005 was implemented by the Group. This sys- tem provides the possibility to fully monitor all produc- tion stages — from forage control and sound health of the cattle to the final product distribution. During 2009, the Group successfully passed the audit conducted by Nestle. Nestle acknowledged high quality of Ukrproduct’s products, as well as advanced milk pow- der production technologies and multi-level quality control. 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 2009 13 REMUNERATION COMMITTEE REPORT T his 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-exec- utive Director, Jack Rowell. This Committee is sched- 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- 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. ties, competitive market rates and the performance of the Executive concerned. Consideration is also given to the cost of living and the Director’s professional experience. While determining the base salaries, the Committee also considers general aspects of the employment terms and conditions of employees elsewhere in the Group. Incentive bonus plans and equity arrangements The Committee plans to consider developing long-term equity incentive arrangements to make the overall Executive Remuneration structure more performance- related, more competitive and aligned with sharehold- 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 the to provide compensation which reflects Company’s contractual obligations. The Remuneration Committee held two meetings during 2009. Bonus Scheme Remuneration Policy The Company’s remuneration policy is to provide remu- neration packages which: The Committee has established a cash bonus scheme for Executive Directors based on the overall perform- ance of the Company and attainment of the operating profit targets. • are designed to attract, motivate and retain high cali- Non-executive directors bre Executives; • are competitive and in line with comparable businesses; • 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- formance related remuneration; and • set challenging performance targets and motivate Executives to achieve those targets both in the short and long-term. The appointments of non-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-appoint, as well as the determination of the fees of the non-executive Directors, rests with the Board. The non-executive Directors may accept appoint- ments with other companies, although any such appointment is subject to the Board’s approval and terms and conditions of Service Agreements. Base salary Directors’ remuneration The Committee reviews base salaries of the Executive Directors annually taking into account job responsibili- Details of the Directors’ cash remuneration are outlined below: UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 14 GBP Annual Salary/fee 2009 2008 Bonus 2009 2008 Non-cash compensation 2008 2009 Total cash remuneration 2009 2008 Executive Iryna Yevets (resigned) Dr Dmitry Dragun (resigned) - 22,500 40,000 Roman Prannychuk Alexander Slipchuk Sergey Evlanchik Non-executive Dr Jack Rowell 40,000 14,445 70,000 70,000 90,000 83,889 45,000 45,000 - - - - - - - - - - - - - - - - - - - - - - - - - - 22,500 40,000 40,000 14,445 70,000 70,000 90,000 83,889 45,000 45,000 Share based payments In 2005 the Company granted share options to the Directors. Details of the options outstanding at 31 December 2009 are shown below. The Directors’ Remuneration disclosed above does not include any amounts for the value of options to acquire shares of the Company. These options were not exercised. Directors Jack Rowell Share Option Exercise Price, pence Exercise Period 130,290 12.8 06/07/2013 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 15 STATEMENT OF DIRECTORS’ RESPONSIBILITIES The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the com- pany, 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- 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- 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- 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. In preparing the financial statements, the Directors are required 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- ty’s financial position and financial performance. Financial statements are available on the Group’s web- site in accordance with the applicable legislation gov- 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 April 2010 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 16 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF UKRPRODUCT GROUP LIMITED W e have audited the consolidated financial state- ments of Ukrproduct Group Limited for the year ended 31 December 2009 which comprise the consoli- dated income statement, consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of cash flows, consolidated statement of changes in equity and the related notes. These consolidated financial statements have been prepared under the accounting policies set therein. This report is made solely to the company’s members as a body, in accordance with Article 110 of the Companies (Jersey) Law 1991. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsi- bility to anyone other than the company and the compa- ny’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards as adopted by the European Union, (“IFRS”) are set out the Statement of Directors’ Responsibilities. in Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory require- 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 are properly prepared in accordance with the Companies (Jersey) Law 1991. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the company has not kept proper account- ing records and if we have not received all of the infor- mation and explanations we require for our audit. We read the other information contained in the Annual report and consider whether it is consistent with the audited financial statements. The other information UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 17 Opinion In our opinion: • • • the Group financial statements give a true and fair view, in accordance with IFRS, as adopted by the European Union of the state of the Group’s affairs as at 31 December 2009 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 con- sistent with the financial statements. David Hopkins for and on behalf of Baker Tilly Channel Islands Limited Chartered Accountants Jersey 21 April 2010 comprises only the Directors’ Report, CEO Comment and Financial Highlights, Chairman and Chief Executive’s Statement, Financial Review, Corporate Governance Report, Corporate Social Responsibility Report and Remuneration Committee Report. We con- sider the implications for our report if we become aware of any apparent misstatements or material inconsisten- cies with the financial statements. Our responsibilities do not extend to any other information. 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 examina- tion, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately dis- closed. 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 evidence to give reasonable assurance that the financial state- ments 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 state- ments. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 18 CONSOLIDATED INCOME STATEMENT Notes 7,21 22 22 22 22 23 25 30 27 Revenue Cost of Sales Gross profit Administrative expenses Selling and distribution expenses Other operating expenses Profit from operations Finance expense, net Effect of foreign currency translation Profit before taxation Income tax expense Profit for the year Attributable to: Equity holders Non-controlling interest Earnings per share: Basic Diluted Year ended 31 December 2009 £ ‘000 Year ended 31 December 2008 £ ‘000 (restated) 43,167 (36,238) 6,929 (2,578) (2,601) 20 1,770 (426) (249) 1,095 (54) 1,041 1,064 (23) 1,041 2,5 2,5 51,925 (41,494) 10,431 (3,221) (3,342) (645) 3,223 (592) (192) 2,439 (162) 2,277 2,320 (43) 2,277 5,4 5,4 The notes on pages 24 to 66 form an integral part of these consolidated financial statements. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 19 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2009 £ ‘000 Year ended 31 December 2008 £ ‘000 Profit for the year Other comprehensive income Depreciation of revaluation reserve of property, plant and equipment Reduction of revaluation reserve Tax effect from change in revaluation reserve Exchange differences on translation to the presentation currency Other comprehensive income for the year, net of tax Total comprehensive income for the year, net of tax Attributable to: Equity holders Non-controlling interest 1,041 127 - (32) (974) (879) 162 194 (32) 162 2,277 165 11 (44) 1,730 1,862 4,139 4,188 (49) 4,139 The notes on pages 24 to 66 form an integral part of these consolidated financial statements. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 20 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 Assets Non-Current Assets Property, Plant and equipment Intangible assets Available for sale investments Deferred tax assets Total non-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 Non-controlling interest Total equity Liabilities Non-Current Liabilities Deferred tax liabilities Promissory notes Total Non-Current Liabilities Current Liabilities Bank loans and overdrafts Trade and other payables Taxes payable Current income tax liabilities Total Current Liabilities Total equity and liabilities 8 9 10 11 12 13 34 14 15 19 20 30 11 16 18 8,534 1,065 86 63 9,748 2,445 4,738 1,031 79 236 8,529 18,277 4,107 (318) 10,779 14,568 30 14,598 459 - 459 1,581 1,575 32 32 3,220 18,277 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 30 5,520 22,503 These financial statements were approved and authorised for issue by the Board of Directors on 21 April, 2010 and were signed on its behalf by: The notes on pages 24 to 66 form an integral part of these consolidated financial statements. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 21 Sergey Evlanchick Chief Executive Officer 21 April 2010 CONSOLIDATED STATEMENT OF CASH FLOWS Year ended 31 December 2009 £ ‘000 Year ended 31 December 2008 £ ‘000 (restated) Cash flows from operating activities Profit for the year Adjustments for: Exchange difference Depreciation and amortisation Loss of disposal of non-current assets Interest income Interest expense Income tax expense Decrease / (increase) of inventories Decrease / (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 Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from sale of investments Purchase of available for sale investments Repayments / (proceeds) from loans issued Net cash used in investing activities Cash flows from financing activities (Repayments) / proceeds from issue of bonds net of issue costs Proceeds from issue of shares, net of issue costs Own shares acquisition Dividends paid Interest paid Net proceeds from short 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 1,041 249 1,405 (7) (1) 427 54 667 (1,290) (194) 2,351 1 (150) 2202 (616) 96 492 - (50) (78) - - (210) (253) (427) (1,461) - (2,351) (227) (228) 691 236 2,277 192 1,750 13 - 592 162 139 (1,236) (984) 2,905 - (264) 2641 (1,384) 62 - (530) (13) (1,865) (811) 628 - (523) (629) 361 329 (645) 131 (527) 1,087 691 The notes on pages 24 to 66 form an integral part of these consolidated financial statements. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 22 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to equity holders Share capital £ ‘000 Other Retained reserves earnings £ ‘000 £ ‘000 Total attributable to equity holders of the parent £ ‘000 Non- controlling interest £ ‘000 4,164 4,060 7,031 15,255 131 Balance at 1 January 2008 Depreciation on revaluation of non-current assets Reduction of revaluation reserve Exchange differences on translation to 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 Depreciation on revaluation of non-current assets Reduction of revaluation reserve Exchange differences on translation to the presentation 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) Decrease of Non-controlling interest Reduction of options reserve Balance at 31 December 2009 (175) - - 4,107 (124) (2) 124 8 - 6 (3,503) 1,736 (1,767) (3,629) - 1,868 2,320 - - 118 - 4,282 (3,629) - 510 (118) 823 4,188 (523) - 118 10,814 (95) (3) 95 - (1,761) 2,320 559 (523) 628 - 15,919 - (3) (984) (965) (1,949) (1,082) - (870) 1,064 (1,082) (35) - (24) (318) 194 (253) - - 24 10,779 (1,952) 1,064 (888) (253) (210) - - 14,568 - - (6) (6) (43) (49) - - - 82 - - (9) (9) (23) (32) - - (20) - 30 Total Equity £ ‘000 15,386 - 6 (1,773) (1,767) 2,277 510 (523) 628 - 16,001 - (3) (1,958) (1,961) 1,041 (920) (253) (210) (20) - 14,598 The notes on pages 24 to 66 form an integral part of these consolidated financial statements. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Group and principal activities The Company is a public limited liability entity regis- 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- 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 num- ber of employees of the Group during the year ended 31 December 2009 was 1,925 (2008: 2,089). 2. Summary of significant accounting policies The principal accounting policies adopted in the prepa- ration of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements have been pre- pared on a historical cost basis, except for property, plant and equipment, derivative financial instruments and available-for-sale financial assets that have been measured at fair value. The carrying values of recog- nised assets and liabilities that are hedged items in fair value hedges that would otherwise be carried at cost, are adjusted to record changes in the fair values attrib- utable to the risks that are being hedged. The consoli- dated financial statements are presented in British pounds sterling and all values are rounded to the near- est thousand (£000) except where otherwise indicated. Statement of compliance These consolidated financial statements have been pre- pared in accordance with International Financial International Accounting Reporting Standards, Standards and Interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the European Union. The majority of companies making up the Group main- 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 maintained in Ukrainian Hryvnia (“UAH”). The Hryvnia has also been adopted as the functional curren- cy for the purpose of the consolidated financial state- ments. Since the Ukrainian Hryvnia is not a major con- vertible or recognisable currency outside of Ukraine, and also because the Group’s public shareholder base has been located mostly in the UK, the financial information has been translated into British pounds sterling (here- inafter “GBP” or £) as the Group’s presentational cur- rency. The preparation of financial statements in con- formity 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. Basis of consolidation Following the early adoption by the Group of IFRS 3, Business Combinations (Revised) and IAS 27, Consolidated and Separate Financial Statements, the basis of consolidation changed with effect from 1 January 2009. The consolidated financial statements comprise the financial statements of Ukrproduct Group Limited and its subsidiaries as at 31 December 2009. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than half of the voting rights. The existence and effects of potential voting rights are considered when assessing whether the Group controls the entity. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceas- es. The financial statements of subsidiaries are prepared UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 24 for the same reporting period as the parent company, using consistent accounting policies. ent, unless the non-controlling interest had a binding obligation to cover these. All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a change of control, is accounted for as an equity trans- action. Losses are attributed to the non-controlling interest even if that results in a deficit balance. If the Group loses control over a subsidiary, it: • Derecognises the assets (including goodwill) and lia- bilities of the subsidiary • Derecognises the carrying amount of any non-control- ling interest • Derecognises the cumulative translation differences, recorded in equity • Recognises the fair value of the consideration received • Recognises the fair value of any investment retained • Recognises any surplus or deficit in profit or loss • Reclassifies the parent’s share of components previ- ously recognised in other comprehensive income to profit or loss. Basis of consolidation prior to 1 January 2009 In comparison to the above mentioned requirements which were applied on a prospective basis, the following differences applied: Non-controlling interests represented the portion of prof- it or loss and net assets that were not held by the Group and were presented separately in the consolidated income statement and within equity in the consolidated statement of financial position, separately from the par- ent shareholders’ equity. Acquisitions of non-controlling interests were accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired were recognised in goodwill. Losses incurred by the Group were attributed to the non- controlling interest until the balance was reduces to nil. Any further excess losses were attributable to the par- Upon loss of control, the Group accounted for the investment retained at its proportionate share of net asset value at the date control was lost. Changes in accounting policies and disclosures In preparing these financial statements, the following amendments to published standards and interpretations to existing standards effective in 2009 were adopted by the Group. • • • • • • • • • • • • • • IFRS 2, Share-based Payment: Vesting Conditions and Cancellations effective 1 January 2009; IFRS 2, Share-based Payment: Group Cash-settled Share-based Payment Transactions effective 1 January2010 (early adopted) ; IFRS 3, Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) effective 1 July 2009 (early adopted) including consequential amendments to IFRS 7, IAS 21; IFRS 7, Financial Instruments: Disclosures effective 1 January 2009; IFRS 8, Operating Segments effective 1 January 2009; IAS 1, Presentation of Financial Statements effective 1 January 2009; IAS 23, Borrowing Costs (Revised) effective 1 January 2009; IAS 32, Financial Instruments: Presentation and IAS 1 Puttable Financial Instruments and Obligations Arising; IAS 39, Financial Instruments: Recognition and Measurement – Eligible Hedged Items effective 1 July 2009; IFRIC 9, Remeasurement of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement effective for periods ending on or after 30 June 2009; IFRIC 13, “Customer Loyalty Programmes” IFRIC 16, “Hedges over net investment in a Foreign Operation” IFRIC 18, Transfers of Assets from Customers effec- tive 1 July 2009, Improvements to IFRSs. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 25 IFRS 2, Share-based Payment (Revised) IFRS 7, Financial Instruments: Disclosures The IASB issued an amendment to IFRS 2 which clarifies the definition of a vesting condition and prescribes the treatment for an award that is effectively cancelled. The Group adopted this amendment as of 1 January 2009. It did not have an impact on the financial position or per- formance of the Group. The IASB issued an amendment to IFRS 2 that clarified the scope and the accounting for group cash-settled share- based payment transactions. The Group adopted this amendment as of 1 January 2009. It did not have an impact on the financial position or performance of the Group. IFRS 3, Business Combinations (Revised) and IAS 27, Consolidated and Separate Financial Statements (Amended) The Group adopted the revised standard from 1 January 2009. IFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contin- gent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results. IAS 27 (Amended) requires that a change in the owner- ship interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by IFRS 3 (Revised) and IAS 27 (Amended) will affect future acquisitions or loss of control of subsidiaries and transactions with non-controlling interests and have no impact on the current stature and performance of the Group due to absence of transactions and balances that could be influenced by the amendments. The change in accounting policy was applied and had no material impact on earnings per share. The amended standard requires additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognised at fair value. In addition, a rec- onciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and assets used for liquidity management. IFRS 8, Operating Segments IFRS 8 replaced IAS 14 Segment Reporting upon its effective date. The Group concluded that the operating segments determined in accordance with IFRS 8 are the same as the business segments previously identified under IAS 14. IFRS 8 disclosures are shown in Note 7, including the related revised comparative information. IAS 1, Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconcilia- tion of each component of equity. In addition, the stan- dard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked state- ments. The Group has elected to present two statements. IAS 23, Borrowing Costs The main change from the previous version is the removal of the option of immediately recognition as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The adoption of these amendments did not impact on the financial position of the Group considering that the borrowing costs are not a material item for the Group. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 26 IAS 32, Financial Instruments: Presentation and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation IFRIC 16, Hedges of a Net Investment in a Foreign Operation The standards have been amended to allow a limited scope exception for puttable financial instruments to be classified as equity if they fulfil a number of specified criteria. The adoption of these amendments did not have any impact on the financial position or the performance of the Group. IAS 39, Financial Instruments: Recognition and Measurement — Eligible Hedged Items The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. This also covers the designation of inflation as a hedged risk or portion in particular situations. The Group has concluded that the amendment will have no impact on the financial position or performance of the Group, as the Group has not entered into any such hedges. IFRIC 9, Reassessment of Embedded Derivatives and Instruments: Recognition and IAS 39, Financial Measurement This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative must be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on cir- cumstances that existed on the later of the date the enti- ty first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. IAS 39 now states that if an embedded derivative cannot be reliably measured, the entire hybrid instrument must remain classified as at fair value through profit or loss. IFRIC 13, Customer Loyalty Programmes IFRIC 13 requires customer loyalty credits to be accounted for as a separate component of the sales transaction in which they are granted. IFRIC 16 provides guidance on the accounting for a hedge of a net investment. As such it provides guidance on iden- tifying the foreign currency risks that qualify for hedge accounting in the hedge of a net investment, where with- in the group the hedging instruments can be held in the hedge of a net investment and how an entity should deter- mine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. IFRIC 18, Transfer of Assets from Customers The interpretation clarifies the treatment 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 construct an item of property, plant and equipment) that the entity must then use either to connect the customer 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 measured Improvements to IFRSs In May 2008 and April 2009 the IASB issued omnibus amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: clarifies that the disclosures required in respect of non-current assets and disposal groups classified as held for sale or discontinued oper- ations are only those set out in IFRS 5. The disclosure requirements of other IFRSs only apply if specifically required for such non-current assets or discontinued operations. IFRS 8, Operating Segment Information: clarifies that seg- ment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 27 As the Group’s chief operating decision maker does review segment assets and liabilities, the Group has continued to disclose this information in Note 7. IAS 1, Presentation of Financial Statements: Assets and liabilities classified as held for trading in accordance with IAS 39 Financial Instruments: Recognition and Measurement are not automatically classified as current in the statement of financial position. The Group analysed whether the expected period of realisation of financial assets and liabilities differed from the classifi- cation of the instrument. This did not result in any reclassification of financial instruments between current and non-current in the statement of financial position. IAS 16, Property, Plant and Equipment: Replaces the term “net selling price” with “fair value less costs to sell”. The Group amended its accounting policy accord- ingly, which did not result in any change in the financial position. IAS 20, Accounting for Government Grants and Disclosures of Government Assistance: Loans granted with no or low interest will not be exempt from the requirement to impute interest. Interest is to be imputed on loans granted with below-market interest rates. This amendment did not impact the Group as the government assistance received is not loans but direct grants. IAS 23, Borrowing Costs: The definition of borrowing costs is revised to consolidate the two types of items that are considered components of ‘borrowing costs’ into one — the interest expense calculated using the effective interest rate method calculated in accordance with IAS 39. The Group has amended its accounting pol- icy accordingly which did not result in any change in its financial position. IAS 36, Impairment of Assets: When discounted cash flows are used to estimate ‘fair value less cost to sell’ additional disclosure is required about the discount rate, consistent with disclosures required when the discount- ed cash flows are used to estimate ‘value in use’. This amendment had no immediate impact on the consoli- dated financial statements of the Group because the recoverable amount of its cash generating units is cur- rently estimated using ‘value in use’. The amendment clarified that the largest unit permitted for allocating goodwill, acquired in a business combina- tion, is the operating segment as defined in IFRS 8 before aggregation for reporting purposes. The amend- ment has no impact on the Group as the annual impair- ment test is performed before aggregation. IAS 38, Intangible Assets: Expenditure on advertising and promotional activities is recognised as an expense when the Group either has the right to access the goods or has received the service. This amendment has no impact on the Group because it does not enter into such promotional activities. The reference to there being rarely, if ever, persuasive evidence to support an amortisation method of intangi- ble assets other than a straight-line method has been removed. The Group reassessed the useful lives of its intangible assets and concluded that the straight-line method was still appropriate. Other amendments resulting from Improvements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group: IFRS 2, Share-based Payment; IFRS 7, Financial Instruments: Disclosures; IAS 8, Accounting Policies, Change in Accounting Estimates and Error; IAS 10, Events after the Reporting Period; IAS 19, Employee Benefits; IAS 27, Consolidated and Separate Financial Statements; IAS 28, Investments in Associates; IAS 31, Interest in Joint Ventures; IAS 34, Interim Financial Reporting; IAS 38, Intangible Assets; UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 28 IAS 40, Investment Properties; IAS 39, Financial Instruments: Recognition and Measurement; FRIC 9, Reassessment of Embedded Derivatives; IFRIC 16, Hedge of a Net Investment in a Foreign Operation. Comparative information Certain information in the consolidated income state- ment and the consolidated statement of cash flows has been reclassified to conform with the presentation for- mat adopted in the current year. The restatement has no effect on the financial results or financial position of the Group. 2.2. Significant accounting policies a) 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- counts after eliminating sales within the Group. Revenues and expenses are recognised on an accruals basis. The income is recognized when cash compensa- tions are eliminated and paid to distributed after the goods sold. b) Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is meas- ured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non- controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and perti- nent conditions as at the acquisition date. This includes the separation of embedded derivatives in host con- tracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit and loss. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the con- tingent consideration which is deemed to be an asset or liability, will be recognised in accordance with IAS 39 either in profit or loss or as change to other comprehen- sive income. If the contingent consideration is classified as equity, it shall not be remeasured until it is finally set- tled within equity. Goodwill is initially measured at cost being the excess of the consideration transferred over the Group’s net iden- tifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the pur- pose of impairment testing, goodwill acquired in a busi- ness combination is, from the acquisition date, allocat- ed to each of the Group’s cash generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the opera- tion. Goodwill disposed of in this circumstance is meas- ured based on the relative values of the operation dis- UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 29 posed of and the portion of the cash-generating unit retained. c) 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: (i) the Ukrainian Hryvnia is the currency of the pri- mary economic environment in which the Group operates. Consequently the Ukrainian Hryvnia is the most appropriate functional currency for the Group; (ii) 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 Hryvna figures to British pounds for presentation purposes: (i) 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 trans- actions took place. (ii) for comparative figures all assets and liabilities are translated at the closing rate existing at the rele- vant balance sheet date. Income and expense items are translated at rates approximating to those ruling when the transactions took place. (iii) all exchange differences resulting from the appli- cation of the translation methods described above are recognised directly in equity as a separate com- ponent of equity (IAS 21.39 (c)) Actual exchange rates applied in the translation are detailed in note 2(n) below. d) Segment reporting ating decision makers in order to allocate resources to the segment and to assess its performance. The Senior Management and the members of the Board of Directors of the Group are identified as the chief operating deci- sion makers. Segments in the consolidated financial statements are defined in accordance with the type of products sold or services provided. A geographical segment is engaged in providing prod- ucts or services within a particular economic environ- ment that are subject to risks and returns different from those of segments operating in other economic environ- ments. e) Property, plant and equipment Figures calculated using Ukrainian statutory accounting rules, have been adopted as deemed depreciated histor- ical cost for property, plant and equipment as at 1 January 2004. Subsequent additions have been record- 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. This change of accounting policy was made on the grounds that management 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 revaluation model has not been applied retrospectively. All categories of property, plant and equipment are sub- sequently carried at fair value at the date of revaluation, less any subsequent accumulated depreciation and sub- 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). Operating segments are reported in a manner consistent with the internal reporting as provided to the chief oper- Depreciation is applied to all items of property, plant and equipment with the exception of land. Depreciation is UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 30 calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows: Buildings 20 — 40 years; Plant and machinery 7 — 15 years; Equipment and motor vehicles 3 — 10 years. Gains and losses on disposals are determined by com- paring proceeds with the carrying amount and are included in operating profit. f) 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 construction. Upon the completion, the Group assess whether there is any indication that an asset may be impaired. If any such indication exists, the Group per- forms impairment testing as described in note 2 (h). In case no indication exists that the asset may be impaired, all accumulated costs of the asset are trans- ferred to the relevant fixed asset category and depreci- ated at applicable rates from the time the asset is com- pleted and ready for use. g) 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-line method (7 years). The amortisation expense is included Income within Administrative expenses Statement. the in Trademarks are shown at historical cost. Trademarks have finite useful lives and are carried at cost less accu- mulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trade- marks over their estimated useful lives (20 years). The amortisation expense is included within Selling & Distribution expenses in the Income Statement. The Customer list is shown at fair value at the date of revaluation obtained by using the estimates of the inde- pendent valuers, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of the customer list over its estimated useful lives (20 years). The amortisation expense is included in expenses in the Income Statement. h) Impairment of assets Assets with indefinite useful lives 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 busi- ness whenever events or changes in circumstances indi- cate that the carrying amount of an asset may not be recovered. 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 in an arm’s length transaction while value in use is the present discounted value of estimat- ed future cash flows expected to arise from the continu- ing 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 gen- erating 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. i) Inventories Inventories are stated at the lower of cost and net real- isable value. Cost is determined using the first-in, first- out method. The cost of finished and unfinished goods comprises raw materials, direct labour, other direct costs and related production overheads (based on nor- mal operating capacity) but excludes borrowing costs. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 31 j) Share-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- 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- es received from persons other than employees is diffi- cult to identify, the fair value of the instruments granted is charged to the income statement over the vesting period. k) Income taxes Taxation has been provided for in the financial state- 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 in the Income Statement. Deferred income tax is provided, using the balance sheet liability method, for all temporary differences arising 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 proba- ble 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 enacted at the balance sheet date. l) Value added tax (VAT) on export of goods and provision of works or services to be used outside Ukraine. VAT output equals the total amount of VAT collected with- in a reporting period, and arises on the earlier of the date of shipping goods to a customer or the date of receiving payment from the customer. VAT input is the amount that a taxpayer is entitled to offset against his VAT liability in a reporting period. According to the Ukrainian laws, rights to VAT input arise on the earlier of the date of pay- ment to the supplier or the date goods are received. m) Short-term employee benefits Short-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-term employee benefits a liability (accrued expense), after deducting any amount already paid. n) 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- 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. VAT is levied at two rates: 20% on Ukrainian domestic sales and imports of goods, works and services and 0% 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- UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 32 Official rate as at December 31, 2009 Official rate as at December 31, 2008 Weighted average rate for 2009 Weighted average rate for 2008 age rate for the year was calculated based on the daily exchange rates officially set by the Bank of Ukraine. o) 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. p) 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- es only in-the-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- tarily classify any financial assets as being at fair value through profit or loss. Loans and receivables: These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise prin- cipally through the provision of goods and services to customers (trade receivables), but also incorporate other types of contractual monetary asset. They are car- ried at amortised cost using the effective interest method less any provision for impairment. Impairment provisions are recognised when there is objective evidence (such as significant financial difficul- ties on part of the counterparty or default or significant Hryvnia for 1 GBP (£) 12.6647 11.1430 12.2284 9.6613 Hryvnia for 1 USD ($) 7.9850 7.0700 7.7962 5.2842 delay in payment) that the Group will be unable to col- lect all of the amounts due under the terms receivable, 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- in administrative expenses in the income statement. On confirmation that the trade receivable will not be col- 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- gotiations will lead to changes in the timing of payments rather than changes to the amounts owed and, in con- 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-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-derivative financial assets not included in the above categories are classi- fied as available-for-sale and comprise principally the Group’s investments in entities not qualifying as sub- sidiaries as well as investment certificates. They are car- ried at fair value with changes in fair value recognised directly in a separate component of equity (available- for-sale reserve). Where there is a significant or pro- UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 33 longed decline in the fair value of an available for sale financial asset (which constitutes objective evidence of impairment), the full amount of the impairment, includ- ing any amount previously charged to equity, is recog- nised in the Income statement q) Financial liabilities The Group classifies its financial liabilities into cate- gories depending on the purpose for which the liability was acquired. The Group has not classified any of its lia- bilities at fair value through profit and loss. Financial liabilities held at amortised cost include the following items: Trade payables and other short-term monetary liabili- 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 interest bearing liabilities are subsequently measured at amor- tised 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 lia- bility carried in the balance sheet. "Interest expense" in this context includes initial transaction costs and inter- est payable on redemption, as well as any interest or coupon payable while the liability is outstanding. r) Dividends Equity dividends are recognised when they become legal- 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. s) Share issue costs All qualifying transaction costs in respect of the issue of shares are accounted for as a deduction from share pre- mium, net of any related tax deduction. Qualifying trans- 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. t) Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred. u) Operating leases Operating leases and the corresponding rental charges are charged to the income statement on a straight 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- 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- tions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabili- ties within the next financial year are discussed below. • • Estimates of fair value of property, plant and equip- ment based on revaluation. The Group is required, periodically as determined by the management, to conduct revaluations of its property, plant and equip- ment. Such revaluations are conducted by independ- ent valuers who 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 and equipment are amortised or depreciated over their useful lives. Useful lives are based on the manage- ment’s estimates of the period that the assets will generate revenue, which are periodically reviewed for UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 34 • • continued appropriateness. Due to the long life of cer- tain 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- 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 esti- mates of whether additional taxes and interest will be due. These tax liabilities are recognised when, despite the company’s belief that its tax return positions are supportable, the company believes that certain posi- tions are likely to be challenged and may not be fully sustained upon review by tax authorities. The compa- ny believes that its accruals for tax liabilities are ade- quate for all open audit years based on its assessment of many factors including past experience and inter- pretations of tax law. This assessment relies on esti- mates 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 recorded, such differences will impact income tax expense in the period in which such determination is made. Further information is contained in notes 11 and 25. • 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 disclosed 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 pro- ceedings and at each balance sheet date, in order to assess the need for provisions in its financial state- ments. Among the factors considered in making deci- sions on provisions 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 voluntar- ily applies non-domestic standards — ISO and HASSP — to some of the Group’s operations. For the industri- al 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 technical specifications are not met or the delivery of products 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 state- ments. Realisation of any such contingent liabilities not currently recognised or disclosed in the financial state- ments could have a material effect on the Group’s financial position. Application of these accounting principles to quality claims requires the Group’s man- agement to make determinations about the future mat- ters that may, at the time of determination, be beyond management’s control. Among the factors considered in making decisions on quality claims provisions are: the nature of the claim, the quantifiable variances in quality giving rise to a claim, the potential loss from satisfying the claim and any decision of the Group’s management as to how it will respond to the claim. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 35 4. Subsidiaries The consolidated financial statements include the results of the companies set out in table below. Country of incorporation Proportion of the Group’s ownership interest 2009 2008 Method of consolidation Molochnik OJSC* Starokonstantinovskiy Molochniy Zavod SC* Starkon-Moloko LLC* Krasilovsky Molochny Zavod Private Enterprise SC* Zhmerinsky Maslosyrzavod Private Enterprise SC * Zhmerinsky Maslosyrzavod LLC* Letichivsky Maslozavod Private Enterprise SC* Letichivsky Maslozavod OJSC* Teofipolskiy Dairy Plant Private Enterprise SC* Podilskiy Dairy Plant Private Enterprise SC***** Milk investments Private Enterprise SC* Avtopark Starokonstantinov LLS** ATP Centr LLC** Tekhnomolprom Private Enterprise SC** Ukrprodexpo SC* Ukrprodexport Private Enterprise SC* Ukrproduct-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*** Premierproduct-Donetsk Private Enterprise SC**** Premierproduct-Mikolaiv Private Enterprise SC**** Premierproduct-Dnipro Private Enterprise SC**** Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine 97.6% 97.6% Acquisition 100% 100% 100% 100% 100% 100% 100% Acquisition Acquisition Acquisition - Acquisition - 100% Acquisition 100% - Acquisition - 92.7% Acquisition 100% - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Acquisition Acquisition - Acquisition 100% Acquisition - - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 36 Premierproduct-Jitomir Private Enterprise SC**** Premierproduct-Lviv Private Enterprise SC**** Premierproduct-Harkiv Private Enterprise SC**** Premierproduct-Centr Private Enterprise SC**** Ukrproduct Group CJSC LinkStar Limited Dairy Trading Corporation Limited St. Invest Holding LTD Ukrproduct Group LTD Country of incorporation Proportion of the Group’s ownership interest 2009 2008 Method of consolidation Ukraine Ukraine Ukraine Ukraine Ukraine Cyprus BVI BVI Jersey 100% 100% 100% 100% 100% 100% 100% 100% - - - - 100% 100% 100% Acquisition Acquisition Acquisition Acquisition Merger Merger Merger - Acquisition Parent * ** *** **** ***** The companies are held through Ukrproduct Group CJSC which is a 100%-owned subsidiary of the Company The companies are held through LinkStar Limited which is a 100%-owned subsidiary of the Company Subsidiaries of Agrospetsresursy LLC. Subsidiaries of St. Invest Holding LTD, the Group’s specialised distribution companies. The company is held through Starkon-Moloko LLC which is a 100% — owned subsidiary of the Company A reorganisation of the Group’s legal structure took place in 2009 and resulted in: • The subsidiaries of Agrospetsresursy LLC (the Group’s former specialised distribution companies) transferred their principal business and assets to the subsidiaries of St. Invest Holding LTD the Group’s new specialized distribution companies. (The subsidiaries of Agrospetsresursy LLC are in the process of being liquidated); • Zhmerinsky Maslosyrzavod PE SC and Letichivsky Maslozavod PE SC ceased being subsidiaries of Zhmerinsky Maslosyrzavod LLC and Letichivsky Maslozavod OJSC respectively; and • new subsidiaries of Ukrproduct Group CJSC and LinkStar Limited were established and these became the owners of the Group’s production assets. 5. Financial instruments — Risk Management The principal risks facing the Group’s business are cred- it risk, liquidity risk and market risk, including fair value or cash flow interest-rate risk and foreign exchange risk. The main purpose of the Group’s risk management pro- 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- 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 fol- lows: trade and other receivables investments in unquoted equity securities in Ukraine loans issued • • • • cash and cash equivalents • bank overdrafts • promissory notes • trade and other payables UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 37 Financial assets Loans and receivables: - trade and other receivables (excluding non-financial assets) - cash and cash equivalents - loans issued Available for sale investments: - unquoted investments Financial liabilities Held at amortised cost: - bank loans - overdrafts - promissory notes - other financial liabilities - trade and other payables (excluding non-financial assets) As at December 2009 £ ‘000 As at December 2008 £ ‘000 4,264 236 79 86 4,665 1,574 7 - - 1,475 3,056 5,129 691 35 557 6,412 3,200 165 285 35 1,475 5,160 General objectives, policies and processes The Group’s overall risk management programme recognises 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 identifies and evaluates financial risks in close co-operation with the Group’s operating units. The management board provides broad guidance and operating principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest-rate risk, credit risk, and investing excess liquidity. The Board has overall responsibility for the determina- tion 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 imple- mentation 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 appropriateness of the objectives and policies it sets. The Group’s internal operating auditors review the risk management poli- cies 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. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 38 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 contract 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- 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- 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- on-delivery payments terms and no-returns policy (quality-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 available, and in some cases bank references. Purchase limits are established for each customer, which represents the maximum open amount without requiring approval from the CEO. These limits are reviewed quarterly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group on a prepayment basis only. Quantitative disclosures of the credit risk exposure in relation 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- 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- due is expected to remain stable or even fall because in Ukraine the Group deals increasingly with the modern- format retailers whose creditworthiness is conducive to the payment discipline required by the Group. 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- 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- 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- tomer premises — 2 weeks thereafter filing a claim to the commercial court for repayment of the amount overdue and late payment fees — 2 weeks thereafter • • obtaining a court order for repayment of the amount due and collaboration with bailiff — 2 weeks there- after. As a result of the credit control and risk assessment pro- cedures, the Group does not expect any losses from non-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- 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 security or other credit enhancements. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 39 The Group does not enter into derivatives to manage credit risk, although in certain isolated cases may take steps to mitigate such risks if it is sufficiently concen- trated. Maturities of the Group’s financial instruments are dis- closed further in the notes 13 and 16 of these financial statements. Liquidity risk Liquidity risk is a function of the possible difficulty to be encountered in raising funds to meet financial obliga- tions. The Group’s policy is to ensure that it will always have sufficient cash to enable it to meet its obligations as they fall due by maintaining the minimum cash bal- 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 — and long-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 man- agement is to reduce liquidity risk by fixing interest rates and hence cash flows on substantially all of its long- term borrowings. The CEO (and the Board, if requested) receives rolling quarterly 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 busi- ness, the Group relies on a combination of the available overdraft facilities and cash balances to fund the on- going liquidity needs. Capital expenditures are usually funded though longer-term bank loans. In case of the inadequate cash balances and the overdraft facilities close to the agreed ceilings, the Group is expected to revert to the emergency funding made available through temporary freeze to the current portion of capital spend- ing, immediate operating cost reductions, postpone- ment 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. Market risk Market risk may arise from the Group’s use of interest bearing, tradable and foreign currency financial instru- ments. Market risk comprises fair value interest rate risk, foreign exchange risk and commodity price risk. Cash flow and fair value interest-rate risk As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are sub- stantially independent of changes in market interest rates. The Group’s interest-rate risk arises only from overdrafts, and is considered to be insignificant. The Group analyses the interest rate exposure on a monthly basis. As at 31 December 2009 and 2008, all Group’s borrowings were at fixed rates (note 16). 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 analy- sis, in particular the likelihood of the change in interest rates, supplementary (alternative) funding and the cost of arranging the back-up funding facilities (As at 31 December 2008 the maximum exposure (impact on profit or loss and net assets) of a 700 basis-point shift (being the maximum reasonably possible expectation of changes in interest rates) would be an increase of GBP 80,000 or a decrease of GBP 80,000 ). 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 foreign 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-processed materials and other components of the UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 40 manufacturing cost are made in Ukraine and are entirely Hryvnia-denominated. All outstanding balances of trade payable by the Group are in Hryvnias. Currency analysis is provided in Note 32 and other equity reserves. The Directors view their role as that of corporate guardians responsible for preserva- tion and growth of the capital, as well as for generation of the adequate returns to shareholders. Management believes that foreign exchange risk is immaterial at present and is likely to remain so in the future. No sensitivity analysis is required under circum- stances. Commodity price risk The Ukraine economy has been characterized by high rates of inflation. As we tend to experience inflation-driv- 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 competi- tive 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 oper- ating margins. The Group is also exposed to commodity price risk for skimmed milk powder. The price for this product is pre- dominately determined by the world market and the activities of large international trading companies in this market. Since the beginning of 2009 global skimmed milk powder prices started to drop. The Group took measures in order to reduce its dependence on volatile commodity prices by increasing production of other products, which were more stable. The Group controls the prices for branded products through timely changes of sales prices according to the market development and competition. The prices for SMP in Ukraine tend to depend on the world SMP prices and if in 2009 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 — 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 ordinary share capital, share premium, accumulated retained earnings 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 expec- tations of shareholders. The Group sets the amount of capital it requires in propor- tion to risk. The Group manages its capital structure and makes adjustments to it in the light of changes in eco- nomic conditions and the risk characteristics of the current trading environment. The Group’s core assets consist pre- dominantly 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 div- idends paid to shareholders, repay the debt, return cap- ital 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 monitors 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 2009, 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 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 41 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 jus- tified only under exceptional circumstances and requires the full Board’s consent. The D/E ratios at 31 December 2009 and at 31 December 2008 were as follows. As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 Total debt Less: Cash and cash equivalents Net debt Total equity D/E ratio 1,581 236 1,345 14,598 9.21% 3,685 691 2,994 15,919 18.8% UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 42 7. Segment information At 31 December 2009, the Group was organised internationally into three main business segments: 1. Branded product — (processed cheese, hard cheese, butter, packaged butter and packaged spreds) 2. Skimmed milk powder. 3. Other (transport services and resale of third-party goods). The segment results for the year ended 31 December 2009 are as follows: £ ‘000 Branded products Skimmed milk powder Sales, Total Intra-segment sales Sales to external customers Gross profit Administrative expenses Selling and distribution expenses Other operating expenses Profit from operations Finance expenses Loss from exchange differences 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 72,757 42,893 29,864 6,480 (1,686) (2,218) - 2,576 - - 2, 576 - 2,576 11,626 - - 11,626 933 - - 933 989 588 28,177 16,151 12,026 267 (210) (29) - 28 - - 28 - 28 1,661 - - 1,661 - - - - 280 110 Other 8,138 6,861 1,277 182 (14) (24) - 144 - - 144 - 144 505 - - 505 - - - - 10 6 Un- allocated Total - - - - (668) (330) 20 (978) (426) (249) (1,653) (54) (1,707) - 4,422 63 4,485 - 2,287 459 2,746 126 15 109,072 65,905 43,167 6,929 (2,578) (2,601) 20 1,770 (426) (249) 1,095 (54) 1,041 13,792 4,422 63 18,277 - 2,287 459 3,679 1,405 719 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 43 The unallocated corporate liabilities represent bank loans, overdrafts and accruals. The basis of pricing of the inter-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 2008 are as follows: £ ‘000 Sales, Total Intra-segment sales Sales to external customers Gross profit Administrative expenses Selling and distribution expenses Loss from exchange differences Profit from operations Finance expenses Other operating 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 Branded products Skimmed milk powder 93,001 55,191 37,810 8,751 (2,310) (2,977) - 3,464 - - 3,464 - 3,464 16,662 - - 16,662 794 - - 794 1,379 1,204 20,106 8,545 11,561 1,274 (241) (53) - 980 - - 980 - 980 2,026 - - 2,026 363 - - 363 279 319 Other 9,278 6,724 2,554 406 (49) (46) - 311 - - 311 - 311 822 - - 822 311 - - 311 17 12 Un- allocated Total - - - - (621) (266) (645) (1,532) (592) (192) (2,316) (162) (2,478) - 2,876 117 2,993 - 4,337 697 5,034 75 20 122,385 70,460 51,925 10,431 (3,221) (3,342) (645) 3,223 (592) (192) 2,439 (162) 2,277 19,510 2,876 117 22,503 1,468 4,337 697 6,502 1,750 1,555 The unallocated corporate liabilities represent bank loans, overdrafts, bonds and accruals. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 44 Secondary reporting format — geographical segments: Sales by country (consignees) Year ended 31 December 2009 £ ‘000 Sales by country (consignees) Year ended 31 December 2008 £ ‘000 Ukraine Singapore Holland Germany Turkey Azerbaijan Other countries Total 30,827 4,480 1,810 1,366 1,141 793 2,750 43,167 Ukraine Germany Azerbaijan Nigeria Turkey Other countries 42,550 1,676 1,458 1,461 660 4,120 51,925 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 2009 the Group expanded the geography of milk powder sales and continues to increase the sales of butter and processed cheeses to the Eastern Asia. The Group has no customers volume of sales to which exceeds 10% from the total amount. The segmental information for 2008 has been restated to reflect the reclassification of certain amounts previously included in distribution expenses. 8. Property, plant and equipment Cost or valuation Opening balance at 1 January 2008 Additions Assets under Construction £ ‘000 578 1,350 Transfers to/from Assets Under Construction (AUC) (1,734) Disposals Exchange differences on translation to the presentation currency Closing balance Accumulated depreciation Opening balance at 1 January 2008 Depreciation charge - (3) 191 - - Land and Buildings Machinery £ ‘000 £ ‘000 Plant and Vehicles and equipment Total £ ‘000 £ ‘000 7,895 - 477 (100) (787) 7, 485 2,151 327 5,748 4 369 (238) (555) 5,328 1,971 713 3,770 17,991 12 888 1,366 - (110) (448) (457) (1,802) 4,103 17,107 1,966 644 6,088 1,684 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 45 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 2008 Cost or valuation Opening balance at 1 January 2009 Additions Transfers from AUC Exclusion from Group Disposals Exchange differences on translation to the presentation currency Closing balance at 31 December 2009 Accumulated depreciation Opening balance at 1 January 2009 Depreciation charge Exclusion from Group Disposals Exchange differences on translation to the presentation currency Closing balance at 31 December 2009 Net book amount at 31 December 2009 Net book amount at 31 December 2008 Net book amount at 31 December 2007 - - - 191 585 (194) (2) - (107) 473 - - - - - - 473 191 578 (35) (43) (98) (176) (288) 2,155 (373) 2,268 (355) (1,016) 2,157 6,580 7, 485 5,328 4,103 17,107 - - - (2) (856) 6,627 2,155 277 - - (335) 2,097 4,530 5,330 5,744 - 169 - (90) (635) 4,772 2,268 546 - (6) (312) 2,496 2,276 3,060 3,777 120 25 (2) 705 - (4) (183) (275) (939) (2,537) 3,124 14,996 2,157 516 (1) 6,580 1 339 (1) (136) (142) (667) (1,314) 1, 869 1,255 6,462 8,534 1,946 10,527 1,804 11,903 Fixed assets with a net book value of GBP 6,507,967 at 31 December 2009 (GBP 5,837,414 at 31 December 2008) 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 valuation included a combination of different methods used by two independent appraisers: “Podilia-Expert” LLC (Ukraine), who valued the assets using the cost and comparables method, and “BGS-Aktiv” LLC (Ukraine), who used the asset cash generating method. In accordance with IAS 16, the Group carries out revaluations on a regular basis and conducts a full valuation exercise if there is an indication of impairment. An impairment review was conducted at the balance sheet date. To test property, plant and equipment for impairment, the Group’s business is treated as a single cash generating unit. The recoverable amount of the cash-generating unit was determined on the basis of value-in use. The amount of value in use for the cash generating unit was determined on the basis of the most recent budget estimates prepared by manage- ment and application of the income approach of valuation. Under the income approach, the discounted cash flow method has been applied with discount rate of 27.38%. No impairment was detected following the results of impairment test. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 46 9. Intangible assets 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 Cost or valuation At 1 January 2009 Additions Disposals Exchange differences on translation to the presentation currency At 31 December 2009 Accumulated amortisation At 1 January 2009 Amortisation charge for the year Disposals Exchange differences on translation to the presentation currency At 31 December 2009 Net book amount at 31 December 2009 Net book amount at 31 December 2008 Net book amount at 31 December 2007 Computer software £ ‘000 Trade marks £ ‘000 Customer list £ ‘000 Goodwill Total £ ‘000 £ ‘000 29 15 (2) 42 21 5 (2) 24 42 14 (1) (13) 42 24 9 (1) (11) 21 21 18 8 362 - 138 500 52 20 25 97 500 - - (44) 456 97 23 - (9) 111 345 403 310 752 104 1,247 - - - - 15 136 752 104 1,398 81 41 - 122 752 - - - 752 122 34 - 1 157 595 630 671 - - - - 154 66 23 (243) 104 1,398 - - - 14 (1) (57) 104 1 354 - - - - - 104 104 104 243 66 (1) (19) 289 1,065 1,155 1,093 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 47 The remaining amortisation periods of the intangible assets are as follows: Computer software Trademarks Customer list 4 — 8 years; 16 years; 16 years. Acquired intangible assets and Goodwill The intangible asset “Customer list” represents the cap- tive individual suppliers of raw milk in the vicinity of Letichivsky Maslozavod OJSC and Zhmerinsky Maslosyrzavod LLC. In Ukraine, where about 80% of the entire milk comes from the individual producers, the existing supplier base is very important for the dairy pro- ducers and thus is valuable. The acquired asset “Customer list” was recognised in the accounts on the basis of the Purchase Price Allocation (PPA) exercise conducted within the 12-month period following the acquisitions of two plants. The asset was valued by an independent valuer Uvecon using the sales comparison method and depreciated replacement cost (DRC) methods (for tangible assets) and income and cost advantage methods (intangible assets). At the year end, the carrying value-in-use was determined by discounting the expected future cash flows of the Group’s business to their present value. The key assump- tions for the value-in-use calculations were those regard- ing 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 appro- priate to the Dairy business. The discount rate that is con- sidered 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 2010, 7% for 2011 and 11% for 2012 — 2013. The Group regularly monitors the carrying value of its acquired intangible assets, goodwill and events or changes in circumstances that indicate there may be an impairment. The result of the review, undertaken at 31 December 2009, was that no impairment needs to be recognised and the carrying value of the acquired intangi- ble assets and goodwill is considered appropriate. After having analyzed all key factors the Group’s Management decided that as of December 31, 2009 the Goodwill of Letichiv Diary Plant did not lose any of its value. Besides, this asset has unlimited useful life dura- tion and has been tested as part of Group’s single gener- ating unit. The Group’s production plans are based on the estab- lished practice of production and distribution of dairy products in the raw material zone of Letichiv Diary Plant and it foresees the use of this asset for an unlimited peri- od of time. Maintenance of Goodwill does not require considerable costs and the Group does not plan such inputs in the future. Taking into consideration all the factors mentioned above, the Group’s Management does not see any reasons for Goodwill impairment as of December 31, 2009 and con- siders that the amount of GBR 0.1 million is its fair value. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 48 10. Available for sale investments The currency profile of the Group’s available for sale investments is as follows. UAH USD EUR 11. Deferred tax Floating rate assets £ ‘000 Fixed rate assets £ ‘000 Total as at 31 December 2009 £ ‘000 Total as at 31 December 2008 £ ‘000 - - - - 86 - - 86 86 - - 86 557 - - 557 As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 Deferred tax asset at the beginning of the year (117) Deferred tax liability at the beginning of the year Deferred tax asset recognised in income statement during the year Deferred tax liability 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 year Deferred tax liability at the end of the year - 42 - - - 12 (63) - The tax rate used in deferred tax calculations is 25% (2008: 25%). - 697 (51) - - (65) (78) (32) (14) (114) - 459 - - - (1) (117) - - 752 - 86 (78) - (63) - 697 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 49 12. Inventories Raw materials Finished goods Other inventories 13. Trade and other receivables Trade receivables Other receivables Prepayments As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 733 1,223 489 2,445 636 2,128 747 3,511 As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 4,221 367 150 4,738 4,738 391 514 5,643 The Group’s management believes that carrying value for trade and other receivables is a reasonable approximation of their fair value. There is no concentration of credit risk with respect to trade receivables as the Group has a diverse base of cus- tomers, primarily in Ukraine. Maturity of trade and other receivables As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 In less than 1 year 4,738 5,643 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 - - - - - - 4,738 5,643 As at 31 December 2009 there were no trade and other receivables past due not impaired (2008: nil). UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 50 14. Other financial assets Loans issued to employees As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 79 79 35 35 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 Cash — in other currencies Bank — in other currencies 16. Financial liabilities Bank loans and overdrafts As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 7 162 2 65 236 12 368 - 311 691 Bank loans include a secured 3-year credit line of up to UAH 40,000,000 (GBP 3,160,000) from OTP Bank CJSC denominated in Ukrainian Hryvnia (UAH). As at 31 December 2009 an amount of GBP 1,574,000 was drawn from this credit line (2008: GBP 3,199,551). The average interest rate as at 31 December 2009 was 19.0% (2008: 17.0%). This loan is secured by the assets of OJSC Molochnik, Milk investments Private Enterprise and Starkon-Moloko LLC. As at December 31, 2009 the promissory notes were retired due to their issuer being deconsolidated from the Group. Maturity of financial liabilities The carrying amounts of financial liabilities are reported in the following table. 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 As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 7 1,574 - - 1,581 165 3,235 - 285 3,685 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 51 Interest rate profile of financial liabilities The Group’s has borrowing facilities available at 31 December 2009 in which all conditions have been met. Floating rate £ ‘000 Fixed rate £ ‘000 Total as at 31 December 2009 £ ‘000 Total as at 31 December 2008 £ ‘000 On demand Expiry within 1 year Expiry within 1 and 2 years Expiry in more than 2 years 7 - - - 7 - 1,574 - - 7 1,574 - - 1,574 1,581 165 3,235 - 285 3,685 Currency profile of financial liabilities The currency profile of the Group’s financial liabilities is as follows. Floating rate liabilities £ ‘000 Fixed rate liabilities £ ‘000 Total as at 31 December 2009 £ ‘000 Total as at 31 December 2008 £ ‘000 UAH 7 7 1,574 1,574 1,581 1,581 3,685 3,685 The book value and fair value of financial liabilities are as follows: Book value as at 31 December 2009 £ ‘000 Fair value as at 31 December 2009 £ ‘000 Fair value as at 31 December 2008 31 December 2008 £ ‘000 Book value as at £ ‘000 Bank loans Bank overdrafts Promissory notes Other financial liabilities 1,574 1,574 7 - - 7 - - 1,581 1,581 3,200 165 285 35 3,685 3,200 165 285 35 3,685 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 52 17. Uncancellable lease commitments As at 31 December 2009, the operating lease commitments on uncancellable lease for all the companies included into the consolidation totalled GBP 2,032 (2008: GBP 485,000). Maturity analysis of uncancellable lease commitments Not later than 1 year Later than one year but not later than five years Later than five years As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 2 - - 2 404 81 - 485 Non-cancellable lease commitments represent rent of offices and warehouses. 18. Trade and other payables Trade payables Other payables Prepayments Accruals As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 1,190 113 52 220 1,575 1,235 160 372 244 2,011 The Group’s management believes that the carrying value for trade and other payables is a reasonable approxima- tion of their fair value. 19. Share capital Ordinary shares of 10p each As at 31 December 2009 Number ‘000 50,000 Authorised As at 31 December 2009 £ ‘000 As at 31 December 2008 Number ‘000 As at December 2008 £ ‘000 50,000 5,000 5,000 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 53 Issued and fully paid at beginning and end of the year 2009 Number ‘000 2009 £ ‘000 2008 Number ‘000 2008 £ ‘000 Ordinary shares of 10p each At beginning of the year 42,818 4,282 41,645 4,164 Shares issued on the exercise of the warrants Own shares acquired At end of the year - (1,750) - (175) 1,173 - 118 - (excluding shares held as treasury shares) 41,068 4,107 42,818 4,282 Held as treasury shares 2009 Number ‘000 2009 £ ‘000 2008 Number ‘000 2008 £ ‘000 Ordinary shares of 10p each At beginning of the year Own shares acquired At end of the year - 1,750 1,750 - 175 175 - - - - - - In July 2009 the Company acquired 1,750,250 ordinary shares of 10 pence each at 12 pence per share. These shares will be held as treasury shares. The total consideration paid was GBP 210,000. As at 31 December 2009 the Company held a total of 1,750,250 Ordinary Shares as treasury shares and the total number of Ordinary Shares in issue (excluding shares held as treasury shares) was 41,067,599. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 54 20. Other reserves Share Merger Share option Translation Revaluation premium reserve £ ‘000 £ ‘000 reserve £ ‘000 reserve £ ‘000 reserve £ ‘000 Balance at 1 January 2008 4,117 (1,427) 144 (459) 1,685 Issue of shares Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve Reduction of options reserve 510 - - - Exchange differences on translation to the presentation currency (5) - - - - - Balance at 31 December 2008 4,622 (1,427) Own shares acquisition (35) Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve Reduction of options reserve Exchange differences on translation to the presentation currency - - - 1 - - - - - Balance at 31 December 2009 4,588 (1,427) - - - (118) (2) 24 - - - (24) - - Total other reserves £ ‘000 4,060 510 (124) (2) (118) (3,503) 823 (35) (95) (3) (24) - - - - (3,365) (3,824) - - - - - (124) (2) - (131) 1,428 - (95) (3) - (817) (4,641) (168) 1,162 (984) (318) The reduction in the revaluation reserve is due to the sale of property, plant and equipment which has previously been revalued. The following describes the nature and purpose of each reserve within owners’ equity. Reserve Share capital Share premium Revaluation Merger Share option Retained earnings Translation Non-controlling interest Description and purpose Amount subscribed for share capital at nominal value. Amount subscribed for share capital in excess of nominal value. Gains arising on the revaluation of the Group’s property. The balance on this reserve is wholly undistributable. 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. Amount arising from share based payments (issue of share options). Cumulative net gains and losses recognised in the consolidated income statement. Amount of all foreign exchange differences arising from the translation of the financial information of foreign subsidiaries. Portion of the profit or loss and net assets of the subsidiary attributable to equity inter- ests that are not owned, directly or indirectly through the subsidiaries, by the parent. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 55 21. Revenue General revenue Branded (including bonuses) Charge of bonuses Branded (excluding bonuses) SMP Other Total revenue (excluding bonuses) As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 43,679 30,375 (511) 29,864 12,026 1,277 43,167 52,312 38,197 (386) 37,811 11,561 2,553 51,925 Bonuses are compensation granted to Group’s main customers within its distribution network. Bonuses are accounted for based on a fixed percentage of the product sold by customers who comprise retail net- works and distributors. Cash compensation is paid on a periodic basis during the year. 22. Expenses by nature As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 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) Loss on disposal of fixed assets Exchange difference Audit fees Other expenses Total expenses except for tax and finance 32,024 3,132 1,018 1,339 66 439 (7) 249 73 3,313 41,646 33,580 4,218 1,355 1,684 66 536 13 192 72 7,565 49,281 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 56 23. Finance income and expense Recognised in income statement Finance income Interest income on loans to related parties Total interest income Finance expense Interest expense on bank loans Interest expense on bonds Other finance expense Total finance expense Net finance expense recognised in income statement 24. Employee benefit expense Wages and salaries (including key management personnel) Social security costs Remuneration of key management personnel Salaries As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 1 1 (427) - - (427) (426) - - (563) (27) (2) (592) (592) As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 3,132 1,018 4,150 4,218 1,355 5,573 As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 247 247 276 276 The key management personnel are those persons remunerated by the Group who are members of the Board of Directors of the Company (Ukrproduct Group Ltd) and Senior Management, as disclosed on page 12 and 13. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 57 25. Income tax expense Income tax comprised the following: Current tax charge — Ukraine Current tax charge — non-Ukraine Deferred tax relating to the origination and reversal of temporary differences Income tax charge for the year Year ended 31 December 2009 £ ‘000 Year ended 31 December 2008 £ ‘000 72 18 (36) 54 208 11 (57) 162 Differences in treatment of certain elements of financial statements by IFRS and Ukrainian statutory taxation regu- lations give rise to temporary differences. The tax effect of the movement on these temporary differences is recog- nised at the rate of 25% (2008: 25%). Profit before tax — Ukraine Profit before tax — non-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 2009 £ ‘000 As at 31 December 2008 £ ‘000 (834) 1,929 1,095 58 (4) 54 (898) 3,337 2,439 102 60 162 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. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 58 Profit before tax: Ukraine Cyprus Other (BVI, Jersey) Profit before tax, total 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 2009 £ ‘000 As at 31 December 2008 £ ‘000 (834) 584 1345 1,095 - 58 - 58 36 (40) - (4) 36 18 - 54 Nil 10% Nil 5.3% (898) 1,017 2,320 2,439 - 102 - 102 150 (90) - 60 151 11 - 162 Nil 10% Nil 4.2% The weighted average applicable tax rate was 5.3% (2008: 4.2%). 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 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 59 by the taxpayers. Nevertheless, there remain certain risks in relation to the Ukrainian tax system: few court prece- 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 investi- gation 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 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. 26. Share-based payments The Company operates an equity-settled share based remuneration scheme for employees. During the period under review, all options granted to the Directors in the prior periods and outstanding as at 31 December 2008 were lapsed. The Company has thus written-off the share options reserve outstanding as at 31 December 2008 in the amount of GBP 24,000. Outstanding at beginning of the year 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 2009 Weighted average exercise price (£) 0.570 0.128 - - 0.570 0.128 0.128 2009 Number 130,290 130,290 - - 130,290 130,290 130,290 2008 Weighted average exercise price (£) 2008 Number 0.570 612,028 - - 0.570 481,738 - - - - 0.570 0.570 130,290 130,290 During the period under review the Company has granted share options to the Directors. All options granted to the Directors are exercisable over a period of four years. Taking into account the fair value of options granted estimated at the grant date (GBP0,000) no remuneration charge was recognised in statement of comprehensive income in 2009. The fair value of options granted in 2009 has been calculated based on the following data. UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 60 Item Option pricing model used Weighted average share price at the grant date Exercise price Weighted-average contractual life, years Expected volatility Expected dividend yield Expected dividend growth rate Weighted-average risk-free interest rate 27. Earnings per share 2009 Adjusted Black-Scholes 0.1275 0.1280 4.0 25% 5% 0% 1.92% 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. Net profit attributable to ordinary shareholders, £'000 Weighted number of ordinary shares in issue Basic earnings per share, pence Diluted average number of shares Diluted earnings per share, pence 28. Warrants 31 December 2009 31 December 2008 1,064 2,320 41,997,869 42,817,849 2.5 5.4 41,997,869 42,817,849 2.5 5.4 During the period under review the Company did not grant warrants to any parties. At 31 December 2009, no war- rants were exercisable (2008 : nil). UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 61 29. Dividends As at 17 April 2010, the Board of Directors proposed the final dividend payment of 0.20 pence per ordinary share for the year ended 31 December 2009 in the amount of GBP 82,000 which would lead to 0.40 pence per ordinary share for the full year in the amount of GBP164,000. If approved at the AGM, the final dividend will be paid on 16 July 2010 to the shareholders on the register as at 11 June 2010. No tax consequences for the Group will arise out of this transaction as the Group’s parent company is an entity reg- istered under the Jersey laws. Final dividend for 2008 of 0.40 pence (2007 — 0.82 pence) per ordinary share proposed and paid during the year relating to the previous year’s results Interim dividend of 0.20 pence (2008 — 0.40 pence) per ordinary share paid during the year Total Year ended 31 December 2009 £ ‘000 Year ended 31 December 2008 £ ‘000 172 82 254 351 172 523 The final dividend for the year ended 31 December 2009 has not been accrued at the balance sheet date. 30. Non-controlling interest Balance at 1 January Net profit for the period Decrease of Non-controlling interest Exchange differences on translation to the presentation currency Balance at 31 December Year ended 31 December 2009 Year ended 31 December 2008 82 (23) (20) (9) 30 131 (43) - (6) 82 As at 31 December 2009 a Non-controlling interest of 2.40% (2008: 2.40%) was held in Molochnik OJSC. Decrease of Non-controlling interest is connected with exclusion from the Group of Letichivsky Maslozavod OJSC (As at 31 December 2008 : 7.3%). UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 62 31. Related party transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant influ- 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 24. 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 Year ended 31 December 2009 £ ‘000 Year ended 31 December 2008 £ ‘000 143 108 71 69 Balances due from/(to) related parties at each period end are shown below. As at 31 December 2009 £ ‘000 As at 31 December 2008 £ ‘000 Receivables and prepayments Trade and other payable 113 (51) 131 (59) Trade and other payable include payables to the shareholders of the Company. In 2009, 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 2009 63 32. Currency analysis Currency analysis for the period ended 31 December 2009 is set out below: £ ‘000 UAH USD RUR GBP ЕUR Total Non-Current Assets Property, Plant and equipment 8,504 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-Current Liabilities Deferred tax liabilities Current Liabilities Bank loans and overdrafts Trade and other payable Taxes payable Current income tax liabilities Total Liabilities 21 66 63 2,445 4,310 1,031 79 170 16,689 459 1,581 1,506 32 32 3,610 30 345 20 - - 425 - - 17 837 - - - - - - - - - - - - - - - - - - - - - - - 699 - - - 3 - - 40 742 - - - - - - - - - - - - - - 9 9 - - 69 - - 69 8,534 1,065 86 63 2,445 4,738 1,031 79 236 18,277 459 1,581 1,575 32 32 3,679 UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 64 Currency analysis for the period ended 31 December 2008 is set out below: £ ‘000 UAH USD RUR GBP ЕUR Total Non-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-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 18 535 117 3,511 4,613 267 35 130 19,721 697 3,400 1,909 79 30 70 6,400 32 403 22 - - - - - - - 766 264 - - 258 1,481 - - - - - - - - - - 264 - - 12 - - - 12 - 734 - - - - - - 303 1,037 - - 90 - - - 90 - - - - - - - - - - - - - - - - - 10,527 1,155 557 117 3,511 5,643 267 35 691 22,503 697 3,400 2,011 79 30 70 6,502 33. 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 2009 £ ‘000 As at 31 December 2008 £ ‘000 236 236 691 691 In the period under consideration, there were no non-cash transactions (2008 — nil). UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 65 34. Current taxes VAT receivable Other prepaid taxes Total Year ended 31 December 2009 Year ended 31 December 2008 1029 2 1031 266 1 267 At the reporting date the Group has accumulated a substantial tax asset being VAT receivable, with 79 % of this amount related to OJSC Molochnik. Management intends to recover this amount by way of offsetting it against VAT liabilities that will arise in OJSC Molochnik from the regular business activities during the first half of 2010. 35. Post balance sheet events There were 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 Independent auditors Baker Tilly Channel Islands Limited PO Box 437 13 Caste Street St Helier Jersey JE4 0ZE UK legal advisers Cobbetts 70 Gray’s Inn Road London WC1X 8BT Deutsche Bank International Limited PO Box 727 St. Paul’s Gate New Street St Helier Jersey JE4 8ZB Registrars Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 66 SHAREHOLDER INFORMATION Registered office 26 New Street St Helier Jersey JE4 8PP Registered number 88352 in Jersey Financial Calendar 31 December 2009 21 April 2010 24 June 2010 16 July 2010 September 2010 31 December 2009 Financial year end Preliminary Announcement of full year 2009 results Annual General Meeting Final Dividend Payment Announcement of first half of 2009 results Financial year end Analysis of shareholding — at 31 December 2009 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 11 26 13 15 65 16,9% 40,0% 20,0% 23,1% 100% 20 415,00 473 359,00 1 772 267,00 38 801 558,00 41 067 599,00 0,05% 1,15% 4,32% 94,48% 100,00% The ultimate controlling parties of Ukrproduct Group Ltd are Messrs Sergey Evlanchik and Alexander Slipchuk who collectively controlled, as of 31 December 2009, 67.5% of the common shares of the company. Share price (pence) — year to 31 December 2009 At end of year: 24 p Lowest: 7.5 p Highest: 32.5 p UKRPRODUCT GROUP LTD ANNUAL REPORT 2009 67 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, bereave- ment, 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 2009 68 

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