UkrProduct Annual Report 2009

FY2009 Annual Report · UkrProduct

Loading PDF…

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

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

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

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

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

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

Roman Prannichuk (35)
Chief Financial Officer

Alexander Slipchuk (43)
Executive Director

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

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:

Share options

2009

2008

2009

2008

14,422,383

14,487,383

14,422,383

14,487,383

38,690

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

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

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

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

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

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

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

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

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

90,000

83,889

45,000

22,500

40,000

14,445

70,000

90,000

83,889

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

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

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.

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

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

CONSOLIDATED INCOME STATEMENT

Notes

7,21
22

22
22
22

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•

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

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

97.6%

Acquisition

100%

Acquisition

100%

Acquisition

100%

Acquisition

92.7%

Acquisition

100%

Acquisition

100%

Acquisition

100%

Acquisition

UKRPRODUCT GROUP LTD
ANNUAL REPORT 2009

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

Cyprus

BVI

Jersey

100%

Acquisition

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

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

4,665

1,574

1,475

3,056

5,129

691

557

6,412

3,200

165

285

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

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

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

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

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

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

933

989

588

28,177

16,151

12,026

267

(210)

(29)

1,661

280

110

Other

8,138

6,861

1,277

182

(14)

(24)

144

505

Un-
allocated

Total

(668)

(330)

(978)

(426)

(249)

(1,653)

(54)

(1,707)

4,422

4,485

2,287

459

2,746

126

109,072

65,905

43,167

6,929

(2,578)

(2,601)

1,770

(426)

(249)

1,095

(54)

1,041

13,792

4,422

18,277

2,287

459

3,679

1,405

719

UKRPRODUCT GROUP LTD
ANNUAL REPORT 2009

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

16,662

794

1,379

1,204

20,106

8,545

11,561

1,274

(241)

(53)

980

2,026

363

279

319

Other

9,278

6,724

2,554

406

(49)

(46)

311

822

311

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

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

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

369

(238)

(555)

5,328

1,971

713

3,770

17,991

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

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

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

(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

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

(2)

(1)

(13)

(1)

(11)

362

138

500

(44)

456

(9)

111

345

403

310

752

104

1,247

136

752

104

1,398

122

752

122

157

595

630

671

154

(243)

104

1,398

(1)

(57)

104

1 354

104

243

(1)

(19)

289

1,065

1,155

1,093

UKRPRODUCT GROUP LTD
ANNUAL REPORT 2009

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

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

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

(63)

The tax rate used in deferred tax calculations is 25% (2008: 25%).

697

(51)

(65)

(78)

(32)

(14)

(114)

459

(1)

(117)

752

(78)

(63)

697

UKRPRODUCT GROUP LTD
ANNUAL REPORT 2009

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

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

14. Other financial assets

Loans issued to employees

As at 31 December 2009
£ ‘000

As at 31 December 2008
£ ‘000

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

162

236

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

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

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

1,574

1,581

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

1,581

3,200

165

285

3,685

3,200

165

285

3,685

UKRPRODUCT GROUP LTD
ANNUAL REPORT 2009

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

404

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

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

UKRPRODUCT GROUP LTD
ANNUAL REPORT 2009

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

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

20. Other reserves

Share Merger Share option Translation Revaluation
premium reserve
£ ‘000 £ ‘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

Balance at 31 December 2009

4,588

(1,427)

(118)

(2)

(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

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

439

(7)

249

3,313

41,646

33,580

4,218

1,355

1,684

536

192

7,565

49,281

UKRPRODUCT GROUP LTD
ANNUAL REPORT 2009

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

(427)

(426)

(563)

(27)

(2)

(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

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

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

(36)

208

(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

(4)

(898)

3,337

2,439

102

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

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

(40)

(4)

Nil

10%

Nil

5.3%

(898)

1,017

2,320

2,439

102

150

(90)

151

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

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

2009
Number

130,290

2008
Weighted
average exercise
price (£)

2008
Number

0.570

612,028

0.570

481,738

0.570

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

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%

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

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

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

(23)

(20)

(9)

131

(43)

(6)

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

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

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

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

2,445

4,310

1,031

170

16,689

459

1,581

1,506

3,610

345

425

837

699

742

8,534

1,065

2,445

4,738

1,031

236

18,277

459

1,581

1,575

3,679

UKRPRODUCT GROUP LTD
ANNUAL REPORT 2009

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

535

117

3,511

4,613

267

130

19,721

697

3,400

1,909

6,400

403

766

264

258

1,481

264

734

303

1,037

10,527

1,155

557

117

3,511

5,643

267

691

22,503

697

3,400

2,011

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

34. Current taxes

VAT receivable

Other prepaid taxes

Total

Year ended 31
December 2009

Year ended 31
December 2008

1029

1031

266

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

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

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

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