Last checked at 15 Apr 2009 07:00
PRESS RELEASE
April 15, 2009, Kyiv, Ukraine
MHP S.A.
Preliminary Financial Results for the Fourth Quarter and Full Year ended December 31, 2008
MHP S.A. ("MHP" or the "Company", LSE ticker: "MHPC"), one of the leading agro-industrial companies in Ukraine, focusing on the production of poultry and the cultivation of grain, today announces its financial results for the fourth quarter 2008 and full year ended 31 December 2008.
Key financial highlights for the fourth quarter of 2008:
Revenue increased 2% to US$169 million (Q4 2007: US$165 million).
EBITDA increased 43% to US$70 million (Q4 2007: US$49 million).
EBITDA margin increased to 42% (Q4 2007: 29%).
Financial results adversely affected by 50% depreciation of hryvna against US dollar and non-cash foreign exchange losses due to revaluation of the company's foreign-currency debt
Net loss from continuous operations of the quarter was US$ 165 million (2007: net income US$4 million) due to non-cash foreign exchange losses of US$198 million
Key financial highlights for the full year
Revenue increased 69% to US$803 million (2007: US$474 million).
EBITDA increased 88% to US$312 million (2007: US$166 million).
EBITDA margin increased from 35% to 39%.
Net income from continuous operations for the year decreased to US$15 million (2007: US$50 million) due to the non-cash foreign exchange losses of US$187 million.
Operational highlights of the year
IPO on the Main Market of the London Stock Exchange successfully completed in May 2008, raising US$161 million
All MHP's poultry production facilities continued to operate at full capacity throughout the year and consumer demand for chicken meat remained high
Chicken meat sales to third parties on adjusted-weight basis increased by 26% to 215,000 tonnes (2007: 170,000 tonnes).
In July 2008 MHP acquired 80% stake in "Ukrainian Bacon", a private meat processing company with current production capacity of approximately 50 tonnes of meat products per day and a production potential of 200 tonnes per day
Sausage and cooked meat production volumes more than doubled to 16,000 tonnes
Land bank increased from 148,500 to 180,000 hectares
Record-breaking yields across all crops compared to Ukraine's average
Agreement in December 2008 to sell non-core stake in "Agrofirma Kyivska" to continue to focus on its key businesses
Post period end:
All company's chicken production facilities continue to work at full capacity
US$20 million of short term borrowings successfully refinanced, extending maturities to Q1 2010
New law enacted in February 2009 has extended indefinitely VAT and profit tax benefits for Ukrainian agricultural producers (previously effective until 1 January 2011)
Re-styling of MHP's locomotive "Nasha Ryaba" brand and launch of new advertising campaign in April 2009.
Commenting on the results Yuriy Kosyuk, Chief Executive Officer of MHP, said:
"I am pleased to report that 2008 was a good year for MHP. Following the IPO we have been able to achieve all the promises we gave and havemade great strides in advancing our strategy of expanding our domestic activities and deepening our vertical integration, whilst continuing to control production costs and grow market share. The Ukrainian market continues to represent a significant growth area for us as our consumers continue to substitute imported chicken and more expensive pork and beef with domestically produced chicken meat.
"Despite the challenging economic conditions, both domestically and globally, MHP's financial position is strong and we have continued to produce high-quality products at low production costs that are sold to our customers at affordable prices. We are confident that we have the land, the facilities, the skills and the resources to provide value for our shareholders in 2009 and beyond."
-Ends-
MHP's management will host a conference call for investors and analysts followed by a Q&A session. The dial-in details are:
| Date: | Wednesday, 15 April 2009 |
| Time: | 16.00 Kyiv / 14.00 London / 9.00 New York / 17.00 Moscow |
| Title: | MHP FY 2008 FINANCIAL RESULTS AND Q1 2009 TRADE UPDATE |
| Conference ID | 94172327 |
| UK Standard International | +44 (0) 1452 586 157 |
| UK Free Call | 0800 694 1541 |
| USA Free Call | +1 866 595 6357 |
| Russia Fee Call | 8108 002 438 1012 |
A live webcast of the presentation will be available at:
https://webconnect.webex.com/webconnect/onstage/g.php?t=a&d=662049430
Event Number: 662 049 430
Event Password: 94172327
Alternative URL: https://webconnect.webex.com/
Click on "Unlisted Events"
For further information please contact:
| Financial Dynamics Ben Foster (London) | London: +44 20 7831 3113 |
| Marc Cohen (London) | |
| Leonid Solovyev (Moscow) | Moscow: +7 495 795 06 23 |
| For investor relations enquiries | |
| Elena Solovyov (Kyiv) | Kyiv: +38 044 207 99 55 |
| ir@mhp.com.ua |
Financial overview
| Q4 2008 | Q4 2007 | growth rate | 2008 | 2007 | growth rate | ||
| Revenue | US$, m | 169 | 165 | 2% | 803 | 474 | 69% |
| IFRS 41 standard gains | 11 | (5) | n/a | 6 | 14 | -56% | |
| Gross profit | US$, m | 50 | 27 | 85% | 238 | 124 | 92% |
| Gross margin | % | 30% | 16% | 88% | 30% | 26% | 13% |
| EBITDA | US$, m | 70 | 49 | 43% | 312 | 166 | 88% |
| EBITDA margin | % | 42% | 29% | 45% | 39% | 35% | 11% |
| Net income (continuing operations) | US$, m | (165) | 4 | n/a | 15 | 50 | -70% |
| Net income margin | % | -98% | 2% | n/a | 2% | 11% | -83% |
In the fourth quarter, the growth in revenue from higher sales volumes and increased prices was largely offset by the effect of a 50% depreciation of the hryvna against the US dollar. As a result revenue increased slightly by 2% in US dollar terms to US$169 million (Q4 2007: US$ 165 million). Gross profit from continuing operations increased by 85% to US$ 50 million (Q4 2007: US$ 27 million) mostly due to the cost benefits from the low corn price and use of self produced sunflower protein in chicken fodder. Consolidated EBITDA increased by 43% to US$ 70 million (Q4 2007: US$ 49 million) and EBITDA margin increased from 29% in Q4 2007 to 42% in Q4 2008. Net result from continuing operations, however, decreased to US$ 165 million net loss (Q4 2007: US$ 4 million net income) due to non-cash foreign exchange losses of US$198 million.
In the full year 2008, MHP's consolidated revenues from continuing operations increased by 69% to US$803 million (2007: US$474 million) - a reflection of the strong performance of the company's poultry division. Gross profit from continuing operations was US$238 million (2007: US$124 million). Gross margin increased by 13% to 30% (2007: 26%). EBITDA increased by 88% year-on-year to US$312 million (2007: US$166 million); EBITDA margin increased year-on-year to 39% (2007: 35%).
Net profit for the year from continuing operations at US$15 million (2007 US$50 million) was adversely affected by non-cash foreign exchange losses of US$187 million, principally as a result of the revaluation of the company's foreign-currency debt. This was a result of the significant depreciation of the hryvna and a consequent revaluation of the company's balance sheet.
Discontinued operations
In December 2008, in line with its stated strategy of focusing on chicken production and strengthening its vertical integration, the company agreed to sell its stake in LLC Agrofirma Kyivska ("Agrofirma Kyivska"). Agrofirma Kyivska's principal activity (the cultivation of potatoes) was non-core and, in 2008, returned a loss of US$3.5 million (2007: US$3.5 million). Further development would have required significant investment. Agrofirma Kyivska's operations, which accounted for revenues of US$3.9 million, were classified as discontinued operations in 2008 and are shown separately in the 2008 income statement. Loss on of disposal of Agrofirma Kyivska operations was US$6.2 million.
State support for agricultural production in Ukraine
In view of the agricultural sector's importance to the national economy, as well as the need to improve living conditions in rural areas, support for the sector is a major priority for the Ukrainian government. During 2008, state support was provided in various forms, including special tax regimes (zero corporation tax), tax privileges (VAT refunds), direct subsidies per 1 kg. of live weight and compensations for finance costs under loans from Ukrainian banks.
In 2008, MHP benefited from various forms of State support which resulted in significant tax savings (VAT), as well from substantial direct government grants and interest subsidies. We received an aggregate of US$107.7 million (2007: $56.3 million) in government support, including VAT refunds of US$59.3 million (2007: US$21.4 million) and direct subsidies per 1kg of live weight of US$46.1 million (2007: US$29.6 million).
In February 2009 the new law #922-VI was adopted, and came into effect on March 17, 2009. This removes the limit on the duration of VAT and profit tax benefits for agricultural producers and extends it indefinitely (previously these benefits were effective until 1 January 2011).
Functional currency
The functional currency for the Group's companies is the Ukrainian Hryvna (UAH). Since 30 September 2008, however, for convenience of users of financial statements, MHP has presented its financial statements in US dollars (US$). Translation of the presentation currency has been conducted in line with the requirements of IAS 21 "The Effects of Changes in Foreign Exchange Rates".
For practical reasons, the Group translated items of income and expenses for each period presented in the financial statements using the average rates of exchange which, it estimates, reasonably approximate to the relevant exchange rates at the dates of the transactions.
The relevant exchange rates were:
| As of 31 December 2008 | Average for 2008 | As of 31 December 2007 | Average for 2007 | |
| UAH/USD | 7.7000 | 5.2693 | 5.0500 | 5.0500 |
| UAH/EUR | 10.8555 | 7.7114 | 7.4195 | 6.9192 |
MHP's operating assets are located in Ukraine and its revenues and costs are principally denominated in hryvnias. However approximately 15% of its revenues and all financial costs are denominated in foreign currency, primarily in US dollars. During 2008 the hryvna depreciated approximately 50%, which had a negative effect on the full-year net profit, primarily because of the translation of foreign currency borrowings into hryvnias. Management believes that its exposure to currency exchange rate fluctuations as a result of foreign currency costs is almost fully offset by its US dollar revenue earned from the export of sunflower oil, meat and sunflower husk. In total during 2008, the company generated US$ 120 million of revenue in foreign currencies.
Poultry and related operations
|
|
| Q4 2008 | Q4 2007 | growth rate | 2008 | 2007 | growth rate | ||
| Revenue | US$, m | 138 | 139 | 0% | 660 | 385 | 71% | ||
| - poultry and other | 111 | 109 | 2% | 550 | 318 | 73% | |||
| - sunflower oil | 27 | 30 | -10% | 110 | 67 | 64% | |||
| IFRS 41 standard gains | 18 | (2) | n/a | 18 | 8 | 130% | |||
| Gross profit | US$, m | 69 | 18 | 291% | 236 | 100 | 136% | ||
| Gross margin | % | 50% | 13% | 293% | 36% | 26% | 38% | ||
| EBITDA | US$, m | 81 | 36 | 127% | 296 | 131 | 126% | ||
| EBITDA margin | % | 59% | 26% | 128% | 45% | 34% | 32% | ||
|
| |||||||||
| EBITDA per 1 kg of poultry meat (1) | US$/kg | 1,20 | 0,72 | 65% | 1,30 | 0,73 | 79% | ||
(1) Excluding effect of IAS 41
During the fourth quarter of 2008, the volume of chicken meat sales to third parties was 53,100 tonnes (on adjusted-weight basis), the same level as the fourth quarter of 2007. During the fourth quarter of 2008, consumer demand for chicken remained high and all the Company's existing poultry production facilities continued to operate to their full production capacity. Average chicken meat prices through the fourth quarter of 2008 increased by 24% to 11.60 UAH per kg. of adjusted weight (excluding VAT) compared to the fourth quarter of 2007. However the increase of chicken prices was offset by hryvna depreciation and as a result Q4 segment's revenue remained almost flat at US$ 138 million (Q4 2007: US$ 139 million). Segment's EBITDA increased 127% to US$ 81 million from US$ 36 million in Q4 2007 and EBITDA margin increased from 26% to 59%.
Full 2008 year sales volumes to third parties increased by 26% to 215,000 tonnes on adjusted-weight basis (2007: 170,000 tonnes). The volume growth was primarily due to the launch of the first phase of the Myronivka chicken farm complex in the middle of 2007, which reached its full production capacity in October 2007. Average chicken meat prices through the full year 2008 increased by 44% to 12.03 UAH per kg compared to the full year of 2007. As a result full year segment's revenue increased by 71% from US$ 385 million in 2007 to US$ 660 million in 2008.
The segment's high level of vertical integration resulted in its full year gross profit increasing 136% year-on-year from US$ 100 million to US$ 236 million. Gross margin increased to 36% (2007: 26%). An increase in the average price of chicken combined with stable costs, resulted in the segment's EBITDA increasing by 126% to US$ 296 million (2007: US$ 131 million). EBITDA per 1 kilogramme of poultry meat (excluding effect of IAS 41) increased to US$ 1.30 (2007: US$ 0.73).
Grain growing
|
|
| Q4 2008 | Q4 2007 | growth rate | 2008 | 2007 | growth rate |
| Revenue | US$, m | 7 | 9 | -21% | 50 | 38 | 29% |
| IAS 41 standard gains | (6) | (6) | -5% | (10) | 2 | -545% | |
| Gross profit | US$, m | (16) | 5 | -427% | 1 | 24 | -94% |
| Gross margin | % | -238% | 58% | n/a | 3% | 63% | -95% |
| EBITDA | US$, m | (3) | 12 | -130% | 19 | 34 | -44% |
| EBITDA margin | % | -51% | 135% | n/a | 38% | 88% | -57% |
MHP grows four main crops - corn and sunflower which are used in its own operations; and rape and wheat which are sold to third parties in the Ukraine domestic market.
In 2008, MHP harvested 150,000 hectares including 131,000 hectares in grain growing segment and 19,000 hectares in other agricultural operations segment.
MHP currently uses the majority of the grain it produces in its own operations. Revenue from the Grain division is attributable to the sale of a certain quantity of grain to third parties.
During 2008 revenue from the sale of feed grain to third parties was US$ 50 million (2007: US$38 million) and included the sale of rape, wheat, barley and soy beans. The division gross profit decreased to US$ 1 million (2007: US$ 24 million) as a result of record low corn market prices. In 2008 the segment's profit generated from the sale of rape and wheat was offset by a net change in corn inventories revaluation under IAS 41, which resulted in record low corn prices at the time of harvesting. The company uses 100% of the corn it grows to produce fodder for the Poultry segment. As a result, the Grain division's 2008 profit will be distributed to the Poultry segment in Q4 2008 and 9 months of 2009, since the majority of 2008's harvest will be used by Poultry segment during 2009. Divisional EBITDA decreased by 44% to US$ 19 million (2007: US$ 34 million) while EBITDA margin decreased to 38% on an external sales basis.
Other agriculture operations
|
|
| Q4 2008 | Q4 2007 | growth rate | 2008 | 2007 | growth rate |
| Revenue | US$, m | 24 | 18 | 34% | 93 | 51 | 82% |
| - meat processing | 17 | 10 | 58% | 66 | 35 | 92% | |
| - other | 7 | 7 | 0% | 27 | 17 | 63% | |
| IFRS 41 standard gains | (1) | 4 | -123% | (1) | 4 | -127% | |
| Gross profit | US$, m | (3) | 4 | -172% | 0 | (0) | n/a |
| Gross margin | % | -12% | 23% | -154% | 1% | -1% | -160% |
| EBITDA | US$, m | (4) | 6 | -165% | 8 | 10 | -22% |
| EBITDA margin | % | -16% | 33% | -149% | 8% | 19% | -57% |
|
| |||||||
| Sausage volume | tonnes | 5 200 | 2 300 | 126% | 16 000 | 7 500 | 113% |
During the fourth quarter 2008, sausage and cooked meat production volumes increased by 126% to 5,200 tonnes compared to 2,300 tonnes during the fourth quarter 2007. Due to the fact that "Ukrainian Bacon" produces sausages and cooked meat products in the mass segment the average prices in Q4 2008 were stable at 17.16 UAH per kg. excluding VAT (Q4 2007: 16.95 UAH per kg.). As a result segment revenue increased by 34% to US$ 24 million (Q4 2007: US$ 18 million). Segment gross profit decreased by 172% from the profit US$ 4 million in Q4 2007 to the loss of US$ 3 million mainly as a result of the revaluation of biological assets used in the production of fruit and foie gras.
For the full year 2008, sausage and cooked meat production volumes increased by 113% to 16,000 tonnes compared to 7,500 tonnes during year 2007. More than 60% of this growth was due to the acquisition of the new meat processing facilities of "Ukrainian Bacon" in July 2008. Average sausage and cooked meat prices during full year 2008 increased by 14% to 18.23 UAH per kg excluding VAT (FY 2007: 16.06 UAH per kg.). Due to the fact that "Ukrainian Bacon" produces sausages and cooked meat products in the mass segment the average prices in Q4 2008 were stable at 17.16 UAH per kg. excluding VAT (Q4 2007: 16.95 UAH per kg.).
Revenue from Other Agricultural Operations segment was US$ 93 million (2007: US$ 51 million) an 82% increase year-on-year. This was primarily attributable to an increase in meat processing products sales volume.
Divisional gross profit of the year was US$ 0.5 million in 2008 (2007: US$ 0.4 million loss). Divisional EBITDA decreased by 22% to US $8 million (2007:US$ 10 million) and EBITDA margin decreased to 8% (2007:19%) primarily as a result of the revaluation of biological assets used in the production of fruit and foie gras.
Liquidity and capital resources
| Cash Flows US$, m | 2008 | 2007 | Growth rate |
| Funds from operations | 263 | 108 | 144% |
| Increase in working capital | (141) | (9) | |
| Cash from operating activities | 123 | 99 | 25% |
| CAPEX | (265) | (171) | 55% |
| Including non-cash investments | 64 | 56 | |
| Assets sale and other | 3 | 16 | |
| Deposits | (16) | (8) | |
| Cash from investment activities | (214) | (107) | 99% |
| Cash from financial activities | 142 | (25) | |
| effects of exchange rates on cash | (7) |
| |
| Total change in cash | 44 | (34) | -228% |
Net cash generated from operating activities was US$122.7 million (2007: US$98.6 million). Stronger cash flow was driven primarily by higher prices and greater sales volumes.
In 2008, the net increase in working capital was US$140.6 million. The main contributors to this were:
a US$52.0 million increase in corn and sunflower inventories (MHP is self-sufficient in corn with 2008 harvest)
a US$39.8 million increase in VAT-related tax account receivables resulting from significant capital expenditure in 2008;
a US$23.1million increase in biological assets, mainly expenditure on grain-growing production (costs associated with preparing land for the 2009 season) as a result of more hectares of land being used;
a US$25.5 million increase in trade accounts receivable as a result of higher prices, greater supermarket sales, and an increase in sales of meat and convenience food products which have a longer shelf life.
| CAPEX | 2008 | 2007 |
| Mironivka complex | 99 | 102 |
| Grain growing | 48 | 14 |
| Meat processing | 29 | 8 |
| Administrative and distribution | 47 | 16 |
| Other agricultural projects | 14 | 16 |
| Maintenance CAPEX | 28 | 16 |
| Total: | 265 | 171 |
In 2008 our total capital expenditure, of US$265.2 million, included the construction of phase 2 of the Myronivka poultry facility, the acquisition of additional agricultural machinery for our arable farms, and the expansion of our meat-processing facilities.
| Debt | 31.12.2008 | 31.12.2007 |
| Total Debt, US$ 000 | 517 | 467 |
| - Eurobond | 247 | 244 |
| - Ukrainian bonds |
| 40 |
| - Loans covered ECA | 79 | 87 |
| - Financial Leases and vendor financing | 70 | 44 |
| - ST Loans * | 109 | 53 |
| - Other debt | 12 | - |
| Cash and bank deposits | 79 | 20 |
| Net Debt | 437 | 447 |
| EBITDA from contunuing operations | 312 | 166 |
| Debt / EBITDA | 1,65 | 2,81 |
| Net Debt / EBITDA | 1,40 | 2,69 |
* excludes short-term portion of long-term debt
The increase in company debt during 2008 was as a result of additional short-term loans to support working capital increase and additional financial lease for agricultural machinery.
As at 31 December 2008, the company's total debt was approximately US$517 million, most of which was denominated in US dollars. The average weighted cost of debt is below 10%.
US$250 million of the debt is in Eurobonds, which are not redeemable until November 2011.
US$79 million of our long-term debt is principally represented by finance agreements with vendors of equipment; it matures at various times up to the end of 2013.
US$70 million represents financing for the lease of agricultural machinery and equipment used in our grain growing activities and for vehicles for distribution, and has maturities up to 2012.
US$109 million short-term debt (excludes short-term portion of long-term debt) includes a US$35 million revolving committed credit line facility with ING Bank (Ukraine) which matures in 2010; a US$20 million loan from OTP bank, which was refinanced in January 2009; and a US$54 million debt which matured in the second half of 2008.
| Debt Maturity profile | 2009 | 2010 | 2011 | 2012 - 2014 |
| Total Debt, US$ 000 | 109 | 98 | 289 | 24 |
| - Eurobond | 250 | |||
| - Loans covered ECA | 21 | 23 | 23 | 12 |
| - Financial Leases | 22 | 20 | 16 | 12 |
| - ST Loans | 54 | 55 | ||
| - Other debt | 12 |
|
|
|
Current trading and outlook
Consumer demand for poultry meat remains high and all the Company's production facilities are continuing to operate at full capacity. The company expects poultry production costs in the first half 2009 to be lower than in the same period last year as a result of the decrease in corn prices and due to the use of sunflower protein. The company continues to grow sausage and cooked meat production volumes as most of Ukrainian Bacon's products are positioned in the mass segment where consumer demand is still growing.
Management believes that MHP's high level of vertical integration, low production costs, effective land cultivation as well as government measures to support local agricultural producers all mean that the Company is well positioned to tackle the volatile market conditions. Management remains confident that MHP will continue to perform well in 2009.
- End -
Notes to Editors:
Information on MHP
About MHP
MHP was admitted to the Official List of the London Stock Exchange in May 2008. It is the leading producer of poultry products in Ukraine, with a 2008 market share for industrially produced chicken meat of approximately 39%, according to the State Committee on Statistics of Ukraine. It's "Nasha Ryaba" brand is the market leader, whilst MHP also has several other national and regional brands for processed meat products.
MHP is fully vertically integrated owning and operating each of the key stages of chicken production processes, from feed grains and fodder production to egg hatching and grow out to processing, marketing, distribution and sales (including through MHP's franchise outlets). Vertical integration reduces MHP's dependence on suppliers and its exposure to increases in raw material prices. In addition to cost efficiency, vertical integration also allows MHP to maintain strict bio-security and to control the quality of its inputs and the resulting quality and consistency of its products through to the point of sale.
MHP also has an important and expanding grain operation, producing and selling sunflower oil as a by-product of its fodder production. MHP also produces and sells beef, sausages, cooked meats convenience food products, goose meat, foie gras and fruit.
Forward-Looking Statements
This press release might contain forward-looking statements that refer to future events or forecast financial indicators for MHP S.A. Such statements do not guarantee that these are actions to be taken by MHP S.A. in the future, and estimates can be inaccurate and uncertain. Actual final indicators and results can considerably differ from those declared in any forward-looking statements. MHP S.A. does not intend to change these statements to reflect actual results.
MHP S.A.
AND ITS SUBSIDIARIES
Independent Auditors' Report
Consolidated Financial Statements
Years Ended 31 December 2008,
2007 and 2006
MHP S.A. AND ITS SUBSIDIARIES
TABLE OF CONTENTS
| Page | |
| STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006
| 1 |
| CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006
| |
| Consolidated balance sheets | 4 |
| Consolidated income statements | 5 |
| Consolidated statements of changes in shareholders' equity | 6 |
| Consolidated statements of cash flows | 7-8 |
| Notes to the consolidated financial statements | 9-66 |
MHP S.A. AND ITS SUBSIDIARIES
STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION
AND APPROVAL OF THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 and 2006
The following statement, which should be read in conjunction with the independent auditors' responsibilities stated in the report of the independent auditors set out on pages 2-3, is made with a view to distinguishing the respective responsibilities of management and those of the independent auditors in relation to the consolidated financial statements of MHP S.A. and its subsidiaries (the "Group").
Management is responsible for the preparation of the consolidated financial statements that present fairly the consolidated financial position of the Group as of 31 December 2008, 2007 and 2006, the consolidated results of its operations, cash flows and changes in equity for the years then ended, in accordance with International Financial Reporting Standards ("IFRS").
In preparing the consolidated financial statements, management is responsible for:
Selecting suitable accounting principles and applying them consistently;
Making judgments and estimates that are reasonable and prudent;
Stating whether IFRS have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and
Preparing the consolidated financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business for the foreseeable future.
Management, within its competencies, is also responsible for:
Designing, implementing and maintaining an effective system of internal controls, throughout the Group;
Maintaining statutory accounting records in compliance with local legislation and accounting Standards in the respective jurisdictions;
Taking steps to safeguard the assets of the Group; and
Detecting and preventing fraud and other irregularities.
The accompanying consolidated financial statements of the Group for the year ended 31 December 2008, 2007 and 2006 are the responsibility of the Group's management.
The consolidated financial statements of the Group for the year ended 31 December 2008, 2007 and 2006 were authorized for issue on 9 April 2009 by:
| _______________________________ Yuriy Kosyuk/Chief Executive Officer | _______________________________________ Viktoria Kapelyushnaya/Chief Financial Officer |
| MHP S.A. AND ITS SUBSIDIARIES | ||||
| CONSOLIDATED BALANCE SHEETS | ||||
| AS OF 31 DECEMBER 2008, 2007 AND 2006 (in US Dollars and in thousands) | ||||
| Notes | 2008 | 2007 | 2006 | |||
| ASSETS | ||||||
| Non-current assets | ||||||
| Property, plant and equipment, net | 7 | 517,564 | 624,756 | 487,771 | ||
| Prepayments for property, plant and equipment | 22,269 | 5,883 | 46,246 | |||
| Deferred tax assets | 2,047 | 2,705 | - | |||
| Long-term VAT recoverable, net | 9,112 | 1,742 | 7,855 | |||
| Non-current biological assets | 29,480 | 42,096 | 26,689 | |||
| Other non-current assets | 11 | 6,458 | 8,013 | 4,601 | ||
| Total non-current assets | 586,930 | 685,195 | 573,162 | |||
| Current assets | ||||||
| Inventories | 38,118 | 42,645 | 57,091 | |||
| Biological assets | 84,095 | 90,785 | 51,594 | |||
| Agricultural produce | 42,765 | 31,680 | 21,244 | |||
| Natural gas in stock | - | - | 4,841 | |||
| Other current assets, net | 15,370 | 16,321 | 16,464 | |||
| Taxes recoverable and prepaid, net | 15 | 46,338 | 45,400 | 41,574 | ||
| Trade accounts receivable, net | 16 | 31,531 | 20,363 | 17,727 | ||
| Short-term bank deposits | 17 | 25,342 | 10,055 | 2,000 | ||
| Cash and cash equivalents | 18 | 54,072 | 10,088 | 44,415 | ||
| Total current assets | 337,631 | 267,337 | 256,950 | |||
| Total assets | 924,561 | 952,532 | 830,112 | |||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
| Equity attributable to equity holders of the Parent | ||||||
| Share capital | 19 | 284,505 | 251,311 | 251,311 | ||
| Additional paid-in capital | 178,815 | 60,059 | 56,973 | |||
| Revaluation reserve | 9,410 | 9,410 | 536 | |||
| Cumulative translation differences | (222,699) | 6,292 | 6,292 | |||
| Retained earnings | 82,480 | 80,962 | 39,425 | |||
| 332,511 | 408,034 | 354,537 | ||||
| Minority interest | 13,706 | 11,372 | 12,331 | |||
| Total equity | 346,217 | 419,406 | 366,868 | |||
| Non-current liabilities | ||||||
| Long-term bank borrowings | 20 | 57,456 | 65,878 | 56,054 | ||
| Bonds issued | 21 | 246,903 | 243,604 | 281,503 | ||
| Long-term finance lease and vendor financing obligations | 22 | 47,972 | 30,538 | 17,828 | ||
| Other long-term payables | 400 | 2,005 | 1,474 | |||
| Deferred tax liabilities | 6,160 | 6,506 | 2,289 | |||
| Total non-current liabilities | 358,891 | 348,531 | 359,148 | |||
| Current liabilities | ||||||
| Trade accounts payable | 23 | 22,170 | 25,116 | 13,725 | ||
| Accounts payable for property, plant and equipment | 22 | 8,116 | 9,626 | 11,847 | ||
| Other current liabilities | 24 | 32,992 | 18,085 | 8,754 | ||
| Short-term bank borrowings and current portion of long-term bank borrowings | 20 | 130,241 | 73,855 | 55,988 | ||
| Current portion of bonds issued | 21 | - | 39,604 | - | ||
| Interest accrued | 3,520 | 4,102 | 3,851 | |||
| Current portion of finance lease obligations | 22 | 21,625 | 13,903 | 9,283 | ||
| Deferred income | 25 | 789 | 304 | 648 | ||
| Total current liabilities | 219,453 | 184,595 | 104,096 | |||
| Total liabilities | 578,344 | 533,126 | 463,244 | |||
| Contingencies and contractual commitments | 26 | |||||
| Total liabilities and shareholders' equity | 924,561 | 952,532 | 830,112 |
On behalf of the Board
| _______________________________ Yuriy Kosyuk/Chief Executive Officer | _______________________________________ Viktoria Kapelyushnaya/Chief Financial Officer |
The notes on pages 9 to 66 form an integral part of these consolidated financial statements.
Independent auditors' report is on page 2-3.
| MHP S.A. AND ITS SUBSIDIARIES | ||
| CONSOLIDATED INCOME STATEMENTS | ||
| FOR THE YEARS ended 31 DECEMBER 2008, 2007 AND 2006 (in US Dollars and in thousands, except per share data) | ||
| Notes | 2008 | 2007* | 2006* | |||
| Continuing operations | ||||||
| Revenue | 28, 4 | 802,910 | 474,437 | 310,997 | ||
| Net change in fair value of biological assets and agricultural produce | 4 | 6,327 | 14,241 | 9,329 | ||
| Cost of sales | 29 | (571,710) | (365,018) | (209,996) | ||
| Gross profit | 237,527 | 123,660 | 110,330 | |||
| Selling, general and administrative expenses | 30 | (80,495) | (51,599) | (35,074) | ||
| Government grants recognized as income | 25 | 107,663 | 56,289 | 46,678 | ||
| Other operating expenses | 31 | (10,022) | (7,275) | (6,405) | ||
| Other operating income | 600 | 1,306 | 906 | |||
| Operating profit before loss on impairment of property, plant and equipment | 255,273 | 122,381 | 116,435 | |||
| Loss on impairment of property, plant and equipment | 7 | (11,767) | (10,238) | - | ||
| Operating profit | 243,506 | 112,143 | 116,435 | |||
| Finance costs, net | 32 | (51,663) | (49,482) | (36,516) | ||
| Finance income | 6,695 | - | - | |||
| Foreign exchange losses, net | 27 | (187,127) | (13,059) | (5,628) | ||
| Other expenses | (784) | (734) | (830) | |||
| Gain realized from acquisitions and changes in non-controlling interest in subsidiaries, net | 2 | 4,482 | 1,285 | 26,470 | ||
| Other income | 1,085 | 669 | 938 | |||
| Other expenses, net | (227,312) | (61,321) | (15,566) | |||
| Profit before tax | 16,194 | 50,822 | 100,869 | |||
| Income tax expense | (1,279) | (428) | (573) | |||
| Profit for the year from continuing operations | 14,915 | 50,394 | 100,296 | |||
| Discontinued operations | ||||||
| (Loss)/profit for the year from discontinued operations, net of income tax | 5 | (9,722) | (3,601) | 5,409 | ||
| Net profit for the year | 5,193 | 46,793 | 105,705 | |||
| Attributable to: | ||||||
| Equity holders of the Parent | 1,518 | 40,870 | 100,549 | |||
| Minority interest | 3,675 | 5,923 | 5,156 | |||
| Earnings per share | 35 | |||||
| From continuing operations (USD per share): | ||||||
| Basic | 0.11 | 0.44 | 0.95 | |||
| Diluted | 0.11 | 0.44 | 0.95 | |||
| From continuing and discontinued operations (USD per share): | ||||||
| Basic | 0.01 | 0.41 | 1.01 | |||
| Diluted | 0.01 | 0.41 | 1.01 |
* Amounts have been retroactively restated as a result of the discontinued operations discussed in Note 5.
On behalf of the Board
| _______________________________ Yuriy Kosyuk/Chief Executive Officer | ______________________________________ Viktoria Kapelyushnaya/Chief Financial Officer |
The notes on pages 9 to 66 form an integral part of these consolidated financial statements.
Independent auditors' report is on page 2-3.
| MHP S.A. AND ITS SUBSIDIARIES | ||
| CONSOLIDATED STATEMENTS OF Changes in Shareholders' Equity | ||
| FOR THE YEARS eNDED 31 December 2008, 2007 and 2006 (in US Dollars and in thousands) | ||
| Attributable to Equity Holders of the Parent | Minority interest | Total equity | |||||||||||||
| Share capital | Additional paid-in capital | Revaluation reserve | Retained earnings | Translation difference | Total | ||||||||||
| 1 January 2006 | 54,707 | - | 536 | 170,682 | 6,292 | 232,217 | 33,230 | 265,447 | |||||||
| Net profit for the year | - | - | - | 100,549 | - | 100,549 | 5,156 | 105,705 | |||||||
| Total recognized income and expense for the period | - | - | - | 100,549 | - | 100,549 | 5,156 | 105,705 | |||||||
| Acquisition of entities under common control (Note 2) | - | 22,060 | - | - | - | 22,060 | (4,675) | 17,385 | |||||||
| Acquisition of non-controlling interest in subsidiaries (Note 2) | - | - | - | - | - | - | (25,476) | (25,476) | |||||||
| Increase in minority interest due to sale of shareholding (Note 2) | - | - | - | - | - | - | 321 | 321 | |||||||
| Increase in minority interest due to business combination (Note 2) | - | - | - | - | - | - | 3,116 | 3,116 | |||||||
| Establishment of new entities (Note 2) | - | - | - | - | - | - | 478 | 478 | |||||||
| Withdrawal of subsidiary's share capital by minority shareholder | - | - | - | - | - | - | (327) | (327) | |||||||
| Contribution to share capital and additional paid-in capital | 50 | 348 | - | - | - | 398 | - | 398 | |||||||
| The Group's reorganization (Note 2) | 196,554 | 34,565 | - | (231,806) | - | (687) | 508 | (179) | |||||||
| 31 December 2006 | 251,311 | 56,973 | 536 | 39,425 | 6,292 | 354,537 | 12,331 | 366,868 | |||||||
| Net profit for the year | - | - | - | 40,870 | - | 40,870 | 5,923 | 46,793 | |||||||
| Effect of revaluation of property, plant and equipment (Note 7) | - | - | 11,124 | - | - | 11,124 | - | 11,124 | |||||||
| Deferred tax charged directly to revaluation reserve (Note 8) | - | - | (2,250) | - | - | (2,250) | - | (2,250) | |||||||
| Total recognized income and expense for the period | - | - | 8,874 | 40,870 | - | 49,744 | 5,923 | 55,667 | |||||||
| Effect of sale of subsidiary to the Principal Shareholder, net of income tax effect (Note 2) | - | 430 | - | - | - | 430 | (3,039) | (2,609) | |||||||
| Effect of sale of building to the Principal Shareholder, net of income tax effect (Note 6) | - | 405 | - | - | - | 405 | - | 405 | |||||||
| Acquisition and changes in non-controlling interest in subsidiaries (Note 2) | - | 2,251 | - | - | - | 2,251 | (4,147) | (1,896) | |||||||
| Increase in minority interest due to increase in share capital of subsidiary | - | - | - | 667 | - | 667 | 304 | 971 | |||||||
| 31 December 2007 | 251,311 | 60,059 | 9,410 | 80,962 | 6,292 | 408,034 | 11,372 | 419,406 | |||||||
| Net profit for the year | - | - | - | 1,518 | - | 1,518 | 3,675 | 5,193 | |||||||
| Cumulative translation difference | - | - | - | - | (228,991) | (228,991) | - | (228,991) | |||||||
| Total recognized income and expense for the period | - | - | - | 1,518 | (228,991) | (227,473) | 3,675 | (223,798) | |||||||
| Increase in share capital (net of issue costs) (Note 19) | 33,194 | 118,756 | - | - | - | 151,950 | - | 151,950 | |||||||
| Acquisition and changes in non-controlling interest in subsidiaries (Note 2) | - | - | - | - | - | - | (1,341) | (1,341) | |||||||
| 31 December 2008 | 284,505 | 178,815 | 9,410 | 82,480 | (222,699) | 332,511 | 13,706 | 346,217 | |||||||
On behalf of the Board
| _______________________________ Yuriy Kosyuk/Chief Executive Officer | _______________________________________ Viktoria Kapelyushnaya/Chief Financial Officer |
The notes on pages 9 to 66 form an integral part of these consolidated financial statements. Independent auditors' report is on page 2-3.
| MHP S.A. AND ITS SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
| FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 | |||
| (in US Dollars and in thousands) |
| 2008 | 2007 | 2006 | |||
| Operating activities | |||||
| Profit before tax from continuing and discontinued operations | 6,472 | 47,187 | 107,999 | ||
| Adjustments to reconcile profit to net cash provided by operations | |||||
| Depreciation of property, plant and equipment | 57,394 | 44,814 | 23,843 | ||
| Finance costs, net | 51,663 | 49,482 | 36,516 | ||
| Finance income | (6,695) | - | - | ||
| Effect of fair value adjustments | (4,945) | (11,095) | (11,790) | ||
| Loss on disposal of discontinued operation | 6,193 | - | - | ||
| Gain realized from acquisitions and changes in non-controlling interest in subsidiaries, net | (4,482) | (1,285) | (26,470) | ||
| Non-operating foreign exchange loss, net | 187,127 | 13,059 | 5,628 | ||
| Change in allowance for irrecoverable amounts and direct write-offs | 5,873 | 5,215 | 2,650 | ||
| Impairment of property, plant and equipment | 11,767 | 10,238 | - | ||
| Loss/(gain) on disposal of property, plant and equipment | 1,145 | (660) | 426 | ||
| Other non-cash items | - | (777) | (722) | ||
| Operating profit before working capital changes | 311,512 | 156,178 | 138,080 | ||
| (Increase)/decrease in inventories | (12,106) | 14,446 | (17,737) | ||
| (Increase)/decrease in biological assets | (23,066) | (34,138) | 702 | ||
| Increase in agricultural produce | (44,603) | (8,879) | (8,831) | ||
| Decrease in natural gas stock | - | 3,675 | 2,308 | ||
| Increase in other current assets | (726) | (3,422) | (3,504) | ||
| Increase in taxes recoverable and prepaid | (39,759) | (150) | (28,291) | ||
| (Increase)/decrease in trade accounts receivable | (25,480) | (3,862) | 5,137 | ||
| (Decrease)/increase in other long-term payables | (2,523) | 531 | (129) | ||
| (Decrease)/increase in trade accounts payable | (976) | 11,391 | (10,228) | ||
| Increase/(decrease) in other current liabilities | 6,278 | 11,491 | (9,804) | ||
| Increase/(decrease) in deferred income | 2,405 | (344) | (1,396) | ||
| Cash generated by operations | 170,956 | 146,917 | 66,307 | ||
| Finance costs paid | (51,861) | (47,633) | (33,067) | ||
| Interest received | 5,976 | 769 | 614 | ||
| Income tax paid | (2,353) | (1,488) | (779) | ||
| Net cash generated by operating activities | 122,718 | 98,565 | 33,075 | ||
| Investing activities | |||||
| Purchases of property, plant and equipment | (179,695) | (100,149) | (204,494) | ||
| Purchases of other non-current assets | (2,688) | (3,398) | (2,845) | ||
| Proceeds from sale of building to the Principal Shareholder | - | 4,005 | - | ||
| Proceeds from disposal of subsidiary, net of cash disposed | (17) | 4,798 | - | ||
| Proceeds from disposals of property, plant and equipment | 3,957 | 6,529 | 1,003 | ||
| Purchases of non-current biological assets | (1,462) | (11,498) | (21,017) | ||
| Financial aid provided in relation to acquisition of subsidiaries and acquisition of non-controlling interest in subsidiaries | (17,432) | - | - | ||
| Short-term deposits placement | (57,711) | (11,442) | (2,000) | ||
| Withdrawals of short-term deposits | 42,130 | 3,387 | 1,421 | ||
| Loans (provided to)/repaid by employees, net | (1,022) | (1,053) | 549 | ||
| Loans (provided to)/repaid by related parties, net | (136) | 673 | 854 | ||
| Contributions to share capital of subsidiaries by minority shareholders | - | 737 | - | ||
| Long-term financial aid to related parties | - | - | (3,913) | ||
| Acquisition of subsidiaries, net of cash acquired | 456 | - | 809 | ||
| Net cash used in investing activities | (213,620) | (107,411) | (229,633) |
| MHP S.A. AND ITS SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
| FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 (CONTINUED) | |||
| (in US Dollars and in thousands) | |||
| 2008 | 2007 | 2006 | |||
| Financing activities | |||||
| Proceeds from loans received | 274,618 | 156,084 | 271,418 | ||
| Repayment of bank loans | (238,716) | (166,284) | (315,482) | ||
| Proceeds from corporate bonds issued | - | - | 289,604 | ||
| Repayments of corporate bonds issued | (41,288) | - | - | ||
| Transaction costs related to corporate bonds issued | - | (2,106) | (6,290) | ||
| Finance lease payments | (18,544) | (13,175) | (5,206) | ||
| Other financing received | 13,846 | - | - | ||
| Issue of share capital, net of issue costs | 151,950 | - | 398 | ||
| Net cash (used in)/generated by financing activities | 141,866 | (25,481) | 234,442 | ||
| Net (decrease)/increase in cash and cash equivalents | 50,964 | (34,327) | 37,884 | ||
| Cash and cash equivalents at beginning of the year | 10,088 | 44,415 | 6,531 | ||
| Effect of translation to presentation currency and exchange rate changes on the balance of cash and cash equivalents held in foreign currencies | (6,980) | - | - | ||
| Cash and cash equivalents at end of the year | 54,072 | 10,088 | 44,415 |
On behalf of the Board
| _______________________________ Yuriy Kosyuk/Chief Executive Officer | ______________________________________ Viktoria Kapelyushnaya/Chief Financial Officer |
The notes on pages 9 to 66 form an integral part of these consolidated financial statements.
Independent auditors' report is on page 2-3.
MHP S.A. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006
(in US Dollars and in thousands)
1. DESCRIPTION OF FORMATION AND THE BUSINESS
Description of formation - MHP S.A. (the "Parent" or "MHP S.A."), a limited liability company registered under the laws of Luxembourg, was formed on 30 May 2006. MHP S.A. was formed to serve as the ultimate holding company of OJSC "Myronivsky Hliboproduct" ("MHP") and its subsidiaries. The registered address of MHP S.A. is 8-10, rue Mathias Hardt, L-1717 Luxembourg, Grand-Duchy of Luxembourg.
In the course of the corporate reorganization related to the establishment of MHP S.A., Raftan Holding Limited ("RHL") was established as a subholding company under MHP S.A., and through a series of transactions became the immediate parent of MHP. As a result of these transactions (collectively referred to as the "Corporate Reorganization") MHP S.A. indirectly owned 99.8% of MHP (see Note 2 for a discussion of the impact on the consolidated financial statements related to the Corporate Reorganization").
References to the "Group" for the periods prior to the formation of MHP S.A. are references to MHP and its subsidiaries and for the periods after the formation of MHP S.A. are to MHP S.A. and its subsidiaries.
The primary subsidiaries and the principal activities of the companies forming the Group as of 31 December 2008, 2007 and 2006 were as follows (for details of changes see Note ):
| Operating entity | Country of registration | Year established/ acquired | Principal activity | Effective ownership interest*, % | ||||
| 2008 | 2007 | 2006 | ||||||
| Operating entity | Country of registration | Year established/ acquired | Principal activity | Effective ownership interest*, % | ||||
| 2008 | 2007 | 2006 | ||||||
| MHP S.A. | Luxembourg | 2006 | Holding company | Parent | Parent | Parent | ||
| RHL | Republic of Cyprus | 2006 | Sub-holding company | 100 | 100 | 100 | ||
| MHP | Ukraine | 1998 | Management, marketing and sales | 99.9 | 99.8 | 99.8 | ||
| Myronivsky Zavod po Vygotovlennyu Krup i Kombikormiv ("MZVKK") | Ukraine | 1998 | Fodder and sunflower oil production | 88.5 | 84.7 | 84.7 | ||
| Peremoga Nova ("Peremoga") | Ukraine | 1999 | Chicken farm | 99.9 | 99.8 | 99.8 | ||
| Druzhba Narodiv Nova ("Druzhba Nova") | Ukraine | 2002 | Chicken farm | 99.9 | 99.8 | 99.8 | ||
|
| ||||||||
| Oril-Leader ("Oril") | Ukraine | 2003 | Chicken farm | 99.9 | 99.8 | 99.8 | ||
| Tavriysky Kombikormovy Zavod ("TKZ**") | Ukraine | 2004 | Fodder production | 99.9 | 99.9 | 29.4 | ||
| Ptahofabryka Shahtarska Nova ("Shahtarska") | Ukraine | 2003 | Breeder farm | 99.9 | 99.8 | 99.8 | ||
| Myronivska Pticefabrica ("Myronivska") | Ukraine | 2004 | Chicken farm | 99.9 | 99.8 | 99.8 | ||
| Starynska Ptahofabryka ("Starynska") | Ukraine | 2003 | Breeder farm | 84.9 | 84.8 | 84.8 | ||
| Ptahofabryka Snyatynska Nova ("Snyatynska") | Ukraine | 2005 | Geese breeder farm | 99.9 | 99.8 | 99.8 | ||
| Zernoproduct | Ukraine | 2005 | Fodder grain cultivation | 89.9 | 89.8 | 89.8 | ||
| Katerynopilsky Elevator | Ukraine | 2005 | Fodder production and grain storage | 99.9 | 99.8 | 99.8 | ||
| Druzhba Narodiv ("Druzhba") | Ukraine | 2006 | Cattle breeding, plant cultivation | 99.0 | 95.3 | 87.6 | ||
| Agrofirma Kyivska ("Kyivska") | Ukraine | 2006 | Cattle breeding | N/A | 75.8 | 75.8 | ||
| Crimean Fruit Company ("Crimean Fruit") | Ukraine | 2006 | Fruits grain cultivation | 81.9 | 81.8 | 81.8 | ||
| NPF Urozhay ("Urozhay") | Ukraine | 2006 | Fodder grain cultivation | 89.9 | 89.8 | 89.8 | ||
| Agrofort ("AGF") | Ukraine | 2006 | Fodder grain cultivation | 86.1 | 86.0 | 86.0 | ||
| Zernoproduct-Lypivka ("ZPL") | Ukraine | 2006 | Fodder grain cultivation | 63.0 | 62.9 | 62.9 | ||
| Ukrainian Bacon | Ukraine | 2008 | Meat processing | 79.9 | N/A | N/A | ||
* Effective voting rights in subsidiaries did not differ from effective ownership rights. Direct ownership interest in subsidiaries by the Parent differs from the effective ownership interest due to cross holdings between subsidiaries.
** The Group consolidated TKZ in 2006 as, in substance, activities of TKZ were conducted on behalf of the Group, so that the Group benefited from TKZ operations, and the Group was exposed to risks incidental to the activities of TKZ. In November 2006, TKZ's majority shareholder withdrew USD 411 thousand of its investment in TKZ resulting in a change in a minority interest. In April 2007, RHL acquired 70.6% of the participatory interests in TKZ from Allied Tech LLC for a cash consideration of USD 200 thousand, which resulted in a decrease in minority interest of USD 2,451 thousand. The resulting excess of the book value of the minority interest over cash consideration paid of USD 2,251 thousand was recognized in these consolidated financial statements as an adjustment to shareholders' equity.
Description of the business - The principal business activities of the Group are agricultural operations (poultry and related operations), cultivation and selling fruits and producing beef and meat products ready for consumption (other agricultural operations) and grain growing. The Group's poultry and related operations integrate all functions related to the production of chicken, including hatching, fodder manufacturing, raising chickens to marketable age ("grow-out"), processing and marketing of branded chilled products and include the production and sale of chicken products, sunflower oil, mixed fodder and convenience food products. Other agricultural operations comprise the production and sale of beef, goose meat, foie gras, sausages, fruits, potatoes and feed grains. Grain growing comprises the production and sale of grains and sugar beets.
The Group's operational facilities are located in different regions of Ukraine, including Kyiv, Cherkasy, Dnipropetrovsk, Donetsk, Ivano-Frankivsk, Vinnytsya, Kherson regions and Autonomous Republic of Crimea.
Prior to 2007, the Group also had natural gas related operations which were discontinued in the first quarter of 2007 (see Note 5).
2. THE GROUP'S FORMATION, ACQUISITIONS AND CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES
Corporate Reorganization - As described in Note 1, in 2006 the Corporate Reorganization was completed in order to establish MHP S.A. as the ultimate holding company.
As the Corporate Reorganization did not have a direct result on MHP or its subsidiaries and the underlying business operated for all periods, the consolidated financial statements have been prepared to present all years on a comparative basis. There has been no accounting impact from the Corporate Reorganization except as follows:
Share capital, additional paid-in-capital and retained earnings: For the periods prior to the Corporate Reorganization, share capital and additional paid in capital is that of MHP. Upon the Corporate Reorganization share capital was changed to that of MHP S.A. and additional paid-in capital was determined as the excess of the net assets of the Group as of the date of the Corporate Reorganization over cost of investment as part of the Corporate Reorganization. The cost of the investment represents the cash contributed to establish MHP S.A. and RHL and the value of the contributed shares of MHP to RHL. The Group has elected to record the offset to the capital and additional paid in capital against retained earnings.
Minority Interest: There were certain minority shareholders of 0.4% of MHP at the time of the reorganization that did not exchange their shares in MHP for shares in MHP S.A. As a result, the Group has established a minority interest associated with these minority shareholders.
In connection with this Corporate Reorganization, MHP also entered into an agreement to acquire ownership in Kyivska and Druzhba resulting in an expansion of the Group's operations and an increase in the value of the Group (see "Kyivska and Druzhba" below).
Acquisitions from entities under common control and subsequent purchase of minority interest from third parties
Kyivska and Druzhba
During 2006, the Group entered into share purchase agreements to acquire 52.0% of voting common shares of Kyivska for cash consideration of USD 91 thousand and to purchase 60.5% of Druzhba from Kyivska for USD 198 thousand. At the time of the share purchase agreements, Druzhba owned a 99.9% interest in Crimean Fruit Company and a 22.6% interest in Druzhba Nova.
Net assets of Druzhba and Kyivska as of the date of acquisition were as follows:
| Druzhba's consolidated carrying amounts | Kyivska's carrying amounts | ||
| Property, plant and equipment, net | 26,151 | 5,021 | |
| Accounts receivable from the Group | 22,578 | 932 | |
| Non-current biological assets | 6,939 | 2,569 | |
| Investment in Druzhba Nova | 4,475 | - | |
| Other non-current assets | 2,152 | 930 | |
| Inventories and agricultural produce | 5,315 | 1,886 | |
| Current biological assets | 13,261 | 1,352 | |
| Trade accounts receivable, net | 9,921 | 14,992 | |
| Cash and cash equivalents | 703 | 6 | |
| Total assets | 91,495 | 27,688 | |
| Long-term bank borrowings and other long-term payables | (9,754) | (591) | |
| Short-term bank borrowings | (4,500) | - | |
| Accounts payable to the Group | (36,264) | (39,367) | |
| Trade accounts payable | (1,009) | (117) | |
| Other current liabilities | (1,615) | (2,989) | |
| Deferred income | - | (231) | |
| Total liabilities | (53,142) | (43,295) | |
| Net assets/(liabilities) acquired | 38,353 | (15,607) | |
| Net liabilities attributable to 52.0% ownership interest of Kyivska | - | (15,607) | |
| Net assets attributable to 60.5% ownership interest of Druzhba | 23,189 | - | |
| Decrease in minority interest in Druzhba Nova | 14,767 | - | |
| Purchase price | (198) | (91) | |
| Difference between purchase price and net assets/(liabilities) acquired recorded in shareholders' equity | 37,758 | (15,698) | |
| Cash acquired | 703 | 6 | |
| Net cash inflow arising on the acquisition | 703 | 6 |
As a result of Druzhba acquisition in March 2006, the Group obtained additional 13.7% effective ownership in Druzhba Nova, resulting in a decrease of minority interest by USD 19,242 thousand as of the date of acquisition.
In accordance with the Group's accounting policy, assets and liabilities of these entities were recognized at the pre-acquisition carrying values. The excess of the carrying value of the assets over consideration paid of USD 22,060 thousand was recorded in shareholders' equity. The results of Kyivska and Druzhba were consolidated by the Group from the date of acquisition of control. As the minority shareholder does not have any obligation to fund losses of Kyivska, the Group has recognized 100% of the net liabilities and has not established a minority interest.
In June 2006, the Group purchased an additional 23.8% ownership in Kyivska from a minority shareholder for a cash consideration of USD 2 thousand increasing its ownership to 75.8%.
In June 2006, MHP acquired 82.0% of voting shares in Crimean Fruit Company from Druzhba for USD 162 thousand. The remaining shares of Crimean Fruit Company were sold to the General Director of Crimean Fruit Company for USD 18 thousand. The difference between the consideration paid and the fair value of the net assets acquired, after reversing minority interest, of USD 261 thousand, was recognized in these consolidated financial statements in Gain realized from acquisitions and changes in non-controlling interest in subsidiaries.
In September 2006, the Group acquired additional 27.3% shareholding in Druzhba from third parties for USD 764 thousand. As a result of the transaction, the Group acquired additional effective interest of 6.2% in Druzhba Nova. The excess of the fair value of the acquired share of Druzhba's and Druzhba Nova's net assets over purchase price, after reversing the minority interest, of USD 20,959 thousand was recognized in these consolidated financial statements in Gain realized from acquisitions and changes in non-controlling interest in subsidiaries.
In October 2006, MHP purchased 22.6% shares of Druzhba Nova from Druzhba resulting in an increase in its total ownership of Druzhba Nova to 100.0%. The difference between the purchase price of USD 158 thousand and the net assets acquired, after reversing the minority interest, of USD 4,499 thousand was recognized in these consolidated financial statements in Gain realized from acquisitions and changes in non-controlling interest in subsidiaries.
During the year ended 31 December 2007, through a series of transactions, the Group increased its effective ownership in Druzhba to 95.3%. These transactions resulted in the recognition of USD 1,285 thousand in these consolidated financial statements in Gain realized from acquisitions and changes in non-controlling interest in subsidiaries.
In August 2008, Druzhba decreased its share capital by repurchasing shares from a number of its minority shareholders, which resulted in an increase of the Group's effective ownership in Druzhba from 95.3% to 98.9%. Consideration payable to the minority shareholders in exchange for the shares was determined based on the respective shareholder's share in the net assets of Druzhba, as recorded in the statutory financial statements as of the date of transaction, and was payable in cash or in kind, depending on the agreements reached with each shareholder. The excess of the fair value of the acquired share over the consideration payable of USD 161 thousand was recognized in these consolidated financial statements in Gain realized from acquisitions and changes in non-controlling interest in subsidiaries.
In December 2008, prior to the sale of its interest, the Group increased the share capital of Kyivska, which resulted in an increase in the Group's effective ownership to 99.7%. The transaction did not have effect on the minority interests due to negative net assets of Kyivska as of the date of the transaction. The Group subsequently sold its interest in Kyivska prior to the year end.
Acquisitions from third parties
Urozhay
In October 2006, the Group acquired from a third party 89.8% interest in Urozhay for USD 595 thousand. Urozhay specializes in fodder grain cultivation. This transaction has been accounted for under the purchase method of accounting.
The fair value of the net assets acquired was as follows:
| Property, plant and equipment, net | 893 |
| Other non-current assets | 6 |
| Other non-current assets | 33 |
| Inventories, biological assets and agricultural produce | 6,146 |
| Trade accounts receivable, net | 4,146 |
| Cash and cash equivalents | 100 |
| Total assets | 11,324 |
| Other long-term payables | (32) |
| Short-term bank borrowings | (990) |
| Trade accounts payable | (9,265) |
| Other current liabilities | (376) |
| Total liabilities | (10,663) |
| Net assets acquired | 661 |
| Fair value of net assets attributable to 90.0% ownership interest | 595 |
| Cash consideration paid | (595) |
| Cash acquired | 100 |
| Net cash outflow arising on the acquisition | (495) |
The revenue and financial results of Urozhay for the year ended 31 December 2006 were insignificant.
Ukrainian Bacon
In July 2008, the Group acquired from a third party a 80.0% interest in Ukrainian Bacon, a meat processing company. The transaction was accounted for under the purchase method of accounting. The Group's effective ownership interest in Ukrainian Bacon upon the acquisition and as of 31 December 2008 was 79.9%.
The fair value of the net assets acquired was as follows:
| Property, plant and equipment, net | 28,737 |
| Prepayments for property, plant and equipment | 662 |
| Other non-current assets | 302 |
| Taxes recoverable and prepaid, net | 3,492 |
| Other current assets, net | 2,605 |
| Trade accounts receivable, net | 107 |
| Accounts receivable from the Group | 732 |
| Inventories | 1,408 |
| Cash and cash equivalents | 456 |
| Total assets | 38,501 |
| Deferred tax liabilities | (2,630) |
| Trade accounts payable | (7,501) |
| Accounts payable to the Group | (20,344) |
| Other current liabilities | (2,989) |
| Total liabilities | (33,464) |
| Net assets acquired | 5,037 |
| Fair value of net assets attributable to 80% ownership interest | 4,030 |
| Fair value of the consideration payable | (469) |
| Gain realized upon acquisition | 3,561 |
| Cash consideration paid | - |
| Cash acquired | 456 |
| Net cash inflow arising on the acquisition | 456 |
The gain realized upon acquisition was recognized within Gain realized from acquisitions and changes in non-controlling interest in subsidiaries for the year ended 31 December 2008.
Prior to and in connection with the acquisition, in order to finance working capital deficit of Ukrainian Bacon, the Group provided short-term interest-free returnable financial aid to Ukrainian Bacon for the total amount of USD 17,432 thousand, as well as provided extended payment terms on ordinary trade transactions in the amount of USD 2,180 thousand as of the date of acquisition.
Other acquisitions
MHP
During 2006, the Group acquired an additional shareholding in MHP from minority shareholders, which resulted in the Group owning 99.8% of MHP as of 31 December 2006. The related excess of the fair value of share of net assets acquired over the purchase price of USD 752 thousand was recognized in these consolidated financial statements in Gain realized from acquisitions and changes in non-controlling interest in subsidiaries for the year ended 31 December 2006.
In September 2008 the Group increased the share capital of MHP, which resulted in the Group owning 99.9% in MHP as of 31 December 2008. The gain on the transaction in the amount of USD 718 thousand was recognized in these consolidated financial statements in Gain realized from acquisitions and changes in non-controlling interest in subsidiaries.
MZVKK
During the year ended 31 December 2008, through a series of transactions, the Group increased its effective share in MZVKK from 84.7% to 88.5%. The excess of the fair value of the share of the net assets acquired over the purchase price in the amount of USD 42 thousand was recognized in these consolidated financial statements in Gain realized from acquisitions and changes in non-controlling interest in subsidiaries.
Other
The Group made other insignificant acquisitions during each of the periods presented. These acquisitions have been accounted for based on the Group's accounting policies. The impact of these acquisitions was not significant to the consolidated financial statements of the Group.
"Pro forma" results of Acquisitions - The "pro forma" revenues and results for the year ended 31 December 2006, had the transactions related to Kyivska and Druzhba as discussed above, been entered into on 1 January 2006 would have been USD 318,746 thousand and USD 101,496 thousand, respectively. The "pro forma" earnings per share would have been USD 0.96 per share and USD 1.01 per share from continuing and continuing and discontinued operations, respectively.
The "pro forma" revenues and results for the year ended 31 December 2008, had the acquisition of Ukrainian Bacon been completed on 1 January 2008, would have been USD 809,358 thousand and USD 3,793 thousand, respectively. The "pro forma" earnings per share would have been USD 0.11 and USD 0.01 per share from continuing and continuing and discontinued operations, respectively.
These "pro forma" revenues and results do not reflect any adjustments related to other transactions. The "pro forma" results represent an approximate measure of the performance of the combined group on an annualized basis. The unaudited "pro forma" information does not purport to represent what the Group's financial position or results of operations would actually have been if these transactions had occurred at such dates or to project the Group's future results of operations.
Establishment of new subsidiaries - In September 2006, the Group established ZZG, a mink production company contributing USD 4,395 thousand into its share capital. In November 2006, ZZG's minority shareholder, LLC Elite, contributed assets comprising the mink production complex in exchange for 41% of the participatory interests in ZZG. The assets contributed by LLC Elite were recorded at fair value at the date of contribution.
Assets contributed by LLC Elite in ZZG were as follows:
| Property, plant and equipment, net | 694 |
| Non-current biological assets (mink) | 2,360 |
| Total assets | 3,054 |
In February 2006, the Group, together with a third party, established a new subsidiary Zernoproduct-Lypivka engaged in grain growing activities. The Group's share was fully paid in cash for USD 869 thousand; share capital contribution by the third party was paid in-kind by property, plant and equipment. As of 31 December 2006, the Group's effective interest in Zernoproduct-Lypivka was 62.9%.
In September 2006, the Group, together with a third party, established Agrofort, which is engaged in grain growing activities with participatory interest of 86.2% and 13.8%, respectively. The Group share was fully paid in cash; share capital contribution by the third party was paid in-kind by property, plant and equipment.
Disposal of subsidiaries
ZZG
In April 2007, the Group sold its shares in ZZG to its Principal Shareholder for a cash consideration of USD 4,798 thousand. The excess of the consideration received by the Group over the carrying value of the net assets of ZZG of USD 430 thousand was recorded in shareholders' equity.
Assets and liabilities of ZZG as of the date of disposal were as follows:
| Property, plant and equipment, net | 2,392 |
| Non-current biological assets (mink) | 3,006 |
| Accounts receivable and other current assets, net | 2,368 |
| Current liabilities (including payables to the Group of USD 325) | (363) |
| Net assets disposed | 7,403 |
| Net assets attributable to 59% ownership in ZZG | 4,368 |
| Sale price | (4,798) |
| Gain recorded in shareholders' equity | (430) |
| Cash consideration received | 4,798 |
| Cash disposed | - |
| Net cash inflow arising on the disposal | 4,798 |
The financial results of ZZG for the years ended 31 December 2007 and 2006 were insignificant. ZZG assets and liabilities were presented in these consolidated financial statements within the other agricultural business segment.
Kyivska
In December 2008, the Group sold its voting rights in Kyivska to a third party for a consideration of USD 974 thousand, receivable in cash during the period from 2011 till 2017. The fair value of the consideration receivable was determined at USD 341, which is the present value of the expected future cash flows.
Assets and liabilities of Kyivska as of the date of disposal were as follows:
| Property, plant and equipment, net | 3,709 |
| Biological assets | 1,723 |
| Agricultural produce | 1,507 |
| Amounts receivable from the Group | 8,300 |
| Inventories | 224 |
| Taxes recoverable and prepaid, net | 1,123 |
| Cash and cash equivalents | 17 |
| Total assets | 16,603 |
| Accounts payable to the Group | (9,315) |
| Trade accounts payable | (501) |
| Other current liabilities | (240) |
| Total liabilities | (10,056) |
| Net assets disposed | 6,547 |
| Group's share in net assets disposed (99.8%) | 6,534 |
| Fair value of consideration receivable | (341) |
| Loss on disposal | (6,193) |
| Cash consideration received | - |
| Cash disposed | (17) |
| Net cash outflow arising on the disposal | (17) |
The disposal of Kyivska was accounted for in these consolidated financial statements as a discontinued operation (Note 5). The loss realized on disposal of Kyivska in the amount of USD 6,193 thousand was recognized in these consolidated financial statements in Loss for the year from discontinued operations.
Kyivska assets and liabilities were presented in these consolidated financial statements within the other agricultural business segment.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and accounting − The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS") issued by the International Accounting Standards Board ("IASB") and Interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"). The operating subsidiaries of the Group maintain their accounting records under Ukrainian Accounting Standards ("UAS"). UAS principles and procedures may differ from those generally accepted under IFRS. Accordingly, the consolidated financial statements, which have been prepared from the Group entities' UAS records, reflect adjustments necessary for such financial statements to be presented in accordance with IFRS.
The consolidated financial statements of the Group are prepared on the historical cost basis, except for revalued amounts of property, plant and equipment, biological assets, agricultural produce, natural gas in stock and certain financial instruments.
Adoption of new and revised International Financial Reporting Standards − Three Interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are: IFRIC 11 "IFRS 2: Group and Treasury Share Transactions", IFRIC 12 "Service Concession Arrangements", IFRIC 14 "IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction". The adoption of these Interpretations has not led to any changes in the Group's accounting policies.
At the date of authorization of these consolidated financial statements, the following Standards and Interpretations, as well as amendments to the Standards were in issue but not yet effective:
| Standard / Interpretation | Effective for annual accounting period beginning on or after: |
| IAS 1 "Presentation of Financial Statements" (Revised September 2007) | 1 January 2009 |
| IAS 23 "Borrowing Costs" (Revised March 2007) | 1 January 2009 |
| IFRS 1 "First-time Adoption of International Financial Reporting Standards (Revised Novemver 2008) | 1 July 2009* |
| IFRS 3 "Business Combinations" (Revised January 2008) | 1 July 2009* |
| IFRS 8 "Operating Segments" | 1 January 2009 |
| IFRIC 13 "Customer Loyalty Programmes " | 1 July 2008 |
| IFRIC 15 "Agreements for the Construction of Real Estate" | 1 January 2009* |
| IFRIC 16 "Hedges of a Net Investment in a Foreign Operation" | 1 October 2008* |
| IFRIC 17 "Distributions of Non-cash Assets to Owners" | 1 July 2009* |
| IFRIC 18 "Transfers of Assets from Customers" | 1 July 2009* |
| Amendments to IAS 27 "Consolidated and Separate Financial Statements" (January 2008) | 1 July 2009* |
| Amendment to IAS 39 "Financial Instruments: Recognition and Measurement" - Eligible Hedged Items (July 2008) | 1 July 2009* |
| Amendment to IAS 39 "Financial Instruments: Recognition and Measurement" - Effective Date and Transition (November 2008) | 1 July 2008* |
| Amendment to IFRS 7 "Financial Instruments: Disclosures" (March 2009) | 1 January 2009* |
| Amendments to IFRIC 9 "Reassessment of Embedded Derivatives" and IAS 39 "Financial Instruments: Recognition and Measurement" | 30 June 2009* |
* Standards and Inrepretations not endorsed by the European Union
The management is currently evaluating the impact of the adoption of IFRS 8 "Operating Segments", IAS 27 "Consolidated and Separate Financial Statements" and IFRS 3 "Business Combinations" (Revised January 2008). For other Standards and Interpretations management anticipates that their adoption in future periods will have no material effect on the consolidated financial statements of the Group.
Use of estimates and assumptions − The preparation of the financial statements requires management of the Group to make judgments, estimates and assumptions that affect the application of the standards and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
These consolidated financial statements include Group's management estimates on value of assets, liabilities, income, expenses and commitments recognized. The most significant estimates related to the following:
Determination of the fair value of the biological assets;
Fair values of assets and liabilities acquired in business combinations;
Impairment of items of property, plant and equipment;
Allowances for irrecoverable accounts receivable and taxes recoverable;
Estimates of the useful lives of property, plant and equipment;
Determination of whether deferred tax assets are realizable;
Allowance for obsolete and slow-moving raw materials and spare parts.
Although the estimates were based on the best information available as of 31 December 2008, future events may require these estimates to be modified (increased or decreased) in subsequent years.
This may result in the recognition of expense in a future period related to amounts from prior periods. Any change in accounting estimates would be recognized prospectively in the corresponding consolidated income statement.
Critical accounting judgments in applying accounting policies − The following are the critical judgments, apart from those involving estimates (see above), that the management has made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements:
Determination of the Group's functional currency;
Consolidation of special purpose entities on the basis of effective control;
Determination of reportable segments;
Determination of whether significant risks and rewards associated with ownership of assets were transferred to the Group.
Functional and presentation currency − The functional currency of MHP S.A. and each of its subsidiaries is the Ukrainian Hryvnia ("UAH"). Transactions in currencies other than the functional currency of the Group are treated as transactions in foreign currencies. Such transactions are initially recorded at the rates of exchange ruling on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are translated at the rates prevailing on the balance sheet date. All realized and unrealized gains and losses arising on exchange differences are included in the consolidated income statement for the period.
In the current year, the Group has chosen to present its consolidated financial statements in
US Dollars ("USD"). The decision was taken for convenience of the users of financial statements.
The results and financial position of the Group are translated into the presentation currency using the following procedures:
Assets and liabilities for each consolidated balance sheet presented are translated at the closing rate as of the date of that balance sheet;
Income and expenses for each consolidated income statement are translated at exchange rates at the dates of the transactions;
All resulting exchange differences are recognized as a separate component of equity.
The relevant exchange rates were:
| As of 31 December 2008 | Average for 2008 | As of 31 December 2007 | Average for 2007 | As of 31 December 2006 | Average for 2006 | |
| UAH/USD | 7.7000 | 5.2693 | 5.0500 | 5.0500 | 5.0500 | 5.0500 |
| UAH/EUR | 10.8555 | 7.7114 | 7.4195 | 6.9192 | 6.6509 | 6.3389 |
Basis of consolidation − The consolidated financial statements incorporate the financial statements of the Parent and entities controlled by the Parent (its subsidiaries). Control is achieved when the Parent has the power to govern the financial and operating policies of an investee, either directly or indirectly, so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements of the Group from the date when control effectively commences.
All significant intercompany transactions, balances and unrealized gains/(losses) on transactions are eliminated on consolidation, unless when the intragroup losses indicate an impairment that requires recognition in the consolidated financial statements.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those adopted by the Group.
The Group consolidates a special purpose entity under the provisions of SIC 12, "Consolidation - Special Purpose Entities" when, in substance, the activities of such entity are being conducted on behalf of the Group, so that the Group benefits from the entity's operations, and the Group is exposed to risks incidental to the activities of this entity.
Accounting for acquisitions − The acquisitions of subsidiaries from third parties are accounted for using the purchase method. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values. The interest of minority shareholders of subsidiaries acquired from third parties is stated at the minority's proportion of the fair values of the assets and liabilities recognized. The excess of the cost of acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition is recognized as goodwill.
Any excess of the fair value of the share in net identifiable assets over the cost of acquisition is recognized immediately in the consolidated income statement.
The acquisition of an additional interest in entities controlled by the Group are accounted for based on the fair value of the net assets at the date of acquisition.
Accounting for transactions with entities under common control − The assets and liabilities of subsidiaries acquired from entities under common control are recorded in these consolidated financial statements at pre-acquisition carrying values. Any difference between the carrying value of net assets of these subsidiaries, and the consideration paid by the Group is accounted for in these consolidated financial statements as an adjustment to shareholders' equity. The results of the acquired entity are reflected from the date of acquisition.
Any gain or loss on disposals to entities under common control are reflected as a component of shareholders' equity.
Discontinued operations − Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use.
This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets and disposal groups classified as held for sale are measured at the lower of the assets' carrying amount and fair value less costs to sell.
If the criteria of classification of the disposal group held for sale are met after the balance sheet date, disposal group is not presented as held for sale in those financial statements when issued. However, when those criteria are met after the balance sheet date but before the authorization of the financial statements for issue, the Group discloses the respective information in notes to the financial statements.
Non-current assets or disposal groups to be abandoned are not classified as held for sale as the carrying amount will be recovered principally through continuing use. Non-current assets or disposal groups to be abandoned include non-current assets or disposal groups that are to be used to the end of their economic life or to be closed rather than sold. The assets or disposal groups to be abandoned are reported as discontinued operations in the period at which they are abandoned.
Property, plant and equipment − Property, plant and equipment are carried at historical cost, or at the cost of construction, less accumulated depreciation and accumulated impairment losses, except for grain storage facilities, which are carried at revalued amounts, being their fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
The historical cost of an item of property, plant and equipment comprises (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; (b) any costs directly attributable to bringing the item to the location and condition necessary for it to be capable of operating in the manner intended by the management of the Group; (c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which the Group incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
Subsequently capitalized costs include major expenditures for improvements and replacements that extend the useful lives of the assets or increase their revenue generating capacity. Repairs and maintenance expenditures that do not meet the foregoing criteria for capitalization are charged to the consolidated income statement as incurred.
Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. If the asset's carrying amount is increased as a result of a revaluation, the increase is credited directly to equity as a revaluation reserve. However, such increase is recognized in the consolidated income statement to the extent that it reverses a revaluation decrease of the same asset previously recognized in the consolidated income statement. If the asset's carrying amount is decreased as a result of a revaluation, the decrease is recognized in the consolidated income statement. However, such decrease is debited directly to the revaluation reserve to the extent of any credit balance existing in the revaluation reserve in respect of that asset.
Depreciation on revalued assets is charged to the consolidated income statement. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus remaining in the revaluation reserve is transferred directly to retained earnings. No transfer is made from the revaluation reserve to retained earnings except when an asset is derecognized.
Depreciation of property, plant and equipment is charged so as to write off the depreciable amount over the useful life of an asset and is calculated using a straight line method. Useful lives of the groups of property, plant and equipment are as follows:
| Buildings and structures | 15-35 years |
| Grain storage facilities | 20-35 years |
| Machinery and equipment | 10-15 years |
| Utilities and infrastructure | 10 years |
| Vehicles and agricultural machinery | 5-15 years |
| Office furniture and equipment | 3-5 years |
Depreciable amount is the cost of an item of property, plant and equipment, or revalued amount, less its residual value. The residual value is the estimated amount that the Group would currently obtain from disposal of the item of property, plant and equipment, after deducting the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life.
The depreciable amount of assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.
The residual value, the useful lives and depreciation method are reviewed at each financial year-end. The effect of any changes from previous estimates is accounted for as a change in an accounting estimate.
The gain or loss arising on a sale or disposal of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in consolidated income statement.
Construction in progress comprises costs directly related to construction of property, plant and equipment including an appropriate allocation of directly attributable variable overheads that are incurred in construction. Construction in progress is not depreciated. Depreciation of the construction in progress, on the same basis as for other property, plant and equipment items, commences when the assets are available for use, i.e. when they are in the location and condition necessary for them to be capable of operating in the manner intended by the management.
At each balance sheet date, the Group reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Income taxes − Income taxes have been computed in accordance with the laws currently enacted in jurisdictions where operating entities are located. Income tax is calculated based on the results for the year as adjusted for items that are non-assessable or non-tax deductible. It is calculated using tax rates that have been enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized.
Deferred tax is charged or credited to the consolidated income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred income tax assets and liabilities are offset when:
The Group has a legally enforceable right to set off the recognized amounts of current tax assets and current tax liabilities;
The Group has an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously;
The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority in each future period in which significant amounts of deferred tax liabilities and assets are expected to be settled or recovered.
Thirteen of the Group companies (poultry farms and other entities engaged in agricultural production) benefit substantially from the status of an agricultural producer. These thirteen companies are exempt from income taxes and pay the Fixed Agricultural Tax instead (Note 8).
Inventories and natural gas stock for own usage − Inventories and natural gas stock for own usage of the Group are stated at the lower of cost and net realizable value. Cost comprises raw materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present locations and condition.
Cost is calculated using the FIFO (first-in, first-out) method. Net realizable value is determined as the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Agriculture related production process results in production of joint products: main and by-products. A by-product arising from the process is measured at net realizable value and this value is deducted from the cost of the main product.
Commodities − The Group's commodities are principally acquired by the Group with the purpose of selling in the near future and generating a profit from fluctuations in price. Commodities held by the Group for resale represent natural gas in stock and are measured at each balance sheet date at fair value.
Biological assets and agricultural produce − Agricultural activity is defined as a biological transformation of biological assets for sale into agricultural produce or into additional biological assets. The Group classifies hatchery eggs, live poultry and other animals and plantations as biological assets.
The Group recognizes a biological asset or agricultural produce when the Group controls the asset as a result of past events; it is probable that future economic benefits associated with the asset will flow to the Group; and the fair value or cost of the asset can be measured reliably.
Biological assets are stated at fair value less estimated point-of-sale costs at both initial recognition and as of the balance sheet date, with any resulting gain or loss recognized in the consolidated income statement. Point-of-sale costs include all costs that would be necessary to sell the assets, including costs necessary to get the assets to market.
The difference between fair value less estimated point-of-sale costs and total production costs is allocated to biological assets held in stock as of each balance sheet date as a fair value adjustment.
The change in this adjustment from one period to another is recognized in Net change in fair value of biological assets and agricultural produce in the consolidated income statements.
Agricultural produce harvested from biological assets is measured at its fair value less estimated point-of-sale costs at the point of harvest. A gain or loss arising on initial recognition of agricultural produce at fair value less estimated point-of-sale costs is included in the consolidated income statement in the period in which it arises.
Based on the above policy, the principal groups of biological assets and agricultural produce are stated as follows:
Biological Assets
(i) Broilers
Broilers comprise poultry held for chicken meat production. Fair value of broilers is determined by reference to the cash flows that will be obtained from sales of 44-day aged chickens, with an allowance for costs to be incurred and risks to be faced during the remaining transformation process.
(ii) Breeders
The fair value of breeders is determined using the discounted cash flow approach based on hatchery eggs market prices.
(iii) Cattle and pigs
Cattle held for regeneration of livestock population and animals raising for milk and beef and pork meat production. The fair value of livestock is determined based on market prices of livestock of similar age, breed and genetic merit. Cattle, for which market-determined prices or values are not available and for which alternative estimates of fair value are determined to be clearly unreliable, are measured using the present value of expected net cash flows from the asset discounted at a current market-determined pre-tax rate.
(iv) Orchards
Orchards consist of plants used for fruits production. Fruit trees achieve the normal productive age in the second to fifth year. The fair value of orchards which have attained normal productive age is determined using the discounted cash flow approach.
(v) Crops in fields
The fair value of crops in fields is determined by reference to the cash flows that will be obtained from sales of harvested crops, with an allowance for costs to be incurred and risks to be faced during the remaining transformation process.
Agricultural Produce
(i) Dressed poultry, beef and pork
The fair value of dressed poultry, beef and pork is determined by reference to market prices at the point of harvest.
(ii) Fodder grain, potatoes and fruits
The fair value of fodder grain, potatoes and fruits is determined by reference to market prices at the point of harvest.
Changes in accounting estimates related to biological assets - In 2006, the Group changed the accounting estimates in respect to valuation of broilers and breeders as follows:
Before 2006, the Group accounted for breeders of the age less than 50 days at cost, considering little biological transformation at this stage. The cost basis was used for the immature portion of biological assets as it was not possible to estimate fair value with a sufficient degree of accuracy. The Group significantly developed its methods for fair valuations of breeders and starting from 2006 is revaluing all breeders based on discounted cash flow approach.
Starting from 2006, the Group changed estimates in respect to the fair valuation model for the broilers live stock. The Group started to use discounting of net cash flows that will be obtained from sales of 44-day chickens for all age groups of broilers.
In 2007, the Group changed the accounting estimates in respect to valuation of milk cows as follows:
Before 2007, the Group accounted for milk cows of age less than 2 years at cost, considering little biological transformation until the assets reach their productive age. The Group was not able to reliably estimate the fair value of immature milk cows due to unavailability of sufficient historical data supporting major assumptions and assessment of risks attributable to the biological transformation process. Starting from 2007, the Group estimates fair value less estimated point-of-sale costs for all milk cows using discounted cash flow techniques.
The changes in these accounting estimates resulted in a gain of USD 150 thousand during the year ended 31 December 2007 (2006: USD 6,738 thousand) recognized in Net change in fair value of biological assets and agricultural produce in the consolidated income statements.
The Group's biological assets are classified into bearer and consumable biological assets depending upon the function of a particular group of biological assets in the Group's production process. Consumable biological assets are those that are to be harvested as agricultural produce, and include hatchery eggs and live broiler poultry intended for the production of meat, as well as milk cows. Bearer biological assets include poultry held for hatchery eggs production, orchards, breeding bulls and pork.
Financial instruments − Financial assets and financial liabilities are recognized on the Group's consolidated balance sheet when the Group becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of the financial assets and liabilities are recognized using settlement date accounting. The settlement date is the date that an asset is delivered to or by an entity. Settlement date accounting refers to (a) the recognition of an asset on the day it is received by the entity, and (b) the derecognition of an asset and recognition of any gain or loss on disposal on the day that it is delivered by the entity. The accounting policies for initial recognition and subsequent measurement of financial instruments are disclosed in the respective accounting policies set out below in this Note.
Accounts receivable − Accounts receivable are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest rate method. Short-term accounts receivable, which are non-interest bearing, are stated at their nominal value. Appropriate allowances for estimated irrecoverable amounts are recognized in the consolidated income statement when there is objective evidence that the asset is impaired. The allowance recognized is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.
Cash and cash equivalents − Cash and cash equivalents include cash on hand, cash with banks, deposits and marketable securities with original maturity of less than three months.
Bank borrowings, corporate bonds issued and other long-term payables − Interest-bearing borrowings, bonds and other long-term payables are initially measured at fair value net of directly attributable transaction costs, and are subsequently measured at amortized cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption amount is recognized over the term of the borrowings and recorded as finance costs.
Derivative financial instruments − Derivative financial instruments are initially measured at fair value on the contract date, and are re-measured to fair value at subsequent reporting dates. The Group does not enter into financial instruments that would be accounted for as derivatives. Changes in the fair value of derivative financial instruments are recognized in the consolidated income statement as they arise.
Trade and other accounts payable − Accounts payable are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest rate method.
Leases − Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Assets received by the Group under finance leases are recognized as assets of the Group at their fair value at the date of acquisition or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the consolidated income statement and classified as finance costs.
Rental income or expenses under operating leases are recognized in the consolidated income statement on a straight-line basis over the term of the lease.
Provisions − Provisions are recognized when the Group has a present legal or constructive obligation (either based on legal regulations or implied) as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the obligation can be made.
Revenue recognition − The Group generates revenue primarily from the sale of agricultural products to end customers. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, the amount of revenue can be measured reliably and it is probable that collection will occur. The point of transfer of risk, which may occur at delivery or shipment, varies for contracts with different types of customers.
Revenue of the natural gas operations is recognized when gas is dispatched to customers and title has transferred.
Segment reporting − The Group applies IAS 14 "Segment Reporting" for disclosure of information on business segments in the consolidated financial statements. The Group identifies a business segment as a separate reportable segment if a majority of its revenue is earned from sales to external customers and (a) its revenue from sales to external customers and from transactions with other segments is 10% or more of the total revenue, external and internal, of all segments; or (b) its segment result, whether profit or loss, is 10% or more of the combined result of all segments in profit or the combined result of all segments in loss, whichever is the greater in absolute amount; or (c) its assets are 10 per cent or more of the total assets of all segments.
The Group combines business segments into a separately reportable segment with one or more other similar internally reported segments if an internally reported segment is below all of the thresholds of significance above. If a segment is identified as a business segment in the current period because it satisfies the relevant 10% thresholds, prior period comparative segment data is restated to reflect the newly reportable segment as a separate segment, even if that segment did not satisfy the 10 per cent thresholds in the prior period.
Finance costs − Interest expenses, finance charges on finance leases and other interest-bearing long-term payables and debt service costs are recognized in the consolidated income statement as finance costs in the period in which they are incurred. Finance costs are added to the carrying amount of the respective liability to the extent they are not settled in the period in which they arise.
Government grants − Government grants received or receivable for processing of live animals and value added tax ("VAT") grants for agricultural industry (conditional upon reinvestment of the granted funds for agricultural production purposes) and compensation of the finance costs are recognized as income over the periods necessary to match them with the related costs. To the extent the conditions attached to the grants are not met at the balance sheet date, the received funds are recorded in the Group's consolidated financial statements as deferred income. Government grants related to selection and genetics programs in breeding as well as subsidies related to crop growing are recognized at the moment when the decision to disburse the amounts to the Group is made.
Contingent liabilities and assets − Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are recognized only when the contingency is resolved.
4. BUSINESS SEGMENTS
All of the Group's operations are located within Ukraine.
During 2006, the Group's operations were divided into three primary business segments - poultry, other agricultural operations and natural gas operations. As a result of the expansion of the Group's grain growing operations in 2007, the Group has identified this as a separate business segment as of 31 December 2007.
In addition, during first quarter of 2007 the Group ceased its natural gas operations and has treated this as a discontinued operation (Note 5).
The Group does not disclose any secondary segments based on geography as all of its operations are conducted within one geography.
Other agricultural operations were largely acquired by the Group in March 2006 acquisitions (Note 2).
The following table presents revenue, results of operations and certain assets and liabilities information regarding business segments for the year ended 31 December 2008. In this table segment results represent operating profit of each business segment. Unallocated corporate assets comprise of assets that are not directly attributable to particular segment. Unallocated corporate liabilities comprise of interest-bearing liabilities, equity and liabilities that are not directly attributable to a particular segment.
| Poultry and related operations | Other agricul-tural | Grain growing | Consolidated | ||||
| REVENUES | |||||||
| Total revenue | 680,393 | 94,370 | 67,430 | 842,193 | |||
| Inter-segment eliminations | (20,362) | (1,268) | (17,653) | (39,283) | |||
| Sales to external customers | 660,031 | 93,102 | 49,777 | 802,910 | |||
| SEGMENT RESULTS | |||||||
| Segment results before loss on impairment of property, plant and equipment | 255,165 | 184 | 10,739 | 266,088 | |||
| Loss on impairment of property, plant and equipment (Note 7) | - | (2,653) | - | (2,653) | |||
| Segment results | 255,165 | (2,469) | 10,739 | 263,435 | |||
| Unallocated corporate expenses | (19,929) | ||||||
| Operating profit | 243,506 | ||||||
| OTHER INFORMATION: | |||||||
| Segment assets | 562,485 | 122,430 | 120,287 | 805,202 | |||
| Unallocated corporate assets | 119,359 | ||||||
| Consolidated total assets | 924,561 | ||||||
| Segment liabilities | (32,565) | (9,696) | (5,202) | (47,463) | |||
| Unallocated corporate liabilities | (530,881) | ||||||
| Consolidated total liabilities | (578,344) | ||||||
| Additions to property, plant and equipment | 159,658 | 23,764 | 48,468 | 231,891 | |||
| Depreciation | 41,230 | 7,383 | 8,325 | 56,938 | |||
| Effect of fair value adjustments | 17,854 | (1,137) | (10,390) | 6,327 | |||
The following table presents revenue, results of operations and certain assets and liabilities information regarding business segments for the years ended 31 December 2007 and 2006:
| 2007 | 2006 | ||||||||||||||
| Poultry and related operations | Other agricultural | Grain growing | Consolidated | Poultry and related operations | Other agricultural | Grain growing | Consolidated | ||||||||
| REVENUES | |||||||||||||||
| Total revenue | 395,621 | 51,655 | 68,672 | 515,948 | 269,505 | 28,826 | 25,175 | 323,506 | |||||||
| Inter-segment eliminations | (10,756) | (573) | (30,182) | (41,511) | (3,882) | (766) | (7,861) | (12,509) | |||||||
| Sales to external customers | 384,865 | 51,082 | 38,490 | 474,437 | 265,623 | 28,060 | 17,314 | 310,997 | |||||||
| SEGMENT RESULTS | |||||||||||||||
| Segment results before loss on impairment of property, plant and equipment | 98,159 | 3,995 | 28,725 | 130,879 | 116,129 | 5,770 | 3,104 | 125,003 | |||||||
| Loss on impairment of property, plant and equipment (Note 7) | (5,683) | (4,555) | - | (10,238) | - | - | - | - | |||||||
| Segment results | 92,476 | (560) | 28,725 | 120,641 | 116,129 | 5,770 | 3,104 | 125,003 | |||||||
| Unallocated corporate expenses | (8,498) | (8,568) | |||||||||||||
| Operating profit | 112,143 | 116,435 | |||||||||||||
| OTHER Information | |||||||||||||||
| Segment assets | 684,951 | 158,434 | 80,207 | 923,593 | 595,815 | 160,955 | 29,986 | 786,756 | |||||||
| Unallocated corporate assets* | 28,939 | 43,356 | |||||||||||||
| Consolidated total assets | 952,532 | 830,112 | |||||||||||||
| Segment liabilities | (27,882) | (8,965) | (9,715) | (46,562) | (23,588) | (6,598) | (1,614) | (31,800) | |||||||
| Unallocated corporate liabilities | (486,564) | (431,444) | |||||||||||||
| Consolidated total liabilities | (533,126) | (463,244) | |||||||||||||
| Additions to property, plant and equipment** | 165,564 | 13,633 | 14,707 | 193,904 | 194,674 | 27,938 | 23,872 | 246,484 | |||||||
| Property, plant and equipment acquired through business combinations | - | - | - | - | - | 31,866 | 893 | 32,759 | |||||||
| Non-current biological assets acquired through business combination | - | - | - | - | - | 11,868 | - | 11,868 | |||||||
| Depreciation | 33,201 | 5,721 | 5,285 | 44,207 | 17,788 | 2,894 | 2,613 | 23,295 | |||||||
| Effect of fair value adjustments | 7,754 | 4,153 | 2,334 | 14,241 | 11,287 | (2,953) | 995 | 9,329 | |||||||
* As of 31 December 2006, unallocated corporate assets and liabilities include assets and liabilities related to natural gas trading operation in the amount of USD 5,304 thousand and USD 170 thousand, respectively.
** Additions to property, plant and equipment in 2006 (Note 7) include unallocated additions to property, plant and equipment in the amount of USD 7,188 thousand.
5. DISCONTINUED OPERATIONS
Natural gas
During the year ended 31 December 2007, the Group ceased its natural gas operations (Note 4). The comparative information for the consolidated income statement has been represented to show the discontinued operations separately from continuing operations.
The results of the natural gas operations segment for the years ended 31 December 2007 and 2006 were as follows:
| 2007 | 2006 | ||
| Revenue | 8,872 | 29,721 | |
| Net change in fair value of natural gas in stock less estimated point-of-sale costs | (1,166) | 1,166 | |
| Cost of sales | (7,842) | (25,981) | |
| Gross (loss)/profit | (136) | 4,906 | |
| Other operating income | - | 1,979 | |
| Operating (loss)/profit | (136) | 6,885 | |
| Income tax benefit/(expense) (Note 8) | 34 | (1,721) | |
| (Loss)/profit for the year from discontinued operations | (102) | 5,164 |
The net cash inflows from operating activities obtained by the Group in relation to the natural gas operations for the year ended 31 December 2007 comprised USD 6,164 thousand (2006: net cash inflows of USD 2,840 thousand). No cash flows related to financing or investing activities from natural gas operations were incurred by the Group during the years ended 31 December 2007 and 2006.
The assets and liabilities comprising the discontinued operations were as follows:
| 2007 | 2006 | ||
| Total assets | - | 5,304 | |
| Total liabilities | - | 170 |
Kyivska
During the year ended 31 December 2008, the Group disposed of its shareholding in Kyivska (Note 2). The comparative information for the consolidated income statement has been represented to show the discontinued operations separately from continuing operations.
The results of Kyivska for the years ended 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Revenue | 3,922 | 3,213 | 3,644 | ||
| Net change in fair value of biological assets and agricultural produce | (1,382) | (1,980) | 1,295 | ||
| Cost of sales | (5,796) | (5,229) | (4,683) | ||
| Gross (loss)/profit | (3,256) | (3,996) | 256 | ||
| Other operating (expenses)/income | (114) | 564 | 301 | ||
| Operating (loss)/profit | (3,370) | (3,432) | 557 | ||
| Other expenses, net | (159) | (67) | (312) | ||
| Income tax benefit/(expense) (Note 8) | - | - | - | ||
| (3,529) | (3,499) | 245 | |||
| Loss on disposal of operation | (6,193) | - | - | ||
| (Loss)/profit for the year from discontinued operations | (9,722) | (3,499) | 245 |
During the years ended 31 December 2008, 2007 and 2006 the results from discontinued operations were attributable to equity holders of the Parent.
The assets and liabilities comprising the discontinued operations were as follows:
| 2008 | 2007 | 2006 | |||
| Total assets | 16,603 | 30,126 | 30,724 | ||
| Total liabilities | 10,056 | 48,342 | 47,579 |
The net cash flows incurred by the Group in relation to Kyivska for the years ended 31 December were as follows:
| 2008 | 2007 | 2006 | |||
| Operating activities | (3,019) | (1,535) | (396) | ||
| Investing activities | (867) | (1,265) | (2,388) | ||
| Financing activities | 3,893 | 2,453 | 4,304 | ||
| Net increase/(decrease) in cash and cash equivalents | 7 | (347) | 1,520 |
6. RELATED PARTY BALANCES AND TRANSACTIONS
For the purposes of these financial statements, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms and conditions as transactions between unrelated parties.
The following companies and individuals are considered to be related parties to the Group as of 31 December 2008:
| Name of the related party | Nature of relations with the Group |
| Mr. Yuriy Kosyuk | Chief Executive Officer of MHP S.A. and the Principal Shareholder of the Group |
| WTI | Immediate parent, company owned by Mr. Yuriy Kosyuk |
| Mrs. Olena Kosyuk | Wife of Mr. Yuriy Kosyuk |
| Allied Tech LLP (United Kingdom) | Companies owned or controlled by Mr. Yuriy Kosyuk |
| Allied Tech LLC (USA) | |
| Allied Tech Commerce LLP (United Kingdom) | |
| Agrofirma Berezanska Ptahofabryka | |
| ULL Beteiligungs und Management GmbH | |
| Merkaba LLC | |
| Spector | Company owned by Merkaba LLC |
| LLC Zolotoniske Zvirogospodarstvo | Company owned by Agrofirma Berezanska Ptahofabryka |
In March 2006, Mrs. Olena Kosyuk sold her shareholding in Kyivska, Druzhba and Crimean Fruit to the Group (Note 2). Starting from the date of their acquisition Kyivska, Druzhba and Crimean Fruit were consolidated into the Group. Accordingly, balances of the transactions with the acquired subsidiaries have been eliminated in the Group's consolidated balance sheet as of 31 December 2006.
In April 2007, Mr. Yuriy Kosyuk sold his shareholding in Roda. Accordingly, starting from June 2007 Roda and Realizatsiyna Baza ceased to be related parties to the Group.
In November 2006, the Group made a prepayment for production equipment amounting to USD 1,500 thousand to ULL Beteiligungs und Management GmbH ("ULL"). In January 2007, the initial agreement was canceled and ULL returned the full amount of the prepayment.
In October 2008 Allied Tech LLC (USA) was liquidated.
The balances of trade accounts receivable due from related parties (Note 16) were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Agrofirma Berezanska Ptahofabryka | 2,316 | 1,235 | 6,549 | ||
| Other related parties | 475 | 80 | 235 | ||
| Total | 2,791 | 1,315 | 6,784 |
The balances of short-term advances, finance aid to and promissory notes from related parties (Note 14) as of 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Agrofirma Berezanska Ptahofabryka | 670 | 408 | 891 | ||
| Spector | 16 | 656 | 444 | ||
| Allied Tech LLP | - | - | 395 | ||
| Allied Tech Commerce LLP | - | - | 350 | ||
| Other related parties | 290 | 359 | 120 | ||
| Total | 976 | 1,423 | 2,200 |
The revenues from sales to related parties for the years ended 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Agrofirma Berezanska Ptahofabryka | 9,630 | 8,430 | 5,744 | ||
| Druzhba | N/A | N/A | 376* | ||
| Kyivska | N/A | N/A | 73* | ||
| Other related parties | 573 | 122 | 6 | ||
| Total | 10,203 | 8,552 | 6,199 |
* Before acquisition on 31 March 2006
During the years ended 31 December 2008, 2007 and 2006, the Group's sales to Agrofirma Berezanska Ptahofabryka mainly consisted of sales of mixed fodder and its components. During the year ended 31 December 2007, the Group sold property, plant and equipment for USD 3,465 thousand to Agrofirma Berezanska Ptahofabryka.
In June 2007, the Group sold to Mr. Yuriy Kosyuk a building with net book value of USD 3,460 thousand, which was used by the Principal Shareholder as a benefit in kind, for a cash consideration of USD 4,005 thousand. The difference between the sale price and net book value of the building at the date of transaction of USD 405 thousand (net of current income tax effect of USD 140 thousand) was recognized in the Group's consolidated financial statements as an adjustment to shareholders' equity.
In April 2007, the Group sold its participatory shareholding in ZZG to Mr. Yuriy Kosyuk for the cash consideration of USD 4,798 thousand (Note 2).
Terms and conditions of sales to related parties are determined based on arrangements, specific to each contract or transaction. Management believes that the accounts receivable due from related parties do not require allowance for irrecoverable amounts and that the amounts payable to related parties will be settled at cost. The terms of the payables and receivables related to trading activities of the Group do not vary significantly from the terms of similar transactions with third parties.
The balances of advances received from related parties were as follows (Note 24) as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Allied Tech LLC | 120 | 116 | 18 | ||
| Allied Tech LLP | 218 | 213 | - | ||
| Other related parties | - | - | 8 | ||
| Total | 338 | 329 | 26 |
The purchases from related parties for the years ended 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Spector | 1,474 | 11 | 631 | ||
| Agrofirma Berezanska Ptahofabryka | 418 | 358 | 35 | ||
| Druzhba | N/A | N/A | 1,426* | ||
| Kyivska | N/A | N/A | 95* | ||
| Crimean Fruit | N/A | N/A | 30* | ||
| Other related parties | - | - | 87 | ||
| Total | 1,892 | 369 | 2,304 |
* Before acquisition on 31 March 2006
As of 31 December 2008, 2007 and 2006, the Group leased property, plant and equipment with the carrying value of USD 150 thousand, USD 285 thousand and USD 2,679 thousand, respectively, to its related parties under operating lease arrangements (Note 7).
For the years ended 31 December 2008, 2007 and 2006, lease payments received from the related parties under the operating lease agreements amounted to USD 53 thousand, USD 116 thousand and USD 403 thousand, respectively (Note 7).
Compensation to key management personnel - Total compensation of the Group's key management personnel (excluding compensation to Mr. Yuriy Kosyuk) included in selling, general and administrative expenses in the accompanying consolidated income statements amounted to USD 9,281 thousand, USD 2,245 thousand and USD 1,959 thousand for the years ended 31 December 2008, 2007 and 2006, respectively. Compensation to key management personnel consists of contractual salary and performance bonuses.
Key management personnel totaled 32 individuals as of 31 December 2008 and 29 individuals as of 31 December 2007 and 2006.
The aggregate amount of remuneration paid by the Group to the Chief Executive Officer Mr. Yuriy Kosyuk during the years ended 31 December 2008, 2007 and 2006 was USD 1,804 thousand, USD 1,620 thousand and USD 1,463 thousand, respectively, in the form of salary.
As of 31 December 2008, 2007 and 2006, Mr. and Mrs. Kosyuk received benefits in kind by use of the following assets:
| 2008 | 2007 | 2006 | |||
| Vehicles at net book value (Note 7) | - | 2,807 | 2,523 | ||
| Short-term and long-term interest free loans | 223 | 207 | 881 | ||
| Buildings at net book value (Note 7) | - | - | 3,402 | ||
| Total | 223 | 3,014 | 6,806 |
7. PROPERTY, PLANT AND EQUIPMENT, NET
The following table represents movements in property, plant and equipment for the year ended 31 December 2008:
| Buildings and structures | Grain storage facilities | Machinery and equipment | Utilities and infrastructure | Vehicles and agricultural machinery | Office furniture and equipment | Construction in progress | Total | ||||||||
| Cost or valuation | |||||||||||||||
| As of 1 January 2008 | 184,169 | 31,497 | 244,200 | 32,115 | 135,930 | 5,016 | 94,375 | 727,302 | |||||||
| Additions | 13,643 | 626 | 18,643 | 6,063 | 54,164 | 1,335 | 137,417 | 231,891 | |||||||
| Disposals | (3,218) | (2) | (10,392) | (471) | (3,297) | (92) | - | (17,472) | |||||||
| Transfers | 7,353 | 7 | 4,879 | 892 | 3,326 | 273 | (16,730) | - | |||||||
| Disposal of Kyivska (Note 2) | (1,317) | (38) | (1,429) | (81) | (1,488) | (31) | (1,287) | (5,671) | |||||||
| Acquired through business combination (Note 2) | 6,143 | - | 8,587 | 992 | 408 | 165 | 12,442 | 28,737 | |||||||
| Impairment loss | (2,653) | - | - | - | - | - | (9,114) | (11,767) | |||||||
| Translation difference | (66,423) | (11,030) | (90,178) | (13,467) | (63,962) | (2,228) | (85,955) | (333,243) | |||||||
| As of 31 December 2008 | 137,697 | 21,060 | 174,310 | 26,043 | 125,081 | 4,438 | 131,148 | 619,777 | |||||||
| Accumulated depreciation | |||||||||||||||
| As of 1 January 2008 | 19,922 | - | 41,976 | 6,779 | 31,974 | 1,895 | - | 102,546 | |||||||
| Depreciation charge for the year | 10,011 | 686 | 22,798 | 3,052 | 19,937 | 1,108 | - | 57,592 | |||||||
| Eliminated on disposal | (375) | - | (1,603) | (32) | (1,559) | (78) | - | (3,647) | |||||||
| Disposal of Kyivska (Note 2) | (410) | (25) | (659) | (25) | (820) | (23) | - | (1,962) | |||||||
| Translation difference | (9,898) | (216) | (21,135) | (3,286) | (16,804) | (977) | - | (52,316) | |||||||
| As of 31 December 2008 | 19,250 | 445 | 41,377 | 6,488 | 32,728 | 1,925 | - | 102,213 | |||||||
| Net book value | |||||||||||||||
| 31 December 2008 | 118,447 | 20,615 | 132,933 | 19,555 | 92,353 | 2,513 | 131,148 | 517,564 | |||||||
| 1 January 2008 | 164,247 | 31,497 | 202,224 | 25,336 | 103,956 | 3,121 | 94,375 | 624,756 | |||||||
The following table represents movements in property, plant and equipment for the year ended 31 December 2007:
| Buildings and structures | Grain storage facilities | Machinery and equipment | Utilities and infrastructure | Vehicles and agricultural machinery | Office furniture and equipment | Construction in progress | Total | ||||||||
| Cost or valuation | |||||||||||||||
| As of 1 January 2007 | 98,447 | 14,129 | 133,011 | 16,507 | 95,029 | 2,568 | 189,543 | 549,234 | |||||||
| Additions | 20,454 | 1,651 | 50,863 | 3,435 | 41,586 | 1,756 | 74,159 | 193,904 | |||||||
| Disposals | (4,564) | - | (6,901) | (119) | (959) | (77) | (210) | (12,830) | |||||||
| Transfers | 77,852 | 1,465 | 74,320 | 12,681 | 882 | 834 | (168,034) | - | |||||||
| Disposal of ZZG (Note 2) | (742) | - | (422) | (46) | (114) | (3) | (1,083) | (2,410) | |||||||
| Reclassifications | (2,912) | 4,610 | (1,698) | - | - | - | - | - | |||||||
| Increase due to revaluation | - | 9,642 | - | - | - | - | - | 9,642 | |||||||
| Impairment loss | (4,366) | - | (4,973) | (343) | (494) | (62) | - | (10,238) | |||||||
| As of 31 December 2007 | 184,169 | 31,497 | 244,200 | 32,115 | 135,930 | 5,016 | 94,375 | 727,302 | |||||||
| Accumulated depreciation | |||||||||||||||
| As of 1 January 2007 | 12,353 | 806 | 26,195 | 3,953 | 17,124 | 1,032 | - | 61,463 | |||||||
| Depreciation charge for the year | 8,375 | 558 | 17,563 | 2,885 | 15,776 | 925 | - | 46,082 | |||||||
| Eliminated on disposal | (695) | - | (1,763) | (58) | (921) | (62) | - | (3,499) | |||||||
| Disposal of ZZG (Note 2) | (10) | - | (2) | (1) | (5) | - | - | (18) | |||||||
| Reclassifications | (101) | 118 | (17) | - | - | - | - | - | |||||||
| Eliminated from revaluation | - | (1,482) | - | - | - | - | - | (1,482) | |||||||
| As of 31 December 2007 | 19,922 | - | 41,976 | 6,779 | 31,974 | 1,895 | - | 102,546 | |||||||
| Net book value | |||||||||||||||
| 31 December 2007 | 164,247 | 31,497 | 202,224 | 25,336 | 103,956 | 3,121 | 94,375 | 624,756 | |||||||
| 1 January 2007 | 86,094 | 13,323 | 106,816 | 12,554 | 77,905 | 1,536 | 189,543 | 487,771 | |||||||
The following table represents movements in property, plant and equipment for the year ended 31 December 2006:
| Buildings and structures | Grain storage facilities | Machinery and equipment | Utilities and infrastructure | Vehicles and agricultural machinery | Office furniture and equipment | Construction in progress | Total | ||||||||
| Cost or valuation | |||||||||||||||
| As of 1 January 2006 | 65,616 | 4,155 | 94,723 | 13,220 | 43,679 | 1,450 | 40,229 | 263,072 | |||||||
| Additions | 15,964 | 9,401 | 18,448 | 2,138 | 44,284 | 876 | 162,561 | 253,672 | |||||||
| Disposals | (374) | (26) | (904) | (258) | (1,858) | (72) | (92) | (3,584) | |||||||
| Transfers | 4,977 | 548 | 9,491 | 768 | 329 | 59 | (16,172) | - | |||||||
| Acquired through business combination (Note 2)* | 12,264 | 51 | 11,253 | 639 | 8,595 | 255 | 3,017 | 36,074 | |||||||
| As of 31 December 2006 | 98,447 | 14,129 | 133,011 | 16,507 | 95,029 | 2,568 | 189,543 | 549,234 | |||||||
| Accumulated depreciation | |||||||||||||||
| As of 1 January 2006 | 7,611 | 399 | 15,323 | 2,707 | 8,385 | 559 | - | 34,984 | |||||||
| Depreciation charge for the year | 4,361 | 393 | 9,834 | 1,285 | 7,774 | 441 | - | 24,088 | |||||||
| Eliminated on disposal | (39) | - | (281) | (59) | (517) | (28) | - | (924) | |||||||
| Acquired through business combination (Note 2)* | 420 | 14 | 1,319 | 20 | 1,482 | 60 | - | 3,315 | |||||||
| As of 31 December 2006 | 12,353 | 806 | 26,195 | 3,953 | 17,124 | 1,032 | - | 61,463 | |||||||
| Net book value | |||||||||||||||
| 31 December 2006 | 86,094 | 13,323 | 106,816 | 12,554 | 77,905 | 1,536 | 189,543 | 487,771 | |||||||
| 1 January 2006 | 58,005 | 3,756 | 79,400 | 10,513 | 35,294 | 891 | 40,229 | 228,088 | |||||||
* Include assets received in the course of Kyivska, Druzhba, Crimean Fruit, ZZG and Urozhay acquisitions.
As of 31 December 2008, included within property, plant and equipment were fully depreciated assets with the cost of USD 5,276 thousand (2007: USD 5,123 thousand; 2006: USD 4,045 thousand).
As of 31 December 2008, the Group's machinery and equipment with the carrying amount of USD 6,674 thousand were pledged as collateral to secure its banks borrowings (Note 20). Vehicles and agricultural machinery with the carrying amount of USD 786 thousand were pledged to secure vendor-financing arrangements with foreign companies (Note 22).
As of 31 December 2008, 2007 and 2006 the net carrying amount of fixed assets held under finance lease agreements were USD 57,476 thousand, USD 57,389 thousand and USD 37,111 thousand, respectively.
Impairment assessment - The Group reviews its property, plant and equipment each period to determine if any indication of impairment exists. Based on these reviews, indicators of impairment were identified in 2008 and 2007 associated with the assets used in the production of goose meat and foie gras, assets used in production of convenience foods under the "Legko!" brand, and construction in progress represented by administrative office premises. As a result, the Group estimated the recoverable amount of these assets and determined that the carrying value exceeded the recoverable amount. Accordingly, during the year ended 31 December 2008 the Group has recognized impairment losses of USD 11,767 thousand (2007: USD 10,238 thousand, 2006: nil) for the difference in these amounts.
The additional impairment losses recognized in respect to assets used in the production of goose meat and foie gras and convenience foods under the "Legko!" brand during the year ended 31 December 2008 are attributable to increased business risks and lower expected returns to the production lines, as well as decreased market prices for commercial properties as compared to the analysis performed during the year ended 31 December 2007.
The amount of impairment losses recognized during the period, together with information on the discount rates used in the estimation of the recoverable amount of impaired assets and the business segments to which the assets belong, is as follows:
| 2008 | 2007 | |||||||
| Production line | Business segment | Discount rate used, % | Loss on impairment | Discount rate used, % | Loss on impairment | |||
| Convenience foods | Poultry and related operations | 25.5 | - | 19.6 | 5,683 | |||
| Goose meat and foie gras | Other agricultural | 33.5 | 2,653 | 22.0 | 4,555 | |||
| Administrative office premises | Unallocated | 15.25 | 9,114 | N/A | - | |||
| Total | 11,767 | 10,238 | ||||||
The discount rates used in assessment of the recoverable amounts of impaired assets vary depending on the currency denomination of future cash flows and different levels of business risks assessed for each group of assets.
Revaluation of grain storage facilities - During the year ended 31 December 2007, the Group engaged independent appraisers to revalue its grain storage facilities. The effective date of revaluation was 1 December 2007. The valuation, which conformed to the International Valuation Standards, was determined by reference to observable prices in an active market and recent market transactions on arm's length terms. During revaluation, the Group identified certain assets which related to the grain storage facilities, but were included into different groups. The related cost and accumulated depreciation of such assets in the amount of USD 4,610 thousand and USD 118 thousand, respectively, were transferred to the grain storage facilities group during the year ended 31 December 2007. During the year ended 31 December 2008 the Group carried out a review of the carrying amount of grain storage facilities to determine whether the carrying amount differed materially from that which would be determined using fair value. Based on the results of this review, the Group determined that no further revaluation is required as of 31 December 2008.
If the grain storage facilities were carried at cost, their net book value as of 31 December 2008 would be USD 13,321 thousand (2007: USD 19,809 thousand).
Leased assets - As of 31 December 2008, 2007 and 2006, the Group leased or provided in use property, plant and equipment to related parties (including Mr. and Mrs. Kosyuk) under operating lease agreements (at net book value):
| 2008 | 2007 | 2006 | |||
| Buildings and structures | - | - | 3,402 | ||
| Machinery and equipment | - | - | 2,278 | ||
| Vehicles and agricultural machinery | 150 | 3,089 | 2,913 | ||
| Office furniture and equipment | - | 3 | 11 | ||
| Total | 150 | 3,092 | 8,604 |
For the years ended 31 December 2008, 2007 and 2006, lease payments received from the related parties under the operating lease agreements amounted to USD 53 thousand, USD 116 thousand and USD 403 thousand, respectively (Note 6).
8. TAXATION
Sixteen of Group companies pay the Fixed Agricultural Tax (the "FAT") in accordance with the Law "On Fixed Agricultural Tax". The FAT substitutes the following taxes for agricultural producers: Corporate Income Tax, Land Tax, Vehicle Tax (excluded in December 2006), Municipal Tax, Natural Resources Usage Duty, and Trade Patent. The FAT is calculated by local authorities and depends on the area and valuation of land occupied. This tax regime was effective till 1 January 2011, and subsequent to 31 December 2008 was extended for an indefinite period (Note 37).
During the years ended 31 December 2008, 2007 and 2006, the Group companies which have the status of the Corporate Income Tax (the "CIT") payers in Ukraine were subject to income tax at 25% rate. The net results of the Group companies incorporated in jurisdictions other than Ukraine were insignificant during the years ended 31 December 2007 and 2006.
The components of income tax expense were as follows for the years ended 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Current income tax expense | 1,739 | 1,132 | 710 | ||
| Deferred tax (benefit)/expense | (460) | (738) | 1,584 | ||
| Income tax expense | 1,279 | 394 | 2,294 | ||
| Attributable to: | |||||
| Continuing operations | 1,279 | 428 | 573 | ||
| Discontinued operations (Note 5) | - | (34) | 1,721 | ||
| 1,279 | 394 | 2,294 |
Reconciliation between profit before tax multiplied by the statutory tax rate and the tax expense for the years ended 31 December 2008, 2007 and 2006 is as follows:
| 2008 | 2007 | 2006 | |||
| Profit before tax from continuing operations | 16,194 | 50,822 | 100,869 | ||
| (Loss)/profit before tax from discontinued operations (Note 5) | (9,722) | (3,635) | 7,130 | ||
| Profit before income tax | 6,472 | 47,187 | 107,999 | ||
| Income tax expense at statutory tax rate of 25% | 1,618 | 11,797 | 27,000 | ||
| Tax effect of: | |||||
| Income generated by FAT payers (exempt from income tax) | (44,987) | (24,475) | (34,669) | ||
| Non-deductible expenses | 12,286 | 5,952 | 1,418 | ||
| Expenses not deducted for tax purposes | 32,362 | 7,120 | 8,545 | ||
| Income tax expense | 1,279 | 394 | 2,294 |
As of 31 December 2008, 2007 and 2006 the Group did not recognize deferred tax assets arising from temporary differences of USD 129,448 thousand, USD 28,480 thousand and USD 34,180 thousand, respectively, as the Group does not intend to deduct respective expenses for tax purposes in future periods.
Deferred tax liabilities have not been recognized in respect of unremitted earnings of Ukrainian subsidiaries as the earnings can be remitted free from taxation currently and in future years.
As of 31 December 2008, 2007 and 2006, deferred tax assets and liabilities comprised the following:
| 2008 | 2007 | 2006 | |||
| Deferred tax assets arising from: | |||||
| Advances received and other payables | 2,099 | 2,209 | - | ||
| Other current liabilities | 1,030 | 310 | 1,328 | ||
| Inventories | 473 | - | 613 | ||
| Expenses deferred in tax books | 4,994 | 3,647 | 814 | ||
| Other | - | 64 | 636 | ||
| Total deferred tax assets | 8,596 | 6,230 | 3,391 | ||
| Deferred tax liabilities arising from: | |||||
|
| |||||
| Property, plant and equipment | (12,312) | (9,339) | (2,790) | ||
| Advances received and other payables | (241) | - | (1,296) | ||
| Inventories | (156) | (692) | (1,594) | ||
| Total deferred tax liabilities | (12,709) | (10,031) | (5,680) | ||
| Net deferred tax liability | (4,113) | (3,801) | (2,289) |
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are presented in the consolidated balance sheet as of 31 December:
| 2008 | 2007 | 2006 | |||
| Deferred tax assets | 2,047 | 2,705 | - | ||
| Deferred tax liabilities | (6,160) | (6,506) | (2,289) | ||
| (4,113) | (3,801) | (2,289) |
The movements in net deferred tax liability for the years ended 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Net deferred tax liabilities as of beginning of the year | 3,801 | 2,289 | 705 | ||
| Deferred tax (benefit)/expense | (460) | (738) | 1,584 | ||
| Deferred tax on property, plant and equipment charged directly to revaluation reserve | - | 2,250 | - | ||
| Deferred tax liabilities arising on acquisition of subsidiaries (Note 2) | 2,630 | - | - | ||
| Translation difference | (1,858) | - | - | ||
| Net deferred tax liabilities as of end of the year | 4,113 | 3,801 | 2,289 |
9. LONG-TERM VAT RECOVERABLE, NET
As of 31 December 2007 and 2006, the balances of long-term VAT recoverable were accumulated in start-up businesses in which significant capital expenditures during the year ended 31 December 2006 were incurred. As of 31 December 2008 the balance of long-term VAT recoverable was accumulated on increased trading activities and continuing investment programs. The management expects that these balances will not be recovered within the twelve months after the balance sheet date.
As of 31 December 2008, an allowance for estimated irrecoverable amounts of USD 1,437 thousand was recorded by the Group for the balance of long-term VAT recoverable.
The balances of non-current biological assets were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||||||||
| Thousand units | Carrying amount | Thousand units | Carrying amount | Thousand units | Carrying amount | ||||||
| Milk cows, boars, sows, units | 10.2 | 6,033 | 12.7 | 8,305 | 9.3 | 4,753 | |||||
| Orchards, hectare | 2.11 | 19,934 | 2.11 | 27,100 | 1.13 | 11,840 | |||||
| Other non-current bearer biological assets | 526 | 200 | 224 | ||||||||
| Total bearer non-current biological assets | 26,493 | 35,605 | 16,817 | ||||||||
| Non-current cattle and pigs, units | 8.6 | 2,987 | 10.7 | 6,491 | 13.0 | 9,872 | |||||
| Total consumable non-current biological assets | 2,987 | 6,491 | 9,872 | ||||||||
| Total non-current biological assets | 29,480 | 42,096 | 26,689 | ||||||||
The balances of current biological assets were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||||||||
| Thousand units | Carrying amount | Thousand units | Carrying amount | Thousand units | Carrying amount | ||||||
| Breeders held for hatchery eggs production, units | 1,420 | 19,323 | 1,481 | 23,710 | 1,108 | 12,501 | |||||
| Total bearer current biological assets | 19,323 | 23,710 | 12,501 | ||||||||
| Broiler poultry, units | 14,297 | 23,126 | 12,830 | 22,798 | 9,351 | 18,270 | |||||
| Hatchery eggs, units | 12,690 | 3,866 | 12,841 | 5,786 | 6,621 | 1,702 | |||||
| Crops in fields, hectare | 70 | 26,840 | 59 | 26,229 | 38 | 10,980 | |||||
| Cattle and pigs, units | 43 | 10,386 | 48 | 10,538 | 43 | 4,245 | |||||
| Other current consumable biological assets | 554 | 1,724 | 3,896 | ||||||||
| Total consumable current biological assets | 64,772 | 67,075 | 39,093 | ||||||||
| Total current biological assets | 84,095 | 90,785 | 51,594 | ||||||||
Other current consumable biological assets include geese, minks and other livestock. The following table represents the changes in the carrying amounts of major biological assets during the years ended 31 December 2008, 2007 and 2006:
| Crops in fields | Orchards | Breeders held for hatchery eggs production | Broiler Poultry | Total | |||||
| As of 1 January 2006 | 881 | - | 6,657 | 10,672 | 18,210 | ||||
| Increase due to purchases | 3,948 | 2,149 | 3,388 | 1,940 | 11,425 | ||||
| Gains arising from change in fair value of biological assets less estimated point-of-sale costs | 25,823 | 11,936 | 26,891 | 180,132 | 244,782 | ||||
| Transfer to consumable biological assets | - | - | (22,373) | 22,373 | - | ||||
| Decrease due to harvest | (19,672) | (2,245) | (2,062) | (196,847) | (220,826) | ||||
| As of 31 December 2006 | 10,980 | 11,840 | 12,501 | 18,270 | 53,591 | ||||
| Increase due to purchases | 5,392 | 6,274 | 4,801 | 432 | 16,899 | ||||
| Gains arising from change in fair value of biological assets less estimated point-of-sale costs | 77,538 | 15,615 | 64,818 | 196,943 | 354,914 | ||||
| Transfer to consumable biological assets | - | - | (54,422) | 54,422 | - | ||||
| Decrease due to harvest | (67,681) | (6,629) | (3,988) | (247,269) | (325,567) | ||||
| As of 31 December 2007 | 26,229 | 27,100 | 23,710 | 22,798 | 99,837 | ||||
| Increase due to purchases | 7,431 | 185 | 5,238 | 26 | 12,880 | ||||
| Gains arising from change in fair value of biological assets less estimated point-of-sale costs | 92,705 | 15,239 | 80,106 | 353,078 | 541,128 | ||||
| Transfer to consumable biological assets | - | - | (72,914) | 72,914 | - | ||||
| Decrease due to harvest | (93,553) | (13,335) | (6,917) | (414,073) | (527,878) | ||||
| Translation difference | (5,972) | (9,255) | (9,900) | (11,617) | (36,744) | ||||
| As of 31 December 2008 | 26,840 | 19,934 | 19,323 | 23,126 | 89,223 |
11. OTHER NON-CURRENT ASSETS
The balances of other non-current assets were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Packaging and containers | 3,458 | 4,227 | 2,349 | ||
| Lease rights for land | 572 | 872 | 941 | ||
| Other investments | 283 | 578 | 406 | ||
| Long-term loans to employees and related parties | 95 | 265 | 322 | ||
| Other non-current assets | 2,050 | 2,071 | 583 | ||
| Total | 6,458 | 8,013 | 4,601 |
Long-term loans to employees and related parties are interest free and measured at amortized cost using the effective interest rate method.
As of 31 December 2007, the balance of other non-current assets included project documentation related to construction in the amount of USD 1,594 thousand (2006: USD 570 thousand).
12. INVENTORIES
The balances of inventories were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Components for mixed fodder production | 21,748 | 20,793 | 37,319 | ||
| Other raw materials | 6,998 | 7,557 | 8,269 | ||
| Spare parts | 2,780 | 4,500 | 3,623 | ||
| Packaging materials | 3,437 | 3,185 | 1,964 | ||
| Mixed fodder | 1,590 | 2,785 | 3,175 | ||
| Sunflower oil | 510 | 793 | 382 | ||
| Other inventories | 1,055 | 3,032 | 2,359 | ||
| Total | 38,118 | 42,645 | 57,091 |
13. AGRICULTURAL PRODUCE
The balances of agricultural produce were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||||||||
| Thousand tons | Carrying amount | Thousand tons | Carrying amount | Thousand tons | Carrying amount | ||||||
| Chicken meat | 4,887 | 7,881 | 5,807 | 9,333 | 7,094 | 9,129 | |||||
| Other meat | N/A | 3,394 | N/A | 1,460 | N/A | 1,899 | |||||
| Grain | 306 | 24,695 | 67 | 12,394 | 26 | 6,238 | |||||
| Fruits, vegetables and other crops | N/A | 6,795 | N/A | 8,493 | N/A | 3,978 | |||||
| Total agricultural produce | 42,765 | 31,680 | 21,244 | ||||||||
14. OTHER CURRENT ASSETS, NET
The balances of other current assets were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Prepayments to suppliers and prepaid expenses | 7,867 | 8,707 | 7,854 | ||
| Government grants receivable (Note 25) | 3,397 | 4,192 | 5,331 | ||
| Short-term advances, finance aid to and promissory notes from related parties (Note 6) | 976 | 1,423 | 2,200 | ||
| Loans to employees | 1,391 | 1,467 | 1,030 | ||
| Other receivables | 2,346 | 2,235 | 709 | ||
| Less: allowance for irrecoverable amounts | (607) | (1,703) | (660) | ||
| Total | 15,370 | 16,321 | 16,464 |
As of 31 December 2008, 2007 and 2006, government grants receivable were mainly represented by amounts due from the state for poultry and cattle processed during the last months of 2008, 2007 and 2006, respectively.
15. TAXES recoverable and prepaid, NET
Taxes recoverable and prepaid were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| VAT recoverable | 49,736 | 47,726 | 42,799 | ||
| Miscellaneous taxes prepaid | 777 | 540 | 5 | ||
| Less: allowance for irrecoverable VAT | (4,175) | (2,866) | (1,230) | ||
| Total | 46,338 | 45,400 | 41,574 |
16. TRADE ACCOUNTS RECEIVABLE, NET
The balances of trade accounts receivable were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Agricultural operations | 26,663 | 19,941 | 9,939 | ||
| Due from related parties (Note 6) | 2,791 | 1,315 | 6,784 | ||
| Sunflower oil sales | 2,957 | 180 | 1,078 | ||
| Natural gas trading | - | - | 463 | ||
| Less: allowance for irrecoverable amounts | (880) | (1,073) | (537) | ||
| Total | 31,531 | 20,363 | 17,727 |
Allowance for irrecoverable amounts is estimated at the level of 25% for trade accounts receivable on sales of poultry meat which are aged over 30 days (for trade accounts receivable on other sales - over 60 days). Trade accounts receivable on sales of poultry meat which are aged over 270 days and trade accounts receivable on other sales which are aged over 360 days are provided in full.
The aging of trade accounts receivable that were impaired as of 31 December 2008 was as follows:
| Trade accounts receivable | Allowance for irrecoverable amounts | ||
| Trade accounts receivable on sales of poultry meat: | |||
| Over 30 but less than 270 days | 280 | 70 | |
| Over 270 days | 561 | 561 | |
| Total trade accounts receivable on sales of poultry meat | 841 | 631 | |
| Trade accounts receivable on other sales: | |||
| Over 60 but less than 360 days | 268 | 67 | |
| Over 360 days | 182 | 182 | |
| Total trade accounts receivable on other sales | 450 | 249 | |
| Total | 1,291 | 880 | |
17. SHORT-TERM BANK DEPOSITS
Short-term bank deposits were as follows as of 31 December 2008, 2007 and 2006:
| Currency | Annual interest rate | 2008 | Annual interest rate | 2007 | Annual interest rate | 2006 | ||||
| Term deposits with Ukreximbank | USD | 11.00% | 24,000 | - | - | - | - | |||
| Term deposits with UniCreditBank | UAH | 18.00% | 1,040 | 10.00% | 7,792 | - | - | |||
| Term deposits with UniCreditBank | UAH | 10.00% | 182 | 9.00% | 2,263 | - | - | |||
| Term deposits with Raiffeisen Bank Aval | USD | 6.00% | 94 | - | - | - | - | |||
| Term deposits with Vneshtorgbank | UAH | 12.00% | 13 | - | - | - | - | |||
| Term deposits with Vneshtorgbank | UAH | 10.00% | 13 | - | - | - | - | |||
| Term deposits with Ukrgasbank | USD | - | - | - | - | 7.50% | 2,000 | |||
| Total | 25,342 | 10,055 | 2,000 |
At the end of 2008 the National Bank of Ukraine imposed restrictions as to early withdrawal of bank deposits (Note 26).
18. CASH AND CASH EQUIVALENTS
The balances of cash and cash equivalents were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Cash in hand and with banks | 18,975 | 10,088 | 6,625 | ||
| Short-term deposits with banks | 35,097 | - | 37,790 | ||
| Total | 54,072 | 10,088 | 44,415 |
At the end of 2008 the National Bank of Ukraine imposed restrictions as to early withdrawal of bank deposits (Note 26).
The balances of term deposits were as follows as of 31 December 2008, 2007 and 2006:
| Currency | Annual interest rate* | 2008 | Annual interest rate | 2007 | Annual interest rate* | 2006 | |||||
| Term deposits with UniCreditBank | USD | 12.00% | 20,500 | - | - | - | - | ||||
| Term deposits with OTP Bank | USD | 11.25% | 10,000 | - | - | 6.5% | 13,000 | ||||
| Term deposits with UniCreditBank | UAH | 18.00% | 2,597 | - | - | - | - | ||||
| Term deposits with Ukrgazbank | USD | 11.00% | 2,000 | - | - | 9.5% | 6,940 | ||||
| Term deposits with HVB Ukraine | USD | - | - | - | - | 6.5% | 17,850 | ||||
| Total | 35,097 | - | 37,790 |
* Actual annual interest rate as of 31 December 2008 and 2006.
19. SHARE CAPITAL
Share capital of MHP S.A.
Share capital of MHP S.A.
As of 30 May 2006 MHP S.A. issued 20,000 shares with par value of EUR 2, which resulted in the share capital of EUR 40 thousand (USD 50 thousand). All these shares have been entirely paid by a contribution in cash. The authorized capital, including the issued share capital, was fixed at EUR 340,000 thousands represented by 170,000,000 shares with par value of EUR 2 each.
On 13 June 2006 MHP S.A. issued an additional 100,000,000 shares with par value of EUR 2, which resulted in increase of the share capital by EUR 200,000 thousand (USD 251,261 thousand), in exchange for a 100% shareholding in RHL. The fair value of the shares was determined by an independent appraiser as of the date of the contribution.
On 15 May 2008 MHP S.A. issued 10,750,000 new ordinary shares. After the issue MHP S.A.'s share capital consists of 110,770,000 ordinary shares at par value EUR 2 each. The offering was
completed at USD 15 per share.
The increase in MHP S.A. share capital amounted to USD 33,194 thousand at the transaction date. Share premium on issue constituted USD 128,056 thousand at the transaction date. The net expenses related to the issue amounted to USD 9,300 thousand. Net proceeds, after deducting expenses, of the offering amounted to USD 151,950 thousand.
MHP S.A. share capital has a par value of EUR 2 and all issued shares have been paid in full. The shareholders have the right to vote and the right to receive dividends. Dividends are payable at the discretion of the Group.
Shareholders - As of 31 December 2008, 2007 and 2006, the shareholders of the parent company of the Group were:
| 2008 | 2007 | 2006 | |||
| Shareholders/parent | MHP S.A. | MHP S.A. | MHP | ||
| WTI Trading Limited | 77.67% | 100.00% | 93.70% | ||
| International Finance Corporation, USA ("IFC") | - | - | 6.30% | ||
| Others | 22.33% | - | - | ||
| Total | 100.00% | 100.00% | 100.00% |
The controlling shareholder of the Group is the Chief Executive Officer of MHP S.A. Mr. Yuriy Kosyuk, who owns 100% of the shares of WTI Trading Limited ("WTI"), which is the immediate shareholder of MHP S.A, which, in its turn, owns 77.67% in MHP S.A. The rest of the shares are listed on the London Stock Exchange in the form of Global Depositary Receipts (GDRs).
On 1 February 2007, WTI acquired 6.3% of the Parent's shares from IFC. As a result of the transaction IFC ceased to be a shareholder of the Group. The purchase price for such shares was determined based on the terms of an agreement entered into between IFC, Mr.Yuriy Kosyuk and WTI dated 15 June 2006.
20. BANK BORROWINGS
The following table summarizes bank loans and credit lines outstanding as of 31 December 2008, 2007 and 2006:
| Bank | Currency | Weighted average interest rate | 2008 | Weighted average interest rate | 2007 | Weighted average interest rate | 2006 | |
| Foreign banks | EUR | 5.43% | 78,697 | 4.77% | 86,597 | 4.82% | 63,426 | |
| Ukrainian banks | USD | 6.78% | 109,000 | 8.71% | 10,799 | 10.10% | 4,257 | |
| Ukrainian banks | UAH | - | - | 12.51% | 42,337 | 13.34% | 44,359 | |
| 109,000 | 53,136 | 48,616 | ||||||
| Total bank borrowings | 187,697 | 139,733 | 112,042 | |||||
| Less: | ||||||||
| Short-term bank borrowings and current portion of long-term bank borrowings | (130,241) | (73,855) | (55,988) | |||||
| Total long-term bank borrowings | 57,456 | 65,878 | 56,054 | |||||
Repayment terms of principal amounts of bank borrowings vary from monthly repayment to repayment on maturity depending on the agreement reached with each bank. The interest on the borrowings drawn with Ukrainian banks is payable on a monthly or quarterly basis. Interest on borrowings drawn with foreign banks is payable semi-annually.
Term loans and credit line facilities were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Credit lines | 132,560 | 84,973 | 39,750 | ||
| Term loans | 55,137 | 54,760 | 72,292 | ||
| Total bank borrowings | 187,697 | 139,733 | 112,042 |
The following table summarizes fixed and floating interest rates bank loans and credit lines held by the Group as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | ||||
| Floating interest rate | 147,941 | 102,348 | 70,357 | |||
| Fixed interest rate | 39,756 | 37,385 | 41,685 | |||
| Total | 187,697 | 139,733 | 112,042 |
Bank loans and credit lines outstanding as of 31 December 2008 were repayable as follows:
| 2008 | ||||||
| Foreign | Ukrainian | Total | ||||
| Within one year | 21,241 | 109,000 | 130,241 | |||
| In the second year | 22,703 | - | 22,703 | |||
| In the third to fifth year inclusive | 34,753 | - | 34,753 | |||
| Total | 78,697 | 109,000 | 187,697 | |||
Included in bank borrowings as of 31 December 2008 is a revolving committed credit line facility drawn with ING Bank (Ukraine) in an amount of USD 35,000 thousand. The facility is available until 2010, and may be drawn in six-months tranches.
On 25 December 2008 the Group entered into a credit facility agreement with OTP Bank (Ukraine) for USD 20,000 thousand until 5 January 2010.
As of 31 December 2008, the Group had available borrowings on undrawn facilities of USD 26,963 thousand, including USD 1,844 thousand of available overdraft facilities. These undrawn facilities expire during the period from January 2009 until December 2016.
The Group as well as particular subsidiaries has to comply with certain covenants imposed by the banks providing the loans. The main covenants which are to be complied by the Group are as follows: total debt to equity ratio, total debt to EBITDA ratio and total equity to total assets ratio. The Group subsidiaries should also obtain approval with lenders regarding the property to be used as collateral.
As of 31 December 2008, the Group had borrowings of USD 13,521 thousand that were secured. These borrowings were secured by property, plant and equipment with the carrying amount of USD 6,674 thousand (Note 7).
21. BONDS ISSUED
Bonds issued and outstanding as of 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| 10.25% Senior Notes due in 2011 | 250,000 | 250,000 | 250,000 | ||
| 14% Druzhba Nova Bonds due in 2008 | - | 39,604 | 39,604 | ||
| Unamortized premium on bonds issued | - | 116 | 295 | ||
| Unamortized debt issue cost | (3,097) | (6,512) | (8,396) | ||
| Total | 246,903 | 283,208 | 281,503 | ||
| Less: Current portion of long-term bonds | - | (39,604) | - | ||
| Total long term portion of bonds issued | 246,903 | 243,604 | 281,503 |
10.25% Senior Notes
In November 2006, MHP S.A. issued USD 250 million 10.25% Senior Notes ("Senior Notes"), due in November 2011, at par. The notes are listed on London Stock Exchange. The Senior Notes are jointly and severally guaranteed on a senior basis by MHP, Peremoga, Druzhba Nova, Oril, MZVKK, Zernoproduct and Druzhba. Interest on the Senior Notes is payable semi-annually in arrears. On or prior to 30 November 2009, the Group may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net proceeds of any offering of MHP S.A. common equity at a redemption price of 110.25% of the principal amount, plus accrued and unpaid interest up to the redemption date.
These Senior Notes are subject to certain restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness, restrictions on mergers or consolidations, limitations on liens and dispositions of assets and limitations on transactions with affiliates. The effective interest rate on the Senior Notes is 11.43% per annum.
If the Group fails to comply with the covenants imposed, all outstanding Senior Notes will become due and payable without further action or notice. If change of control occurs the Group shall make an offer to each holder of the Senior Notes to purchase such Senior Notes at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any.
As of 31 December 2008, the fair value of the Senior Notes issued by the Group was equal to USD 120,875 thousand (2007: USD 252,500 thousand; 2006: USD 255,312 thousand).
14% Druzhba Nova Bonds
In September 2006, Druzhba Nova issued 200,000 of 14.0% coupon bonds with nominal value of USD 39,604 thousand at a premium of USD 360 thousand, due in August 2008. Interest on the bonds was payable quarterly in arrears. The bonds were not subject to any restrictive covenants. The effective interest rate on the bonds was 14.31% per annum. As of 31 December 2007, the fair value of Druzhba Nova bonds was equal to USD 40,966 thousand (2006: USD 39,994 thousand). The bonds were fully repaid during the year ended 31 December 2008.
The fair value of the notes and bonds was determined based on market quotations.
22. LONG-TERM FINANCE LEASE AND VENDOR FINANCING OBLIGATIONS
Long-term finance lease and vendor financing obligations as of 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Finance lease obligations, long-term portion | 47,972 | 30,018 | 17,433 | ||
| Long-term payables for property, plant and equipment under vendor financing arrangements | - | 520 | 395 | ||
| Total | 47,972 | 30,538 | 17,828 |
The long-term payables for property, plant and equipment mainly represent vendor financing arrangements with foreign and Ukrainian companies. As of 31 December 2007, the weighted average interest rates on such payables were 11.0% and 9.9% for payables denominated in EUR and UAH, respectively (2006: 7.58% and 10.0%).
As of 31 December 2008, 2007 and 2006, the current portion of long-term payables for property, plant and equipment was included in current accounts payable for property, plant and equipment as follows:
| 2008 | 2007 | 2006 | |||
| Long-term payables for property, plant and equipment | - | 1,534 | 969 | ||
| Short-term payables for property, plant and equipment | 8,116 | 8,612 | 11,273 | ||
| Less: | |||||
| Long-term portion of payables for property, plant and equipment | - | (520) | (395) | ||
| Total | 8,116 | 9,626 | 11,847 |
As of 31 December 2008, the Group's property, plant and equipment with net book value of USD 786 thousand were pledged as a collateral under vendor financing arrangements with foreign and Ukrainian companies (Note 7).
The long-term finance lease obligations represent amounts due under agreements for lease of trucks, agricultural machinery and equipment with Ukrainian and foreign companies. As of 31 December 2008, the weighted average interest rates on finance lease obligations were 8.28% and 10.0% for finance lease obligations denominated in EUR and USD, respectively.
The following are the minimum lease payments and present value of minimum lease payments under the finance lease agreements as of 31 December 2008:
| Minimum lease payments | Present value of minimum lease payments | ||
| Payable within one year | 28,928 | 21,625 | |
| Payable in the second year | 24,697 | 19,632 | |
| Payable in the third to the fifth year inclusive | 32,408 | 27,776 | |
| Payable after fifth year | 684 | 564 | |
| 86,717 | 69,597 | ||
| Less: | |||
| Future finance charges | (17,120) | - | |
| Present value of lease obligations | 69,597 | 69,597 | |
| Less: | |||
| Current portion | (21,625) | ||
| Finance lease obligations, long-term portion | 47,972 | ||
23. TRADE ACCOUNTS PAYABLE
Trade accounts payable were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Trade accounts payable to third parties | 22,145 | 25,077 | 13,555 | ||
| Payables related to natural gas trading and related transactions | - | - | 170 | ||
| Payables due to related parties | 25 | 39 | - | ||
| Total | 22,170 | 25,116 | 13,725 |
During the year ended 31 December 2008 the Group changed the terms of some of its arrangements related to grain purchase financing. As a result, as of 31 December 2008 trade accounts payable included liabilities that bear a floating rate of interest under grain purchase financing arrangements in the amount of USD 6,205 thousand and accrued interest of USD 136 thousand.
24. Other current liabilities
Other current liabilities were as follows as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Accrued payroll and payroll related taxes | 15,151 | 11,940 | 6,595 | ||
| Advances from and other payables due to third parties | 2,470 | 4,362 | 709 | ||
| Advances from related parties (Note 6) | 338 | 329 | 26 | ||
| Payables on other financing arrangements | 12,484 | - | - | ||
| Other payables | 2,549 | 1,454 | 1,424 | ||
| Total | 32,992 | 18,085 | 8,754 |
Payables on other financing arrangements represented credit facility received at 8.75% with maturity on 30 June 2009.
25. GOVERNMENT GRANTS INCOME
The Ukrainian legislation provides for a number of different grants and tax benefits for companies involved in agricultural operations. The below-mentioned grants and similar privileges are established by Verkhovna Rada (the Parliament) of Ukraine, as well as by the Ministry of Agrarian Policy of Ukraine, the Ministry of Finance of Ukraine, the State Committee of Water Industry, the customs authorities and local district administrations.
The government grants recognized by the Group as income during the years ended 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| VAT refunds | 59,338 | 21,365 | 26,121 | ||
| Processing of live animals | 46,146 | 29,641 | 18,006 | ||
| Fruits and vine cultivation | 468 | 2,417 | 1,397 | ||
| Breeding | 293 | 1,198 | 347 | ||
| Other government grants | 1,418 | 1,668 | 807 | ||
| Total | 107,663 | 56,289 | 46,678 |
VAT refunds for agricultural industry - According to the Law of Ukraine "On the Value Added Tax", companies that generated not less than 50% of gross revenues for the previous tax year from sales of own agricultural products are entitled to refunds of VAT on sales of agricultural products. The VAT on sales, net of VAT paid on purchases, is transferred to a special account, restricted to payments for goods and services related to agricultural activities. The corresponding VAT liability to be refunded at each balance sheet date is recorded in the Group's consolidated financial statements as deferred income, as the income recognition criteria is considered to be met only when payments are made. As of 31 December 2008, the balance of deferred income related to VAT refunds was USD 789 thousand (2007: USD 304 thousand, 2006: USD 648 thousand).
The mentioned VAT refunds were effective during 2008, 2007 and 2006. In October 2008, the Law of Ukraine "On Immediate Actions on Prevention of Financial Crisis Impact" extended the exemption till 1 January 2011. This Law introduced certain changes which come into effect from 1 January 2009 and may affect the amount of VAT refunds for the future periods. The management estimates that these changes will not have a significant impact on the Group's future VAT refunds. Subsequent to 31 December 2008, the exemption was extended for an indefinite period (Note 37).
Government grants on processing of live animals - During the years ended 31 December 2008, 2007 and 2006, the Law "On State Budget of Ukraine" established subsidies for companies engaged in processing of live animals (chicken and other poultry, cows and pigs). This subsidy is provided to the Group's chicken farms in the form of payment for each item of poultry slaughtered at the farms. This subsidy is also available to the Group's beef and pork processing facilities. As of the date these consolidated financial statements were authorized for issue, the regulations as to the amounts of grants on processing of live animals were not issued. Accordingly, there is uncertainty as to the amounts of these grants expected to be received by the Group in 2009.
Government grants on fruits and vine cultivation - In accordance with the Law "On State Budget of Ukraine" two companies of the Group were entitled to receive grants for the years ended 31 December 2008, 2007 and 2006 for creation and cultivating of orchards, vines and berry-fields (these companies were acquired in the second quarter of 2006).
Government grants related to selection and genetics programs in breeding - Two of the Group companies received grants from the state budget for the purpose of financing selection and genetics programs in poultry breeding. This subsidy is provided to the Group's breeding farms in the form of compensation of expenses in connection with selection and genetics poultry breeding. The eligibility, application and tender procedures related to the grants are carried out by the Ministry of Agrarian Policy of Ukraine and Ukrainian Agricultural Academy of Sciences.
Other government grants - Other government grants recognized as income during the years ended 31 December 2008, 2007 and 2006 mainly comprise of subsidies related to crop growing. In 2006, Starynska and Zernoproduct began receiving subsidies in connection with their crop growing activities. This subsidy is calculated based on the number of hectares sowed with a particular crop.
In addition to the government grant income recognized by the Group, the Group receives a grant to compensate agricultural producers for costs used to finance the operations. Agricultural producers are entitled to compensation of finance costs incurred on bank borrowings in accordance with the Law "On State Budget of Ukraine" during the years ended 31 December 2008, 2007 and 2006. The eligibility, application and tender procedures related to the grants were defined and controlled by the Ministry of Agrarian Policy of Ukraine.
These grants were recognized as a reduction in the associated finance costs and during the years ended 31 December 2008, 2007 and 2006 were USD 2,406 thousand, USD 2,141 thousand and USD 449 thousand, respectively (Note 32).
26. CONTINGENCIES AND CONTRACTUAL COMMITMENTS
Recent volatility in global and Ukrainian financial markets - In recent months a number of major economies around the world have experienced volatile capital and credit markets. A number of major global financial institutions have been placed into bankruptcy, taken over by other financial institutions and/or supported by government funding. As a consequence of the recent market turmoil in capital and credit markets both globally and in Ukraine, notwithstanding any potential economic stabilization measures that may be put into place by the Ukrainian government and the National bank of Ukraine, there exists as of the date these financial statements are authorized for issue economic uncertainties surrounding the continued availability, and cost, of credit both for the entity and its counterparties, and the potential for economic uncertainties to continue in the foreseeable future. As a consequence, the potential exists that assets may not be recovered at their carrying amounts in the ordinary course of business, which would have a corresponding impact on the entity's profitability.
During the year ended 31 December 2008, the National Bank of Ukraine imposed restrictions as to the early withdrawal of bank deposits placed by the entities and individuals with Ukrainian banks and Ukrainian subsidiaries of foreign banks. The estimated maximum exposure to the Group, as measured by reference to the carrying value of short-term bank deposits included in cash and cash equivalents (Note 18) and short-term bank deposits (Note 17) as of 31 December 2008 comprised USD 60,439 thousand. The Group's management believes that the Group will be able to substantially recover the carrying amount of the deposits.
Operating environment − The principal business activities of the Group are within Ukraine. Laws and regulations affecting businesses operating in Ukraine are subject to rapid changes and the Group's assets and operations could be at risk if there are any adverse changes in the political and business environment.
Taxation − Ukrainian tax authorities are increasingly directing their attention to the business community as a result of the overall Ukrainian economic environment. In respect of this, the local and national tax environment in Ukraine is constantly changing and subject to inconsistent application, interpretation and enforcement. Non-compliance with Ukrainian laws and regulations can lead to the imposition of severe penalties and interest. Future tax examinations could raise issues or assessments which are contrary to the Group companies' tax filings. Such assessments could include taxes, penalties and interest, and these amounts could be material. While the Group believes it has complied with local tax legislation, there have been many new tax and foreign currency laws and related regulations introduced in recent years which are not always clearly written.
Legal issues − The Group is involved in litigations and other claims that are in the ordinary course of its business activities. Management believes that the resolution of such matters will not have a material impact on its financial position or operating results.
Contractual commitments on purchase of raw materials and biological asset − During the year ended 31 December 2008, the Group became a party to several forward contracts for the purchase of sunflower seeds and biological assets with specified period, quantity, and price.
As of 31 December 2008, purchase commitments on forward contracts amounted to USD 1,833 thousand (2007: USD 108,094 thousand; 2006: USD 9,451 thousand).
As of 31 December 2008, purchase commitments on acquisition of biological assets from a foreign supplier amounted to USD 1,416 thousand (2007: USD 8,734 thousand; 2006: USD 83 thousand).
Contractual commitments on purchase of property, plant and equipment − During the years ended 31 December 2008, 2007 and 2006, the companies of the Group entered into a number of contracts with foreign suppliers for the purchase of property plant and equipment for development of agricultural operations. As of 31 December 2008, purchase commitments on such contracts amounted to USD 20,927 thousand (2007: USD 3,851 thousand; 2006: USD 28,263 thousand).
Contractual commitments on sales of sunflower oil − As of 31 December 2008, commitments of the Group on sunflower oil sales to a foreign customer comprised USD 6,854 thousand (2007: USD 12,869 thousand; 2006: USD 8,307 thousand).
Contractual commitments on purchase of additional shares − In April 2007, the Group entered into an agreement to acquire minority shareholders' interest in Zernoproduct-Lypivka. As of 31 December 2008 the transaction was subject to registration with Ukrainian state authorities. The Group committed to purchase additional shares in Zernoproduct-Lypivka valued at USD 283 thousand. Completion of the transaction is expected to result in an increase of the Group's effective interest in Zernoproduct-Lypivka to 92.8%.
Commitments on operating lease of land − The Group has the following non-cancelable contractual obligations as to the operating lease of land as of 31 December 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||
| Within one year | 5,264 | 5,868 | 4,697 | ||
| In the second to the fifth year inclusive | 19,218 | 21,749 | 18,006 | ||
| Thereafter | 38,193 | 46,359 | 42,726 | ||
| Total | 62,675 | 73,976 | 65,429 |
27. RISK MANAGEMENT POLICIES
Capital risk management − The Group manages its capital to ensure that entities of the Group will be able to continue as a going concern while maximising the return to the equity holders through maintaining a balance between the higher returns that might be possible with higher levels of borrowings and the security afforded by a sound capital position. The management of the Group reviews the capital structure on a regular basis. Based on the results of this review, the Group takes steps to balance its overall capital structure through new share issues and as the issue of new debt or the redemption of existing debt.
The Group's target is to achieve the leverage ratio of not higher than 3.25 up to 31 December 2007, 3.0 up to 31 December 2008, and 2.5 thereafter. It is determined as the proportion of debt to adjusted operating profit. As of 31 December 2008, 2007 and 2006 the leverage ratio was a follows:
| 2008 | 2007 | 2006 | |||
| Bank borrowings (Note 20) | 187,697 | 139,733 | 112,042 | ||
| Bonds issued (Note 21) | 246,903 | 283,208 | 281,503 | ||
| Finance lease obligations (Note 22) | 69,597 | 44,441 | 27,111 | ||
| Payables on other financing arrangements (Note 24) | 12,484 | - | - | ||
| 516,681 | 467,382 | 420,656 | |||
| Operating profit | 243,506 | 112,143 | 116,435 | ||
| Adjustments for: | |||||
| Depreciation expense | 56,938 | 44,207 | 23,295 | ||
| Loss on impairment of property, plant and equipment (Note 7) | 11,767 | 10,238 | - | ||
| Gain from change in accounting estimates in respect of valuation of biological assets | - | (150) | (6,738) | ||
| Adjusted operating profit | 312,211 | 166,438 | 132,992 | ||
| Debt to adjusted operating profit | 1.65 | 2.81 | 3.16 |
Debt is defined as bank borrowings, bonds issued, finance lease obligations, and payables on other financing arrangements. For the purposes of the leverage ratio, debt does not include interest-bearing liabilities, which are included in trade accounts payable (Note 23). Adjusted operating profit is defined as operating profit adjusted for the depreciation expense and losses and gains believed by the management to be non-recurring in nature, as this measure produces results substantially comparable to those reviewed for the purposes of financial covenants under the Group's borrowings.
Major categories of financial instruments
| 2008 | 2007 | 2006 | |||
| Financial assets: | |||||
| Cash and cash equivalents | 54,072 | 10,088 | 44,415 | ||
| Trade accounts receivable, net | 31,531 | 20,363 | 17,727 | ||
| Government grants receivable (Note 14) | 3,397 | 4,192 | 5,331 | ||
| Short-term bank deposits (Note 17) | 25,342 | 10,055 | 2,000 | ||
| Loans to employees and related parties (Notes 11 and 14) | 1,486 | 1,732 | 1,352 | ||
| Other receivables (Note 14) | 2,346 | 2,235 | 709 | ||
| Total financial assets | 118,174 | 48,665 | 71,534 |
| 2008 | 2007 | 2006 | |||
| Financial liabilities: | |||||
| Bank borrowings | 187,697 | 139,733 | 112,042 | ||
| Bonds issued | 246,903 | 283,208 | 281,503 | ||
| Finance lease and vendor financing obligations | 69,597 | 44,441 | 27,111 | ||
| Accounts payable for property, plant and equipment | 8,116 | 9,626 | 11,847 | ||
| Interest accrued | 3,520 | 4,102 | 3,851 | ||
| Trade accounts payable | 22,170 | 25,116 | 13,725 | ||
| Other long-term payables | 400 | 2,004 | 1,474 | ||
| Other current liabilities (Note 24) | 15,033 | 1,454 | 1,424 | ||
| Total financial liabilities | 553,436 | 509,684 | 452,977 |
The main risks inherent to the Group's operations are those related to credit risk exposures, market movements in interest rates and foreign exchange rates, potential negative impact of livestock diseases, and commodity price and procurement risk.
Credit risk − The Group is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.
The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one customer or group of customers. The approved credit period for major groups of customers, which include franchisees, distributors and supermarkets, is set at 5 - 21 days; sales to other customers are performed on prepayment terms.
Limits on the level of credit risk by customer are approved and monitored on a regular basis by the management of the Group. The Group's management assesses amounts receivable from the customers for recoverability starting from 30 and 60 days for receivables on sales of poultry meat and receivables on other sales, respectively. No assessment is performed immediately from the date credit period is expired. About 50% of trade receivables comprise amounts due from large supermarkets, which have the longest contractual receivable settlement period among customers.
Of the trade accounts receivable balance as of 31 December 2008, the Group's five largest customers represent 38% of the outstanding balance.
The Group manages its exposure to the risk of recoverability of bank deposits (Note 26) by placing deposits with banks in which it has drawn bank borrowings.
Liquidity risk − Liquidity risk is the risk that the Group will not be able to settle all liabilities as they are due. The Group's liquidity position is carefully monitored and managed. The Group has in place a detailed budgeting and cash forecasting process to help ensure that it has adequate cash available to meet its payment obligations.
The following table details the Group's remaining contractual maturity for its non-derivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. The amounts in the table may not be equal to the balance sheet carrying amounts since the table includes all cash outflows on an undiscounted basis.
| 2008 | Carrying amount | Contractual amounts | Less than 1 year | From 2nd to 5th year | After 5th year | ||||
| Borrowings | 187,697 | 205,584 | 141,175 | 62,075 | 2,336 | ||||
| Bonds issued | 250,000 | 324,740 | 25,625 | 299,115 | - | ||||
| Finance lease obligations | 69,597 | 86,716 | 28,928 | 57,104 | 684 | ||||
| Total | 507,294 | 617,040 | 195,728 | 418,294 | 3,020 |
The Group's target is to maintain its current ratio, defined as a proportion of current assets to current liabilities, at the level of 1.1 - 1.2. As of 31 December 2008, 2007 and 2006, the current ratio was as follows:
| 2008 | 2007 | 2006 | |||
| Current assets | 337,631 | 267,337 | 256,950 | ||
| Current liabilities | 219,453 | 184,595 | 104,096 | ||
| Current ratio | 1.5 | 1.4 | 2.5 |
Currency risk − Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group undertakes certain transactions denominated in foreign currencies. The Group does not use any derivatives to manage foreign currency risk exposure, at the same time the management of the Group sets limits on the level of exposure by currencies.
The carrying amounts of the Group's foreign currency denominated monetary assets and liabilities as of 31 December 2008 are as follows:
| USD denominated | EUR denominated | |||
| Assets | ||||
| Trade accounts receivable | 3,987 | 2 | ||
| Short-term bank deposits | 24,094 | - | ||
| Cash and cash equivalents | 40,357 | 12 | ||
| Total assets | 68,438 | 14 | ||
| Liabilities | ||||
| Trade accounts payable | 1,694 | 4,591 | ||
| Accounts payable for property, plant and equipment | 6 | 5,790 | ||
| Bank borrowings | 109,000 | 78,697 | ||
| Bonds issued | 250,000 | - | ||
| Finance lease and vendor financing obligations | 8,536 | 61,061 | ||
| Total liabilities | 369,236 | 150,139 |
The below details the Group's sensitivity to strengthening of the Ukrainian Hryvnia against US Dollar and EURO by 5% and weakening of the Ukrainian Hryvnia against US Dollar and EURO by 15%. This sensitivity rate represents management's assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 5% and 15% change in foreign currency rates.
| USD denominated | EUR denominated | |||
| Profit/(loss) | 15,040/(45,120) | 7,506/(22,519) | ||
The effect of foreign currency sensitivity on shareholders' equity is equal to that on profit or loss.
During the year ended 31 December 2008, the Ukrainian Hryvnia depreciated against EURO by 46.3%, against US Dollar by 52.5%. As a result, the Group recognized foreign exchange losses in the amount of USD 187,127 thousand in the consolidated income statement.
The Group's management believes that the currency risk is mitigated by existence of USD-denominated proceeds from sunflower oil sales, which are substantially sufficient for servicing the Group's USD- denominated liabilities.
Interest rate risk − Interest rate risk arises from the possibility that changes in interest rates will affect the value of the financial instruments. The Group borrows on both a fixed and variable rate basis. The primary sources of the Group's funds are loans tied to LIBOR and EURIBOR.
The below details the Group's sensitivity to increase or decrease of floating rate by 10%. The analysis was applied to interest bearing liabilities (bank borrowings, finance lease obligations and accounts payable under grain purchase financing arrangements) based on the assumption that the amount of liability outstanding as of the balance sheet date was outstanding for the whole year.
| LIBOR | EURIBOR | Total | |||
| Profit/(loss) | 12,209/(12,209) | 6,496/(6,496) | 18,705/(18,705) |
The effect of interest rate sensitivity on shareholders' equity is equal to that on profit or loss.
Livestock diseases risk − The Group's agro-industrial business is subject to risks of outbreaks of various diseases. The Group faces the risk of outbreaks of diseases, which are highly contagious and destructive to susceptible livestock, such as avian influenza or bird flu for its poultry operations. These and other diseases could result in mortality losses. Disease control measures were adopted by the Group to minimize and manage this risk. The Group's management is satisfied that its current existing risk management and quality control processes are effective and sufficient to prevent any outbreak of livestock diseases and related losses.
Commodity price and procurement risk − Commodity price risk arises from the risk of an adverse effect on current or future earnings from fluctuations in the prices of commodities. To mitigate this risk the Group accumulates sufficient commodity stock at each balance sheet date to support at least one quarter of operations, and uses commodity forward purchase contracts.
28. REVENUE
Revenue for the years ended 31 December 2008, 2007 and 2006 was as follows:
| 2008 | 2007 | 2006 | |||
| Poultry and related operations segment | |||||
| Revenue from sales of chicken meat | 501,013 | 283,835 | 210,555 | ||
| Revenue from sunflower oil sales | 109,974 | 67,028 | 38,312 | ||
| Revenue from other poultry related sales | 49,044 | 34,002 | 16,756 | ||
| 660,031 | 384,865 | 265,623 | |||
| Other agricultural operations segment | |||||
| Revenue from sales of other meat | 66,122 | 34,523 | 21,174 | ||
| Other agricultural sales | 26,980 | 16,559 | 6,886 | ||
| 93,102 | 51,082 | 28,060 | |||
| Grain growing segment | |||||
| Revenue from sales of grains and sugar beets | 49,777 | 38,490 | 17,314 | ||
| Total revenue from continuing operations | 802,910 | 474,437 | 310,997 |
29. COST OF SALES
Cost of sales for the years ended 31 December 2008, 2007 and 2006 was as follows:
| 2008 | 2007 | 2006 | |||
| Poultry and related operations | 437,865 | 285,008 | 167,689 | ||
| Other agricultural operations | 91,492 | 55,665 | 26,032 | ||
| Grain growing operations | 42,353 | 24,345 | 16,275 | ||
| Total | 571,710 | 365,018 | 209,996 |
For the years ended 31 December 2008, 2007 and 2006, cost of sales comprised the following:
| 2008 | 2007 | 2006 | |||
| Costs of raw materials and other inventory used | 390,421 | 239,004 | 142,908 | ||
| Payroll and related expenses | 86,440 | 58,310 | 30,942 | ||
| Depreciation expense | 51,541 | 40,397 | 20,913 | ||
| Other costs | 43,308 | 27,307 | 15,233 | ||
| Total | 571,710 | 365,018 | 209,996 |
By-products arising from the agricultural production process are measured at net realizable value, and this value is deducted from the cost of the main product.
30. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the years ended 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Payroll and related expenses | 37,820 | 16,306 | 10,178 | ||
| Services | 11,069 | 6,905 | 4,547 | ||
| Advertising expenses | 8,361 | 9,626 | 7,288 | ||
| Representative costs and business trips | 8,319 | 7,912 | 6,244 | ||
| Fuel and other materials used | 8,045 | 4,470 | 3,214 | ||
| Depreciation expense | 5,397 | 3,810 | 2,382 | ||
| Insurance expenses | 580 | 1,130 | 444 | ||
| Bank services and conversion fees | 477 | 824 | 370 | ||
| Other | 427 | 616 | 407 | ||
| Total | 80,495 | 51,599 | 35,074 |
31. OTHER OPERATING EXPENSES
Other operating expenses for the years ended 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Change in allowance for irrecoverable amounts and direct write-offs | 1,052 | 2,777 | 824 | ||
| Change in allowance for irrecoverable VAT and direct write-offs | 4,821 | 2,438 | 1,826 | ||
| Non-production materials write-off | 995 | 817 | 1,283 | ||
| Loss/(gain) on disposal of property, plant and equipment | 1,145 | (660) | 426 | ||
| Non-recurring legal and accounting fees | - | - | 1,140 | ||
| Other | 2,009 | 1,903 | 906 | ||
| Total | 10,022 | 7,275 | 6,405 |
32. FINANCE COSTS, NET
Finance costs for the years ended 31 December 2008, 2007 and 2006 were as follows:
| 2008 | 2007 | 2006 | |||
| Interest on corporate bonds | 31,300 | 32,781 | 4,432 | ||
| Interest on bank borrowings | 11,332 | 10,405 | 16,752 | ||
| Interest on obligations under finance leases | 5,584 | 4,256 | 2,097 | ||
| Interest on grain purchases financing arrangements | 3,456 | 2,533 | 741 | ||
| Bank commissions and other charges | 2,397 | 1,648 | 2,596 | ||
| Early repayment fine on IFC loans | - | - | 10,347 | ||
| Government grants as compensation of the finance costs for agricultural producers (Note 25) | (2,406) | (2,141) | (449) | ||
| Total | 51,663 | 49,482 | 36,516 |
In December 2006, MHP repaid all amounts outstanding under its loan agreements with IFC ahead of schedule with a portion of the proceeds from the offering of the Senior Notes in November 2006 (Note 21). During the year ended 31 December 2006, the Group paid early repayment fine to IFC in the amount of USD 10,347 thousand.
Interest on corporate bonds for the years ended 31 December 2008, 2007 and 2006 includes amortization of premium and debt issue costs on bonds issued in the amounts of USD 1,611 thousand, USD 1,705 thousand and USD 152 thousand, respectively.
33. PENSIONS AND RETIREMENT PLANS
The employees of the Group receive pension benefits from the government in accordance with the laws and regulations of Ukraine. The Group's contributions to the State Pension Fund are recorded in the income statement on the accrual basis. The Group companies are not liable for any supplementary pensions, post-retirement health care, insurance benefits or retirement indemnities to its current or former employees, other than pay-as-you-go expenses. During the years ended 31 December 2008, 2007 and 2006 the Group companies remitted 33.2% and 19.9% for CIT and FAT payers, respectively, of the aggregate employees' salaries to the State Pension Fund subject to the following limits:
| Period | Limit per employee per month, USD |
| 1 January 2006 - 31 March 2006 | 304 |
| 1 April 2006 - 30 September 2006 | 312 |
| 1 October 2006 - 31 December 2006 | 318 |
| 1 January 2007 - 31 March 2007 | 518 |
| 1 April 2007 - 30 September 2007 | 553 |
| 1 October 2007 - 31 December 2007 | 560 |
| 1 January 2008 - 31 March 2008 | 624 |
| 1 April 2008 - 30 June 2008 | 649 |
| 1 July 2008 - 30 September 2008 | 667 |
| 1 October 2008 - 31 December 2008 | 536 |
The Group's contributions to the State Pension Fund during the year ended 31 December 2008 amounted to USD 22,820 thousand (2007: USD 10,152 thousand; 2006: USD 6,793 thousand).
34. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value disclosure of financial instruments is made in accordance with the requirements of International Financial Reporting Standard 7 "Financial Instruments: Disclosure". Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm's length transaction, other than in forced or liquidation sale. As no readily available market exists for a large part of the Group's financial instruments, judgment is necessary in arriving at fair value, based on current economic conditions and specific risks attributable to the instrument. The estimates presented herein are not necessarily indicative of the amounts the Group could realize in a market exchange from the sale of its full holdings of a particular instrument.
As of 31 December 2008, 2007 and 2006, the following methods and assumptions were used by the Group to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
The fair value is estimated to be the same as the carrying value for cash and cash equivalents, trade and other accounts receivable (including promissory notes receivable), and trade and other accounts payable due to the short-term nature of the financial instruments.
The fair value of bank borrowings as of 31 December 2008 is estimated at USD 164,335 thousand compared to carrying amount of USD 187,697 thousand. The fair value of finance lease obligations as of 31 December 2008 is estimated at USD 62,470 thousand compared to carrying amount of USD 69,597 thousand. Fair value of these liabilities was estimated by discounting the expected future cash outflows by a market rate of interest.
The fair value of bonds is estimated at USD 120,875 thousand compared to the carrying value of USD 250,000 thousand. The fair value was estimated based on market quotations.
35 . EARNINGS PER SHARE
The earnings and weighted average number of ordinary shares used in calculation of earnings per share are as follows:
| 2008 | 2007 | 2006 | |||
| Profit for the year attributable to equity holders of the Parent | 1,518 | 40,870 | 100,549 | ||
| Loss/(profit) for the year from discontinued operations used in calculation of earnings per share from discontinued operations | 9,722 | 3,601 | (5,409) | ||
| Earnings used in calculation of earnings per share from continuing operations | 11,240 | 44,471 | 95,140 |
| 2008 | 2007 | 2006 | |||
| Weighted average number of shares outstanding | 106,738,750 | 100,020,000 | 100,020,000 |
During the years ended 31 December 2008, 2007 and 2006 the results from discontinued operations were attributable to equity holders of the Parent.
Due to the change in the capital structure resulting from the Corporate Reorganization, the earnings per share for the year ended 31 December 2006 has been based on the weighted average number of shares after the Corporate Reorganization. The Group has no dilutive potential ordinary shares; therefore, the diluted earnings per share equal basic earnings per share.
36. SUPPLEMENTAL CASH FLOW INFORMATION
Operating, investing and financing transactions that did not require the use of cash or cash equivalents were as follows in the years ended 31 December:
| 2008 | 2007 | 2006 | |||
| Additions of property, plant and equipment under finance leases and vendor financing arrangements | 47,616 | 28,417 | 20,231 | ||
| Additions of property, plant and equipment financed through direct bank-lender payments to the vendor | 16,313 | 27,849 | 51,314 | ||
| Contributions of fixed assets to share capital | - | - | 478 | ||
| Property, plant and equipment purchased for credit | 8,116 | 9,626 | 11,847 | ||
| Transaction costs accrued but not paid | - | - | 2,106 |
37. SUBSEQUENT EVENTS
Extention of benefits for agricultural producers
In March 2009 the newly enacted laws extended the effective period for the FAT regime and VAT refunds for the agricultural producers for an indefinite period.
Increase in ownership share in Starynska
On 2 April 2009 the Group increased the share capital of Starynska by USD 2,594 thousand. As a result, the Group's effective ownership interest increased to 94.9%. The amount of contribution, payable in cash, was outstanding as of the date these consolidated financial statements were authorized for issue.
Refinancing of existing bank borrowings
In January 2009 the Group refinanced bank borrowings with OTP Bank for the total amount of USD 20,000 thousand with maturity in January 2010.
38. AUTHORIZATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements were authorized for issue by the Board of Directors of MHP S.A. on 9 April 2009.