TRIGON AGRI A/S (Incorporated and registered in Denmark, CVR No. 29801843)
Company Description in connection with the admission to trading on First North
Certified Adviser
SEB Enskilda, Skandinaviska Enskilda Banken AB
14 May 2007
IMPORTANT INFORMATION
Trigon Agri A/S (the “Company”), whose registered office First North is an alternative market operated by appears on page 5 of this document, and its Board of Stockholmsbörsen AB (the “Exchange”), but it does not have Directors, whose names appear on page 5 of this document, the legal status of a regulated market. Issuers on First North accept responsibility for the information contained in this are subject to the rules of First North (“the Rules”) but not the document. To the best of their knowledge and belief of the legal requirements for admission to trading on an Exchange. Board of Directors (who has taken all reasonable care to Companies traded on First North are not defined as “stock ensure this is the case), the information contained in this market companies” which for example means that the document is in accordance with the facts and does not om it provisions of the Act concerning Reporting Obligations for anything likely to affect the import of such information. Certain Holdings of Financial Instruments (2000:1087), the Act concerning public offers for acquisitions on the stock This document is made in connection with the Company’s market, IFRS and the rules issued by the Industry and application for admission to trading of the Shares of the Commerce Stock Exchange Committee (NBK) do not apply. Company at the First North alternative marketplace of the OMX Nordic Exchange. This document is for information First North is supervised by the Exchange, but companies that only and does not comprise a prospectus and has not been apply to be traded on First North must engage a Certified drawn up in accordance with the European Prospectus Adviser in connection with the application process. It is the Directive (2003/71/EC), the European Prospectus Regulation Certified Advisers’ obligation to guide the company through (2004/809/EC) and national implementation measures related that process and to make sure that the Rules of First North are thereto in any of the relevant member states or any other laws fulfilled initially as well as continuously. The Exchange will or international exchange rules. regularly monitor the trading in the securities on First North and the Certified Advisers to make sure that they fulfill their This document does not constitute an offer to investors. This obligations according to the Rules. document is not intended to form (and should not therefore be relied upon as forming) the basis of any investment decision or The regulatory framework for companies at First North can any decision to acquire any of the Shares. This document does be divided into two parts; admission requirements and not constitute an offer or invitation, on behalf of the continuous disclosure rules. The admission requirements Company or SEB Enskilda, to sell or the solicitation of an specifies the conditions for companies that whishes to apply offer to buy, subscribe for or underwrite any interest in the for trading on First North and the continuous disclosure rules Company or the Shares and neither this document nor regulate the procedur es on disclosing information to the anything contained in it shall form the basis of, or act as an market. inducement to enter into, or be relied upon in any way in Trading on First North is conducted in the same manner as relation to, any contract or commitment whatsoever relating to any securities. for shares admitted to trading on the regulated market, i.e. in the SAXESS trading system. Information regarding prices, Investors should be aware of the high degree of risk involved volumes and order depth is published in real time through the in investing in the Company and should make the decision to same channels as for shares admitted to trading on the invest only after careful consideration and, if appropriate, regulated market. consultation with an independent financial adviser. For a discussion of certain risk factors regarding the Company and Potential investors, companies and advisers should note that the Shares which should be considered by potential investors, First North, where the Company intends to have its Shares see the “Risk Factors” section of this document. traded on First North, cannot be co mpared with the existing stock market. Investments in companies whose shares are The distribution of this document in certain jurisdictions is admitted to trading on First North may be more risky than restricted by law. Neither the Company nor SEB Enskilda nor investments in listed companies, as the companies are often any of their respective officers, directors, employees, smaller and thus more sensitive towards external and internal representatives, advisers or agents represents that this influences. Moreover, the liquidity and thus the negotiability document may be lawfully distributed, or that the Shares may of shares admitted to trading on First North may be more be lawfully offered, in compliance with any applicable limited than in connection with investments in stock exchange registration or other requirements in any such jurisdiction, or listed shares. pursuant to an exemption available there under, or assumes any responsibility for facilitating any such distribution or The contents of this Company Description are not to be offering. Accordingly, the Shares may not be offered or sold, construed as legal, business or tax advice. Each prospective directly or indirectly, and this document may not be investor should consult with its own legal adviser, business adviser or tax adviser as to legal, business and tax advice. distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and jurisdictions. The Company and SEB Enskilda require persons into whose possession this document comes to inform themselves about, and to observe any restrictions imposed by, such laws and jurisdictions. By accepting receipt of this document potential investors acknowledge and confirm to be bound by the foregoing limitations.
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This document contains ‘forward-looking statements’ which Accordingly, without limiting the express or implied may relate to, without limitation, the Company’s, or as limitations, or denial of either responsibility or liability of the appropriate the Management’s, current views with respect to Company or SEB Enskilda (or their respective officers, plans, objectives, goals, strategies and future operations and directors, employees, affiliates, representatives, advisers and performance and the assumptions underlying these forward- agents) set out elsewhere in this document, potential investors looking statements. The Company uses words such as should not place undue reliance on these forward-looking “anticipates”, “believes”, “estimates”, “expects”, “intends”, statements. These forward-looking statements speak only as at “may”, “plans”, “projects”, “should”, “will” and other similar the date of this document. The Company and Management expressions to identify forward-looking statements. Such expressly disclaim any obligations or under-taking to statements can also be identified by the fact that they do not disseminate, after het date of this document, any updates or relate strictly to historical or current facts but rather involve revisions to any forward-looking statements contained herein risks and uncertainties. The Company has based these to reflect any change in their expectations with regard thereto forward-looking statements on the current view of its or any change in events, conditions or circumstances on which Management with respect to future events and financial any such forward-looking statement is based, unless required performance. These views reflect the best judgment of its to do so by applicable law. Management but involve uncertainties and are subject to certain risks, the occurrence of which could cause actual results to differ materially from those predicted in the forward-looking statements and from past results, performance or achievements. Statements that contain these words should be read carefully because they discuss future expectations, certain projections of the Company’s future results of operations or the Company’s future financial condition, or state other “forward-looking information”. Although the Company believes that the estimates and the projections reflected in its forward-looking statements are reasonable, if one or more of the risks or uncertainties materialise or occur, including those which it has identified in this document, or if any of its underlying assumptions prove to be incomplete or incorrect, the actual results of operations of the Company may vary from those expected, estimated or projected.
The undersigned members of the Board of Directors of the Company hereby declare that, to the best of their knowledge, the information provided in the Company Description is accurate and that, to the best of their knowledge, the Company Description is not subject to any omissions that may serve to distort the picture the Company Description is to provide, including that all relevant information in the minutes of board meetings, auditors' records and other internal documents is included in the Company Description.
Copenhagen 14 May 2007
Kaupo Ojavee Tõnis Leetjõe
Ülo Adamson
3 TABLE OF CONTENTS
IMPORTANT INFORMATION ...... 2
BRIEF INFORMATION...... 5
BOARD OF DIRECTORS AND ADVISERS...... 5
DEFINITIONS AND GLOSSARY...... 6
KEY INFORMATION...... 8
RISK FACTORS...... 10
INDUSTRY OVERVIEW...... 30
INFORMATION ON THE GROUP ...... 39
SUMMARY OF FINANCIAL INFORMATION...... 61
LEGISLATION OF RUSSIA, UKRAINE AND ESTONIA RELATED TO LAND AND REAL PROPERTY...... 65
ADDITIONAL INFORMATION ...... 75
SUMMARY OF APPLICABLE DANISH COMPANY LAW...... 76
TAX CONSIDERATIONS...... 79
VEDTÆGTER/ARTICLES OF ASSOCIATION...... 82
INDEX TO FINANCIAL STATEMENTS ...... 94
4 BRIEF INFORMATION
Existing number of Shares 59,627,479
Par value EUR 1
Total share capital EUR 59,627,479
Distribution of votes One vote per one Share at the Meeting of Shareholders
Half -year interim report, January – June August 2007 2007
2007 Unaudited annual earnings figures February 2008
Annual general meeting April 2008
ISIN-code DK0060083566
Shortname on First North TAGR
Trading currency EUR
Website www.trigonagri.com
BOARD OF DIRECTORS AND ADVISERS
Board of Directors Ülo Adamson (Chairman) Kaupo Ojavee (CEO) Tõnis Leetjõe
Registered office of the Company Sundkrogsgade 5 DK-2100 Copenhagen Ø Denmark
Auditors of the Group PricewaterhouseCoopers Statsautoriseret Revisionsaktieselskab Strandvejen 44 DK-2900, Hellerup Denmark
Certified Adviser to the Company SEB Enskilda, Skandinaviska Enskilda Banken AB Nybrokajen 5 SE-103 36 Stockholm Sweden
Attn: Carl-Johan Pousette and Rikard Schwalbe
Liquidity provider SEB Enskilda, Skandinaviska Enskilda Banken AB Nybrokajen 5 SE-103 36 Stockholm Sweden
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DEFINITIONS AND GLOSSARY
“Admission” Admission to trading of the Shares on First North.
“Advisory Agreement” Advisory Agreement entered into between the Company and Trigon Capital on 10 May 2007, pursuant to which Trigon Capital provides the Company with certain advisory services.
“Agricultural year” The 12-month period between 1 July and 30 June.
“Articles of Association” The Articles of Association of the Company.
“Board of Directors” The board of directors (bestyrelse ) of the Company.
“Share” A share in the Company as described in the Articles of Association.
“Company” Trigon Agri A/S, incorporated in Denmark, under the Danish Companies Act, consolidated act No. 649 of 15 June 2006, as amended (aktieselskabsloven) with registration number CVR No. 29801843.
“Completed Offer” The offer of 40,000,000 new Shares to current and new investors in the Company that was completed at 9 May 2007. As a result of the Completed Offer the Company raised EUR 50,000,000.
“DDU” Delivered Duty Unpaid, an international delivery term defined in ICC Incoterms 2000, indicating that the goods will be delivered to the agreed destination at the seller’s cost and risk, but without paying customs or other duties.
“EXW” Ex Works, an international delivery term defined in ICC Incoterms 2000, indicating that goods are made available at the seller’s premises and that the buyer is responsible for loading as well as subsequent costs and risks.
“First North” First North an alternative marketplace of the OMX Nordic Exchange.
“FOR” Free on Rail, an international delivery term defined in ICC Incoterms 1980, indicating that the goods will be delivered onto the railway wagon at the seller’s cost and risk.
“ISIN” International Securities Identification System, an international standard for identifying securities.
“Joint agricultural companies” Companies formed during privatization by private individuals by contributing their privatization certificates on kolkhozes’ and sovkhozes’ property and equipment, generally operating on the former collective farm territory.
“Kolkhozes” Russian collective farms established under the Soviet system.
“Marketing year” The 12-month period between 1 June and 31 May.
“Oblast” An administrative region of Russia.
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“Paj” A share in jointly owned land in Ukraine, certified by a special certificate, giving it’s owner the right to use the paj or to transfer leasehold rights, but not to transfer ownership rights to third persons (in the Company’s transactions often comprising approximately 2 to 8 hectares of undefined land).
“Russian Land Code” The Land Code of the Russian Federation of 25 October 2001, No. 136-K1 (FZ) as amended, most recently on 28 February 2007.
“SEB Enskilda” SEB Enskilda, Skandinaviska Enskilda Banken AB.
“Sovkhozes” Russian state farms established under the Soviet system.
“Supervisory Board” The supervisory board (repræsentskab) of the Company.
“Trigon Capital” AS Trigon Capital, an Estonian company that provides management and consulting services to the Group under the Advisory Agreement.
“Trigon” or the “Group” The Company and its subsidiaries.
“Ukrainian Land Code” The Land Code of Ukraine of 25 October 2001, No. 2768-III as amended, most recently 19 December 2006.
“VPC” Värdepapperscentralen AB, Regeringsgatan 65, SE-103 97, Stockholm, Sweden.
“VP Services” VP Investors Services A/S (“VP Securities”), Helgeshöj Allé 61, P.O. Box 20, DK-2630 Taastrup, Denmark.
All references in this Company Description to (i) currency of the European Union Member States “kroon” or “EEK” refer to the currency of Estonia, participating in the European Monetary Union (ii) “U.S. dollars”, “U.S.$” or “USD” refer to the (“EMU”); (v) “hryvnia“ or “UAH” refer to the currency of the United States of America, (iii) “RUB” currency of Ukraine; and (vi) “krone” or ”DKK” refer or “rouble” refers to the currency of the Russian to the currency of Denmark. Federation, (iv) “euro” or “EUR” refer to the single
The following exchange rates have been used for currency conversions in this Company Description:
USD/EUR EEK/EUR UAH/EUR DKK/EUR RUB/EUR
Exchange rate as of 1.3354 15.6466 6.7173 7.4512 34.7070 30 March 2007 Source: Bloomberg, Central Bank of Estonia
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KEY INFORMATION
holding companies for its operations in Estonia, INTRODUCTION Ukraine and Russia are direct subsidiaries of the Following the recent Completed Offer the Company Company. has decided to admit the Shares to trading on First North in order to create more liquidity in the trading of the Shares. This document containing a company THE NATURE OF THE SHARES AND THE description is issued in connection with the Admission PURPOSE OF THE ADMISSION in order to make information regarding the Company The Shares will be admitted to trading as dematerialised and the Group more publicly spread to investors and securities and are registered with both the depository potential investors. and clearing organisation VP Services in Denmark and the VPC in Sweden. The shareholders registry is managed by the VP Services. The Shares are negotiable OVERVIEW instruments and there are no restrictions regarding the The Group was established in May 2006 by the Eastern transferability of the Shares. Share certificates will not European asset manager Trigon Capital to invest in be issued for the Shares. farming in Russia, Ukraine and Estonia. As at 30 March 2007, the Group controlled in total 23,095 hectares of The reason for the Admission is to broaden the farmland. Its operations include: Group's shareholder base and to create a more · two dairy farms in Estonia with 1,241 milking cows developed liquidity in the trading with the Shares of and some 2,707 hectares of land; the Company. It is the Board of Director’s opinion that this, in the long run, will be to the benefit of the · four cereals farms in Ukraine with a total of 19,261 Company in terms of attracting financing possibilities hectares of land; and as well as creating a large r interest for the Group itself · 1,127 hectares in Russia planned to be developed among investors, analysts and the general public etc. into a dairy farm expected to be operational in November 2007. STRATEGY AND COMPETITIVE STRENGTHS Raw milk produced in the Group’s dairy farms is to be The Group’s overall business strategy is based on: sold to local milk processors in Estonia and · introducing modern technology St Petersburg region. In its cereals farms the Group intends to grow primarily winter wheat, barley, corn · geographic clustering of operations and sunflower together with selected local crops, with · focus on large operating units the first harvest expected in summer-autumn 2007. The Group is in the process of acquiring a grain elevator to · geographic diversification be able to store the grain until commodity reach higher · combination of cereals and dairy farming levels after the harvest season. The Group expects to grow its Estonian dairy farming operations via acquisitions to obtain additional EU raw GROUP HISTORY AND STRUCTURE milk production quota. Trigon’s Russian dairy farming The Group was established following the success of an strategy is to construct new modern dairy farms on earlier pilot project by Trigon Baltic Farming, which undeveloped grassland relatively close to St Petersburg, enabled Trigon Capital to develop expertise in where there currently is a shortage of high-quality raw restructuring underperforming farms in the Baltic milk. The Group aims to be a large scale raw milk States. Trigon Baltic Farming is not part of the Group, supplier in Estonia and the St Petersburg region. but the Group has access to its expertise and experience through the Advisory Agreement with Trigon Capital. The Group’s cereals farming operations are located in the Black Earth region of Russia and Ukraine because Trigon Agri A/S, a company with limited liability of its superior climatic conditions. The Group plans to incorporated under the laws of Denmark in December expand its cereal farming operations both in Ukraine 2006, is the parent company of the Group. Pursuant to and Russia by either acquiring or signing long-term the shareholders resolution of 2 April 2007 the leases on farmland currently operated by joint shareholders of the Group swapped their shares in the agricultural companies and improve their productivity Estonian company AS Trigon Farming (“Trigon by introducing Western management and farming Farming”) for shares of the Company. The Group’s
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practices. The Group aims to acquire storage and OWNERSHIP, SHARE CAPITAL, LOCK-IN drying capacity in order to achieve better pricing. The Company has issued a total of 59,627,479 Shares. Each Share has a par value of EUR 1.00. Management believes that Trigon’s main competitive strengths are: All Shares rank pari passu with each other in relation to · agricultural industry know -how right to receive dividend or other distribution of profits or assets from the Company. Each Share entitles its · Trigon Capital’s track record of turnaround holder to cast one vote in the Meeting of Shareholders management of the Company. · experience in operating in the Former Soviet Union The Company has agreed not to issue or sell Shares or securities convertible into Shares for 12 months · access to capital on international capital markets subsequent to signing the placing agreement entered · early mover advantage into between the Company, Trigon Capital and Skandinaviska Enskilda Banken AB (publ), London RISK FACTORS branch, in connection with the Completed Offer (the “Placing Agreement”) without the prior written Before purchasing the Shares, investors should carefully consent of Skandinaviska Enskilda Banken AB (publ), consider the risks described in “Risk factors” section in London branch. Trigon Capital has agreed not to issue addition to the other information contained in this or sell shares of the Company or securities convertible Risk Company Description. The risks described in “ into shares of the Company for 36 months subsequent factors” section are not the only risks that the Group to signing the Placing Agreement without the prior and investors in the Shares will face. Additional risks written consent of Skandinaviska Enskilda Banken AB not currently known to the Group or that the Group (publ), London branch, except for Shares subscribed for currently believes are immaterial may also adversely by Trigon Capital in the Completed Offer in excess of affect its business, financial condition and results of 1,600,000 Shares. Each of the shareholders who held operation. The trading price of the Shares could decline Shares prior to the Completed Offer (other than due to any of these risks and investors could lose all or Trigon Capital) has agreed not to sell Shares or part of their investment. For a discussion of factors to securities convertible into Shares for 6 months consider in an evaluation of an investment in the subsequent to signing the Placing Agreement. Shares, see “Risk fact ors”.
CORPORATE GOVERNANCE MANAGEMENT AND EMPLO YEES It is the Company's declared intention to secure that The control and management of the Company is the standards and principles of good corporate divided among the general meeting, supervisory board governance as outlined in the Danish company law will (representantskab, the “Supervisory Board”), the Board be adhered to at all times. In this respect, Management of Directors (the “Board of Directors”) and the of the Company will actively seek to uphold registered CEO. Trigon Capital provides management constructive dialogue with the Company's shareholders services to the Group under the Advisory Agreement, and other stakeholders. Furthermore, Trigon Capital under which it provides to the Group the services of at will be the Company's advisor and provide least three Board of Directors members and general management advisory services to the Company. management services.
The current members of the Board of Directors are DIVIDEND POLICY Mr. Kaupo Ojavee, Mr. Ülo Adamson and Mr. Tõnis Leetjõe. Mr. Ojavee is the Chief Executive Officer and The Shares will be entitled to future dividends paid by member of the Board of Directors and functionally the Company, commencing with any dividend declared responsible for the dairy farming and grain farming for the financial period starting on 11 December 2006 and all dividends declared and paid thereafter. The operations of Trigon Farming. The current members of timing and amount of future dividend payments, if any, the Supervisory Board are Mr. Joakim Helenius, will be decided by the Meeting of Shareholders on the Mr. Pertti Laine, Mr. Erkki Myllärniemi, Mr. Sakari basis of a proposal of the Board of Directors, which Kivisaari and Mr. Pekka Samuelsson. Mr. Joakim will depend upon the Company’s future earnings, Helenius is the Chairman of the Supervisory Board of financial position, capital requirements and prospects, the Company. as well as other factors that the Board of Directors may deem relevant. The Group currently employs 412 employees.
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RISK FACTORS Company Description may not be indicative of its financial condition or results of operations in the future. The Group has incurred significant losses in the first year of operations and would expect these losses to Investment in the Shares involves a high degree of risk. continue in 2007. Potential investors should carefully review this entire document and in particular consider all the risks inherent Dependence on key personnel in making such an investment, including the risk factors Each of the Group’s farming operations re lies on a set forth below, before making a decision to invest. Before small management team for the implementation of its investing in the Shares, investors should carefully consider strategy and the operation of its day-to-day activities the risks described below in addition to the other information contained in this Company Description. The and as a result, the Group is dependent on the risks described below are not the only risks that the Group performance of its key employees. In addition, personal and investors in the Shares will face and they are not connections and relationships of members of intended to be presented in any assumed order of priority. management are important for the Group’s business. Additional risks not currently known to the Group or that The Group’s performance depends to a significant the Group currently believes are immaterial may also extent on its ability to attract and retain highly adversely affect its business, financial condition and results qualified and skilled managerial personnel for its of operation. The value of the Shares could decline due to farming operations. No assurance can be given that key any of these risks and investors could lose all or part of members of the senior management team as well as their investment. Investors in companies holding assets in members of management at the local operational level emerging markets such as Russia and Ukraine should be will remain with the Group. aware that these markets are subject to greater risks than more developed markets, including, in some cases, In addition, the Group’s future success will also depend significant legal, economic and political risks. Investors on its continuing ability to attract, retain and motivate should also note that emerging markets such as Russia and appropriate managerial personnel with experience in Ukraine are subject to rapid change and that the the Russian and Ukrainian agricultural market. The information set out in this document may become out of competition in the Russian Federation and Ukraine for date relatively quickly. Accordingly, investors should reliable and trustworthy personnel with relevant exercise particular care in evaluating the risks involved expertise is intense due to the small number of qualified and must decide for themselves whether, in light of those individuals. The Company will attempt to structure risks, their investment is appropriate. compensation packages in a manner consistent with the evolving standards of the Russian and Ukrainian labour RISKS RELATING TO TH E GROUP markets.
Very limited operational history Any inability to attract and retain the Group’s key Although many members of the Group’s management employees and managers and other professional team and key employees have extensive farming and personnel could have a material adverse effect on the business experience and Trigon Capital has had Group’s business, financial condition and results of successful farming operations in Estonia since 2003, the operations. See “Information on the Group – Group only commenced its business in 4 May 2006 and Organizational structure and management model – has been operating for approximately 11 months. The Management and other key employees”. Group’s audited financial statements cover only the eight -month period from 4 May 2006 to 31 December Growth and its control 2006. Accordingly, the Group has a very limited During its short operational history, the Group has operating history upon which prospective investors grown rapidly by acquiring farming operations in may base an evaluat ion of future performance and it is Estonia, Russia and Ukraine and by implementing difficult to identify long-term trends and developments methods of modern farming management on the in the Group’s business. The lack of longer-term acquired operations. Management expects that it will historical audited financial data for the Group may continue to grow, both through further development provide prospective investors with less information on of its existing assets and through further acquisitions. which to evaluate the Completed Offer than is available The future success of the Group will to a large extent in offerings of securities of companies in other markets depend upon Management’s ability to identify and such as in North America or Western Europe. To acquire or lease appropriate farming assets in Estonia, evaluate the Group’s historical performance and its Russia and Ukraine. The success will also depend on prospects, potential investors should consider the risks, the terms at which such assets are acquired or leased. In expenses, uncertainties and obstacles that the Group addition, the Group needs to continually improve its may face in implementing its strategy and in financial and management controls, reporting systems conducting its current and planned business. In addition, the financial information contained in this
10 and procedures. This growth and expansion will place persons without citizenship, foreign legal entities or significant demands on its management resources. foreign states (Article 22 of the Ukrainian Land Code). Non-agricultural land can be owned by legal entities No assurance can be given that the Group can acquire established by Ukrainian citizens or by Ukrainian legal or lease suitable farming assets, or that legislative or entities, through the use of “joint ventures” and by political changes in Russia or Ukraine or their sub- foreign legal entities and by Ukrainian and foreign divisions could not complicate the holding or citizens and persons without citizenship. The wording acquisition of farming assets by foreign-controlled of the relevant provisions of the Ukrainian Land Code companies. The Group may fail to negotiate or is ambiguous, and it is unclear to what extent a complete an acquisition or lose a target asset to a higher Ukrainian company that is a wholly-owned subsidiary bidder. The Group may fail to integrate the acquired of a foreign company is allowed to own land in operations in accordance with its business strategy. Ukraine. Foreign legal entities and joint ventures are allowed to own land in residential areas only for the If the Group fails to control its growth and purposes of property development. Foreign legal development successfully, this may have an adverse entities and joint ventures may acquire non-agricultural effect on the Group’s financial condition and results of land in non-residential areas only if they also acquire a operations. The continuing growth requires building which situated on the land (see “Legislation of investments in fixed assets and additional working Russia, Ukraine and Estonia related to land and real capital. The availability of additional financing on property – Ukraine”). Moreover, under the Ukrainian advantageous terms cannot be assured. Land Code, legal entities may not acquire agricultural land plots in excess of 100 hectares before 1 January 2015. The wording of the relevant provision is unclear Foreign ownership of land and other assets in Russia as to whether this restriction applies to any single land The Russian law stipulates that a Russian company is plot which is larger than 100 hectares or whether it considered controlled by a foreign entity if 50 per cent prevents a legal entity from acquiring in aggregate more or more of its share capital is owned by a foreign than 100 hectares of agricultural land. entity. The Russian assets of the Group are currently owned by Russian operating companies, which are The Group currently does not own the title to any land wholly-owned subsidiaries of a holding company in Ukraine, but controls the land or is in the process of incorporated in Russia. The Russian parent holding acquiring the control to land through long term leases company is owned by two Cypriot holding companies, accompanied by a right of first refusal in case the which are wholly-owned direct subsidiaries of the landowner proposes to sell the freehold. In addition, Company. the Group owns the buildings and structures on the leased land. Management believes that this structure The current holding structure of the Group does not does not breach Ukrainian law and that it offers the breach Russian law, provided that the relevant laws are Group maximum security of tenure under the current interpre ted literally. However, no assurances can be legislation. However, no assurances can be given that given that such structures could not be considered void the leases combined with a right of first refusal could because they may be deemed to violate the spirit of the not be considered void due to violation of the spirit of law. The Russian courts and legal system generally tend law. Moreover, under the current legislation, the to adopt a formal approach to legislative interpretation Group may not be able to exercise its right of first and usually do not go beyond the formal requirements refusal to acquire the title to land that is leased to it. of a legislative act. However, no assurance can be given The Ukrainian courts and legal system generally tend as to how a Russian court would treat each particular to adopt a formal approach to legislative interpretation situation brought to its consideration, or as to future and usually do not go beyond the formal requirements developments of the Russian legal system which give of a legislative act. No assurance can be given, however, more weight to substance over form. as to how a Ukrainian court would treat each particular situation brought to its consideration, as to whether or If the Group’s holding structure of its Russian assets is not the Ukrainian legal system will continue to give found to breach Russian law, the Group could be more weight to formal requirements of the law as forced to either sell part of its assets or introduce opposed to substance. Russian shareholders to its subsidiaries, which may have a material adverse effect on the Group’s business, If the Group’s ownership and lease structures regarding financial condition and results of operations. its Ukrainian assets is found to breach Ukrainian law, the Group could be forced to give up some or all of its farming operations in Ukraine, which may have a Foreign ownership of land in Ukraine material adverse effect on the Group’s business, Ukrainian law distinguishes between agricultural and financial condition and results of operations. non-agricultural land. The title to agric ultural land cannot be sold or transferred to foreign citizens,
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The Group ultimately will seek to have its Ukrainian No assurance can be given that such process is land leases converted into freehold rights. No assurance completed without unexpected or questionable can be given that the Group will be successful in behaviour by the authorities, which could result in the converting such lease rights into freehold rights. In the Group losing its title to the land in question without event that the Group’s title to any of its land is being able to recover its investment. In order to secure challenged on the grounds of it been improperly the land, the Group sometimes has to make pre- acquired, and the Group is unable to defend the claim, payments to the sellers or freeholders, but the the Group risks losing its rights to such land which transaction can only be completed after the land has could materially affect the Group’s business, financial been registered. Until such time, the Group risks losing condition, and results of operations. its pre-payments in the event that the registration is denied. In such cases, the Group can seldom expect to recover the pre-payments from the sellers or Land registration process freeholders. As at 31 December 2006, the Group had The registration procedure required to secure title or EUR 2.9 million in outstanding pre-payments for lease to land in Russia and Ukraine is long and Ukrainian real properties with registration pending and complicated. This process can take up to 18 months to machinery. Should the Group face complications in the complete, and during this process the Group is largely title or lease registration process, it could materially dependent on the good will of the local and regional affect the Group’s business, financial condition and authorities who control the administrative process. results of operations.
Especially in Ukraine the process of registration is still In order to secure the support of the local aut horities, it ongoing. Depending on the lessor and scope of his is important for the Group to demonstrate its genuine ownership rights to the land plot different registration intention to cultivate the land and not just speculate on procedures apply. OOO Trigon Farming Kharkov short-term growth in property values. Moreover, under leases the land plots from private individuals and some Russian law, if the land is not cultivated, the state has a land plots from the state. OOO Rubezhnoye leases right to expropriate it. In Ukraine a similar situation land plots from state. The land lease agreements with exists as far as the state authorities’ control over the use private individuals partially concern privatised land of land and they can similarly dispossess the owner of it plots (the lessor has ownership ights)r and partially is in situation where there has been major breaches of land plots not yet privatised (the lessor has not yet full respective provisions. ownership title to the land plot, but just a so called “Paj”, which is confirmed by a “certificate”. Such Paj Since the Russian president Mr. Vladimir Putin allows lessor to use the land plot and to lease the land declared agriculture a na tional priority in 2005, there plot, but not to transfer ownership rights to the land has been substantial pressure from local and regional plot to third persons. To transfer ownership rights the authorities to push investors as fast as possible into full individual should first register ownership title to the cultivation. As grain production is totally dependent on land plot). OOO Trigon Farming Kharkov usually the seasons, the Group has to start active work on the concludes all lease agreements with individuals on acquired land during the spring months, even if the privatised land plots in notarised form for a term of 25 registration process is pending. Should the title years. These agreements with individuals are to be registration process prove unsuccessful, the Group may registered with the state land register. These agreements lose the working capital resources invested in such enter into force only after such registration. Depending operations, which could adversely affect the Group’s on the local authorities this registration can take up to business, financial condition and results of operations. several months. The agreements with individuals with respect to Pajs are concluded for one year terms only, since these individuals are about to receive their Past privatisation transactions ownership rights and to subsequently lease out these Many kolkhozes and sovkhozes in Russia, Ukraine and land plots to OOO Trigon Farming Kharkov. These Estonia were privatised in the 1990s, when the agreements were registered with the local council. Since legislation regarding the privatisation process and individuals own / have certificates on average 4.5 ha, private ownership in these countries was still relatively OOO Trigon Farming Kharkov has had to deal with under-developed. The earlier privatisation transactions more than 4,000 agreements with individuals for the were often poorly documented or documentation may land OOO Trigon Farming Kharkov controls today. be missing. Leaseholds for state owned land plots or Pajs without “owner”, so called unclaimed Pajs, are granted by Whilst Management tries to avoid acquiring companies respective orders from the local authority, usually for a that have acquired their assets through early term of 49 years. The granting of these rights is privatisation transactions, the Group currently owns partially still in process. certain buildings, machinery and other assets through two Ukrainian companies, OOO Rubezhnoye and OOO Trigon Farming Kharkov, and the Estonian
12 companies OÜ Kaiu LT and certain subsidiaries of OÜ that such funding required by the Group will be Kärla PM, which originally participated in the process available at reasonable terms. If the Company is unable of privatisation or acquired certain assets from to obtain additional financing as needed, it may be successors of kolkhozes and sovkhozes. The documents required to reduce the scope of its operations or relating to the reorganisation of OOO Rubezhnoye anticipated expansion which may have a material and privatisation of these assets are not complete in all adverse effect on the Group’s financial condition and respects and in some instances fail to contain full results of operations. evidence of compliance with all the procedures required for privatisation at the time. Some also fail to have Contractual risks documentation certifying that the acquired buildings have appropriate permits for their current use. Whilst Many of the supply and maintenance agreements Management has tried to secure the Group’s title to between the Group’s Estonian subsidiaries and their these assets to the greatest extent possible, no assurance suppliers and customers have not been reduced to can be given that the title could not be challenged in writing. Whilst Management is confident that all such the future on the basis of alleged breaches of suppliers and customers can be replaced without privatisation laws. If such a challenge were to be disruption to the Group’s business, the Group may not successful, it could have a material adverse effect on the be able to enforce penalties, penalty interest or other Group’s business and results of operations. Similarly, such remedies that under Estonian law market practice there is no evidence of the issue of appropriate permits are available only pursuant to written agreement. for construction or use of several buildings owned by Similarly, approximately 7.4 per cent of all the land Kaiu LT and certain subsidiaries of Kärla PÜ, which is used or controlled by the Group’s Estonian subsidiaries why no assurance can be given that the current use of is leased to the Group pursuant to verbal agreements. such buildings would not be required by the authorities Whilst Management is confident that none of such land to be ended or, in case of lack of construction permits, is essential to the Group’s business, the Group may not the buildings to be demolished. be able to enforce its rights under verbal agreements or secure its tenure to the leased land. A dispute may arise between the Group and its contractual counterpart on Financing the interpretation, content or the validity of a verbal The Group has limited financial resources. While agreement or on fulfilling of contractual obligations, Management believes that the proceeds from the which can lead to arbitration or litigation with an Completed Offer will enable it to acquire further unfavourable outcome for the Group. Contractual farming assets, subsequent acquisitions of further claims and other demands may also have an adverse agricultural properties will be dependent upon the effect on the Group’s profits or financial position. See Company’s ability to obtain financing through the “Information on the Group – Existing operations”. raising of additional equity or debt financing or other means. Management expects the Group to be loss- Availability of reliable information making in the initial years of operation. The extent of such losses may be greater than initially planned, which As indicated above (see “Important Information”), this could have a significant impact on the Group’s cash Company Description contains various forward - flows. As Management proposes an aggressive land looking statements that are subject to risks and acquisition programme and will need to finance uncertainties that could cause the Group’s actual results preparations for increasing productivity and and financial position to differ materially from those profitability, no assurances can be given that the Group projected. Investors are cautioned not to place undue will be able to find enough additional financing to reliance on these forward-looking statements. compensate for negative cash flows. Management relies on forecast and models developed The negative covenants in one loan agreement of the on the basis of the experience of the Group’s and Group currently restrict the payment of dividends Trigon Capital’s agronomists, farm managers and from the Group’s Estonian subsidiary TÜ production directors with the support of its financial (tulundusühistu) Kärla PÜ to the Company. The Group directors, top executives and external advisors. Modern is in the process of refinancing this loan and does not agricultural business in Russia and Ukraine generally envisage entering into such negative covenants at the lacks detailed historical records. No assurance can be subsidiary level in the future. given that the assumptions and financial forecasts of the Group could not be proven wrong, or that significant Any additional equity financing may be dilutive to divergences could not take place between the models shareholders and debt financing, and if available, may and forecasts proposed in the current document and involve restrictions on financing and operating facts or future plans of the Group. Moreover, as the activities. Debt financing for the Group’s Russian and Group’s activities very much depend on the climate Ukrainian businesses on commercially acceptable terms and the weather as well as condition of the soil, there may be difficult to obtain. There can be no assurance might be significant deviations between planned figures
13 and assumptions and actual realised figures or future given that the Group’s land holdings could not include plans. Finally, it is difficult to predict future levels of land that has undiscovered contamination. Moreover, inflation in Russia and Ukraine, where in the recent the measures required for correcting deficiencies have years the cost of equipment, materials, and salaries have been based on verbal guidance and discussions with the tended to increase faster than the average inflation rate. Environmental Inspectorate, and no assurances can be given that, in absence of written documentation, a If the Group fails to reliably forecast its operational verbal clearance given by the authorities could not be cost or revenues, it may have a material adverse effect revoked or denied at a later date. Environmental on the Group’s financial condition and results of obligations arising from land contamination could operations. materially adversely affect the Group’s business, results of operations and financial condition.
Governmental regulations It is also possible that the Group may become involved The Group’s operations and properties are subject to in claims, lawsuits and administrative proceedings regulation by various government entities and relating to environmental matters. An adverse outcome authorities. The approval and consent requirements in any of these could have a significant negative impact vary between entities and authorities; they are on the Group’s business, results of operations, financial numerous, sometimes contradictory and subject to condition and prospects and may include the change without public notice and they are occasionally imposition of civil or criminal liability on the Group applied retroactively. Regulatory authorities exercise or its officers. Changes in environmental, health and considerable discretion in matters of enforcement and safety laws and enforcement policies could result in interpretation of laws, regulations and standards, the substantial costs and liabilities and could subject the issuance and renewal of permits and in monitoring Group’s real estate properties (or those formerly owned compliance with the terms thereof. Compliance with or operated by the Group) to more rigorous scrutiny the requirements imposed by these authorities may be than at the moment. Compliance with such laws could costly and time-consuming and may result in delays in result in significant capital expenditures as well as other the commencement or continuation of the Group’s costs and liabilities, thereby materially harming the operations or of some of its projects. Moreover, the Group’s business, financial condition and results of Group’s failure to comply with such requirements may operations. result in the imposition of sanctions, including civil and administrative penalties applicable to the relevant member of the Group and criminal and administrative Insurance policies penalties applicable to its officers. In certain cases, the The Group does not carry insurance policies to a Group may be required to cease certain business similar extent as may be common in some of the more activities and/or to remedy past infringements. Any developed market economies of North America and such decisions, requirements or sanctions may restrict Europe. The Group also does not maintain separate the Group’s ability to conduct its operations or to do funds or otherwise set aside reserves to cover losses or so profitably. third-party claims from uninsured events. Thus, if such an uninsured event were to occur, the Group could The Group believes that its current legal and regulatory experience significant disruption in its operation compliance programmes adequately address these and/or would have to make significant payments for concerns and that the Group is compliant in all which it would not be compensated, which in turn material respects with applicable laws and regulations. could have a material adverse effect on the Group’s However, additional effort on compliance with, or any business, financial condition and results of operations. violation of, current and future laws or regulations could result in material expenditures by the Group or Inflation otherwise have a material adverse effect on the Group’s business, financial condition and results of operations. High rates of inflation have been characteristic for both the Russian and Ukrainian economies. In Russia, the annual inflation rate was approximately 17 per cent in Environmental liabil ities and compliance costs 2004, 11 per cent in 2005 and an estimated 9.8 per cent The Russian, Ukrainian and Estonian environmental in 2006. The corresponding figures in Ukraine were laws impose actual and contingent liabilities on the 12.4 per cent in 2004, 10.3 per cent in 2005 and 10.6 per owners of land to conduct remedial action on cent in 2006, and the forecast for 2007 – 13.5 per cent. contaminated sites. Several deficiencies relating to the Certain costs of the Group’s costs, such as cost of waste handling, manure storage and other investment in machinery, equipment and labour costs environmental matters concerning the Group have are sensitive to rises in the general price levels in been identified by the Environmental Inspectorate in regions where the Group’s farming operations are Estonia. While the Estonian farms have corrected the located. Competitive pressure may prevent the Group identified deficiencies to date, no assurances can be from raising the prices of its produce sufficiently to
14 preserve its margins, and in many cases, the prices are Exposure to foreign currency fluctuations contractually fixed for a period up to 12 months. Most of the Group’s employees and suppliers costs are Accordingly, high rates of inflation could increase the paid in either Russian roubles, Ukrainian hryvnia or Group’s costs and there can be no assurance that the Estonian kroons. Similarly, the Group sells its products Group will be able to maintain or increase its margins also in roubles, hryvnia and kroons. As its consolidated to cover such costs. reporting currency is Euro, the Group is exposed to fluctuations between the currency exchange rates in Dependence on low labour costs Euro and roubles, hryvnia and kroons. As a Member State of the European Union, Estonia is Management is currently working out financial risk becoming increasingly integrated in the European management policies, which will seek to minimise markets, and its price levels and salaries are gradually potential adverse effects on the Group’s financial becoming aligned with those in the other member performance from unpredictable fluctuations in the countries. Whilst the Estonian wages and salaries financial markets (see Note 3 to the consolidated generally remain lower than in the older Member financial statements for the year ended States, the further integration with the European 31 December 2006, attached to this document). Union, coupled with economic and legislative However, even if the Group will put in place financial developments, is expected to result in a gradual erosion risk management policies, significant exchange rate of this competitive advantage of Estonian businesses. movements and other fluctuations in the financial markets could have a material adverse effect on the Wage costs in Russia and Ukraine have historically results of operations and financial condition of the been significantly lower than wage costs in some of the Group. more developed market economies of North America and Western Europe for similarly skilled employees. However, if wage and related costs were to increase in RISKS RELATING TO TH E FARMING Russia and Ukraine, the Group’s profitability could be BUSINESS reduced. The Group might need to increase the levels The availability and price of agricultural commodities of its employee compensation more rapidly than in the are subject to wide fluctuations due to unpredictable past to remain competitive. factors such as weather, planting intentions, government (domestic and foreign) farm programmes Unless the Group is able to continue to increase the and policies, changes in global demand resulting from efficiency and productivity of its employees, wage population growth and changes in standards of living increases could have a material adverse effect on its and global production of similar and competitive crops. business, financial condition and results of operations. Other risks such as human behaviour, lack of work ethic and a general lack of professional and managerial The Company is a holding company qualifications can have significant adverse consequences on the profitability of the Group. The Company is a holding company that conducts its operations through its subsidiaries and affiliates. It holds no significant assets other than the investments Weather conditions into the operating companies and is therefore Weather conditions are a significant operating risk dependent upon receipt of sufficient dividend income affecting the Group. Poor weather conditions (whether from these companies to meet its own obligations. too dry or too wet) may adversely affect farm output which, in turn, may adversely affect volume-related Under Estonian, Russian and Ukrainian law, a revenues earned by the agricultural businesses in which company is not allowed to pay dividends or make other the Group intends to invest. distributions unless current or retained profits are available for such distribution. Company’s ability to benefit from the distribution of any assets of its Agricultural commodity prices subsidiaries upon liquidation of any such companies Prices of agricultural commodities are influenced by a will be subject to the prior claims of such companies' variety of unpredictable factors which are beyond the creditors, including trade creditors. control of the Group, including weather, planting intentions, government agricultural programmes and The Group’s financial position is dependent on the policies, changes in global demand resulting from contractual and legal ability of its subsidiaries to declare population growth and higher standards of living and and pay dividends. A decrease in dividend income may global production of similar and competitive crops. have an adverse effect on the Group’s financial Grain prices have, until recently, been depressed, condition and results of operations. primarily as a result of foreign government subsidies and trade barriers. Prices rose in late 2002 in response to reduced production and lower grain inventories
15 worldwide. Grain prices are a chief determinant of provides the following quota volumes for the export of farm income levels and influence farmers’ decisions certain agricultural products: regarding total plant ed acreage and the types of crops · wheat and mixture of wheat and rye (meslin) grown. Historically, farmers have tended to react to (except emmer wheat) – 3,000 tonnes; lower agricultural commodity prices by reducing expenditures on crop production inputs and other farm · barley – 600,000 tonnes; related expenditures. There is no state regulation as to · corn – 500,000 tonnes; and milk prices in Ukraine. However, certain provisions with recommendations exist. · rye – 3,000 tonnes. The resolution also stipulates that 80 per cent of the Availability of infrastructure total export quotas for specific types of agricultural The development of the Group’s business depends on products are reserved for applicants that have exported access to adequate infrastructure necessary for bringing such products during the past three years, pro rated to its produce to the market, in particular elevator the past actual exports by each applicant during the capacity, drying facilities and adequate storage and same period. The remaining 20 per ce nt is allocated to transport facilities. the other applicants, distributed pro rata according to their declared volumes. Sugar cane and sugar beet are Whilst Management believes that the Group has also subject to licensing, but without quotas. Export adequate infrastructure available to its current licences for sugar-cane or sugar beet require an approval operations and land holdings, no assurance can be given by the Ministry of Agriculture. that such facilities are available in a reasonable proximity to the properties that the Group may The Law On Procedure for Effectuation of Settlements acquire in the future. If the facilities are not within in Foreign Currency requires that all sales proceeds close proximity to the properties, the Group would received by Ukrainian resident individuals or need to build and manage such facilities at its own cost. companies from export contracts must be deposited to An involvement in such activity may result in costs or an account at an authorised bank no later than 90 losses, which could adversely affect the Group’s calendar days from the date when the products clear business, financial conditions and results of operations. Ukrainian customs. Receiving any additional proceeds requires a further licence from the National Bank of Ukraine. Payments between the residents and non- Export controls residents can be made or received in foreign currency The primary legal basis for export control in Ukraine is only. the Law on Foreign Economic Activity, first adopted in 1991, and most recently amended in 2006. This law Failure by the Group’s Ukrainian subsidiaries to obtain regulates the export of a numerous listed categories of the requisite export licences and quotas could prevent goods, ranging from agricultural products to nuclear the Group from exporting the produce of its Ukrainian materials and weapons. The Cabinet of Ministers of farms and prevent the Group from benefiting from Ukraine can issue further regulations regarding export higher export prices, which may adversely affect the of goods from Ukraine. Several ministries and state Group’s business, financial condition and results of agencies are involved with export controls, including operations. the Department of Non-tariff Regulation, which grants export licenses, the Department for Monitoring Foreign Trade, which prepares materials for export Existing animal herds applications and calculates quotas, the State Customs The regional and local authorities often require that the Commission, which supplies export statistics to the Group take on an existing herd of cows when acquiring Ministry of Economy and the State Commission on a farm and assume the working capital expenses Export Controls, which has a broad authority over associated with such a herd. Refusing to accept such exports policy, licensing, quotas and implementation of conditions may cause an adverse reaction from the legislation. authorities and endanger the land titles registration process. Such herds are usually in poor condition but Since 1993, the Cabinet of Ministers and the Ministry cannot be disposed of before appropriate replacements of Economy have maintained a list of goods which are have been acquired. Significant capital investment is subject to export control. This list includes certain usually required to turn such herds into profit making types of agricultural goods, which are subject to quota operations. There are no guarantees that the Group and licensing requirements. For example, the Cabinet will be able to rapidly provide these farms with a of Minister Resolution On Approval of Export Quotas replacement herd, in which case the Group may face for Agricultural Products Requiring Licensing until 30 operational losses, which could adversely affect the June, 2007, and Procedure for Granting Licenses, Group’s business, operating results, financial condition and cash flows.
16
Competition The official data published by Russian and Ukrainian The Group is likely to face competition from larger government agencies is substantially less complete and international companies, publicly and privately owned supported by less research than those in some of the domestic companies, as well as smaller local companies. more developed market economies of North America Many of such competitors will be larger and have and Europe. Official statistics may also be produced on substantially greater financial, personnel, technical and different bases than those used in such economies. Any marketing resources than the Company is expected to discussion of matters relating to Russia or Ukraine in have and may therefore be in a position to offer a this Company Description must therefore be subject to higher price for the most desirable farms and land uncertainty due to concerns about the completeness or holdings, as well as offer more competitive produce reliability of available official and public information. prices to their customers. Management expects the level of competition in the Russian and Ukrainian markets Risks relating to the Russian Federation to increase (both from international and local compa- Set out below is a description of some of the risks nies). relevant to an investment linked to a business operating in the Russian Federation. Animal diseases Livestock like cows are vulnerable to virus infections Political stability and other infectious diseases, including the foot and Russia is a federation of 89 sub-federal political units mouth disease. Whilst Management believes that the (grouped into seven federal districts), consisting of Group’s dairy opera tions follow high sanitary republics, regions (oblasts), territories (krais), cities of standards in order to minimise the spreading of federal importance, autonomous regions and infectious diseases, no assurances can be given that autonomous districts (okrugs), some of which exercise Group’s livestock could not be infected from sources considerable autonomy in their internal affairs outside the Group’s control. In recent years, major pursuant to arrangements with the federal government. international food scares like foot and mouth epidemics The delineation of authority and jurisdiction between have particularly affected the farming sector through federal, regional and local authorities is still evolving, import / export bans, which have closed the farming often remaining unclear and contested, particularly in businesses’ access to export markets. As dairy farming regulatory matters. Lack of consensus between the is mainly local in nature and milk is seldom transported federal, regional and local authorities often results in beyond a 300 km radius of the farm, such import / conflicting legislation and may lead to further political export bans are not likely to prevent the Group to instability. In particular, conflicting laws have been access its milk customers. Nevertheless, a serious enacted in the areas of privatisation, securities, outbreak of infectious animal diseases may result in corporate legislation and licensing. Some of these laws costs or losses, which could adversely affect the and governmental and administrative decisions Group’s business, financial condition and results of implementing them, as well as certain transactions operations. consummated pursuant to them, have in the past been challenged in the courts, and such challenges may occur RISK FACTORS RELATING TO DOING in the future. For these reasons, the Russian political BUSINESS IN RUSSIA, UKRAINE AND system is vulnerable to tension and conflict between ESTONIA federal, regional and local authorities. This tension creates uncertainties in the operating environment in Since the 1980s, the former Union of Soviet Socialist Russia, which hinder the Group’s long-term planning Republics, including Russia, Ukraine and Estonia, have efforts and may prevent the Group from carrying out been undergoing a substantial political transformation its business strategy effectively and efficiently. from a centrally controlled command economy under communist rule to a pluralist market-oriented Russia last held Duma elections in December 2003, democracy. These three countries have all experienced when the pro-government party United Russia received significant political, legal and economic changes and close to half of all Duma seats. Observers judged the liberalization in the last two decades. Duma election as falling short of international standards for fairness. The last Presidential election saw Investors investing in emerging markets such as Russia President Putin overwhelmingly re-elected in March and Ukraine should recognize that these markets are 2004. The next elections for the Duma will be in subject to significantly greater legal, economic and December 2007, with the Presidential election to follow political risks than more mature markets. The same shortly in early 2008. applies partly also to Estonia, although its accession to the European Union has brought this country within In addition, ethnic, religious, historical and other the European regulatory framework and reduced both divisions have, on occasion, given rise to tensions and, legal and political risk associated with this market. in certain cases, terrorist attacks. If such tensions escalate, significant political consequences could arise,
17 including the imposition of a state of emergency in Should the EU not renew the PCA with Russia or the some or all regions of Russia. Moreover, any terrorist relations between Russia and the EU deteriorate, it may attacks and the resulting heightened security measures have negative effects on the Russian economy and, in could cause disruptions to domestic commerce and consequence, affect adversely on the Group’s business, could have a material adverse effect on the Group’s financial condition and results of operations. business, results of operations, financial condition and prospects, and thus the value of the Shares. Social stability
Russian Federation and the World Trade Organisation Russian social climate has progressed in certain instances, with the standard of living rising and The Russian Federation remains the last major unemployment reducing, with real wages growing by economy outside the WTO. Its accession to the WTO 82 per cent. A greater number of Russians are now is perceived as producing substantial benefits to both considered middle class, with the proportion of Russia and the WTO itself, particularly in terms of Russians considered ‘poor’ falling to about 18 per cent market liberalization, improving access to and for in 2004. Private consumption has increased, as foreign investors, improved market transparency, as Russians also have improved access to mortgages, bank well as overall costs savings through competition and loans, and credit cards. On the other hand, wealth elimination of trade (tariff) barriers. The working distribution remains concentrated, with 75 per cent of party on Russia’s WTO accession was initially the poorest Russians living in peripheral and remote established in 1993, with an accelerated programme for rural areas. Further, the demographic situation in the Working Party concluded in 2003. To date, Russia Russia has been identified as a possible impediment to has completed multilateral negotiations with the WTO, future growth, with a large ‘brain-drain’ crisis, low and concluded bilateral market access agreements with birth rates, poor healthcare, and emigration of qualified both the EU (2004) and the USA (2006), thereby paving labour. the way for Russia’s accession to the WTO. Nevertheless, substantial hurdles remain for Russia The failure of the Russian government and many before WTO membership will be realized, primarily in private enterprises to pay full salaries on a regular basis the are as of intellectual property protection, and the failure of salaries and benefits generally to keep simplifying customs procedures, subsidies and energy pace with the rapidly increasing cost of living have led pricing, and the WTO working party officials have in the past, and could lead in the future, to labour and expressed concern with Russia’s pace of implementing social unrest. Labour and social unrest could have commitments. political, social and economic consequences, such as increased support for a renewal of centralised Should the Russian accession to the WTO be delayed authority; increased nationalism, with support for re- or abandoned, it may have negative effects on the nationalisation of property, or expropriation of or Russian economy and, in consequence, affect adversely restrictions on foreign involvement in the economy of on the Group’s business, financial condition and results Russia; and increased violence. Any of these could of operations. have an adverse effect on confidence in Russia’s social environment and the value of investments in Russia, Russia and European Union could restrict the Group’s operations and lead to a loss of revenue, and could otherwise have a material adverse The European Union is Russia’s largest neighbor and effect on the Group’s business, results of operations, trading partner, with EU trade comprising over 50 per financial condition, properties and prospects, and thus cent of Russia’s overall trade in 2004. Conversely, the value of the Shares. Russia is the EU’s fifth largest trade partner, making up 5 per cent of total EU trade in 2004. The EU exports Crime and corruption primarily capital and finished industrial and consumer goods, whereas Russia exports predominantly consist of The political and economic changes in Russia since the fuel and primary products. The EU Partnership and early 1990s have resulted in significant dislocations of Cooperation Agreement (PCA) concluded with Russia authority. The local and international press have in 1997 forms the basis for bilateral contacts between reported that significant organised criminal activity has Russia and the EU, includ ing in the areas of political arisen, and that property crime in large cities has dialogue, trade and goods, investment, finance, inter increased substantially. In addition, there are reportedly alia, with the eventual goal of establishing a EU-Russia high levels of corruption in locations where the Group free trade zone. The PCA provides Russia with Most- conducts its business. Press reports have also described Favoured-Nation (MFN) status, thereby exempting instances in which government officials have engaged in Russian exports from quantitative limitations, except selective investigations and prosecutions to further for steel. The EU is currently pursuing renewal of the their own interests or the interests of certain initial PCA, which expires in 2007. individuals. Any allegations of the Group’s involvement in such practices would pose a risk of
18 prosecution and of possible criminal or administrative through the use of promissory notes. These problems liability. Additionally, published reports indicate that a were magnified by a Russian banking crisis in 1995 and significant number of Russian media regularly publish by the impact on the Russian banking system of the slanted articles in return for payment. The events of August 1998, which further impaired the proliferation of organised or other crime, corruption ability of the banking sector to act as a consistent and other illegal activities that disrupt the Group’s source of liquidity to Russian companies. A re- ability to conduct its business effectively, or any claims emergence of the problems in the Russian banking that it has been involved in corruption, demands of system could have a material adverse effect on the corrupt officials or illegal activities (even if not proven) Group’s business, financial condition and operating that generate negative publicity, could have a material results. adverse effect on the Group’s business, results of operations, financial conditions and prospects, and thus Physical infrastructure the value of the Shares. The physical infrastructure of the Russian Federation Economic stability largely dates back to Soviet times and has not been adequately funded and maintained over the past Simultaneously with the implementation of political decades. Particularly affected are the rail and road reforms, the Russian Government has initiated policies networks; power generation and transmission assets; of economic reform and stabilisation. These policies communication systems; and building stock. Road have involved liberalising prices, reducing defence conditions throughout Russia are poor, with many expenditures and subsidies, privatising state-owned roads not meeting minimum quality requirements. The enterprises, reforming the tax and bankruptcy systems federal government is actively considering plans to and introducing legal structures designed to facilitate reorganise the nation’s rail, electricity and telephone private business, foreign trade and investment. After systems. Any such reorganisation may result in the initial post-reform period, the Russian economy increased charges and tariffs while failing to generate was characterised by declining industrial production, the anticipated capital investment needed to repair, significant inflation, a managed but unstable currency, maintain and improve these systems. The deteriora tion rising unemploy ment and underemployment, high of Russia’s physical infrastructure harms the national government debt relative to gross domestic product, economy, disrupts the transporta tion of goods and high levels of corporate insolvency with little recourse supplies, adds cost to doing business in Russia and can to restructuring or liquidation in bankruptcy interrupt business operations. This could directly or proceedings, a weak banking system providing limited indirectly have a material adverse effect on the Group’s liquidity to Russian enterprises, wide-spread tax existing and future assets and/or business. evasion, high levels of corruption, the penetration of organised crime into the economy and the Exchange rates, exchange controls and repatriation impoverishment of a large portion of the Russian restrictions population. The Russian economy has been subject to abrupt downturns. Although economic conditions in Until 2003 the Russian rouble experienced a significant the Russian Federation have improved in the last three depreciation relative to the U.S. dollar following the years, in part to the high oil and gas prices, the prospect financial crisis of August 1998. Before the crisis, the still exists of widespread bankruptcy, mass Central Bank of Russia had been trying to support the unemployment and the deterioration of certain sectors rouble within a certain band. However, after the of the Russian economy. No assurance can be given dramatic devaluation of the rouble in 1998, the band that reform policies will continue to be implemented was cancelled. Since 2003 the Russian rouble has and, if implemented, will be successful, that the Russian appreciated against the U. S. dollar. The ability of the Federation will remain receptive to foreign trade and Russian Government and the Central Bank of Russia to investment or that the Russian economy will improve. maintain the stability of the rouble will depend on many political and economic fac tors, including the Lack of liquidity ability of the government to control inflation and the availability of foreign currency. The rouble is not Russian companies may face significant liquidity convertible outside the Russian Federation. A market problems due to a limited supply of domestic savings, exists within the Russian Federation for the conversion few foreign sources of funds, high taxes, limited lending of the rouble into other currencies, but it is limited in by the banking sector to the industrial sector and other size and is subject to rules limiting the purposes for factors. Many Russian companies cannot make timely which conversion may be effected. The relative payments for goods or services and owe large amounts stability of the exchange rate of the rouble against the of overdue federal and local taxes, as well as wages to U.S. dollar since 1999 has mitigated risks associated employees. Many Russian companies have also resorted with conversion, but no assurance can be given that to paying their debts or accepting settlement of such stability will continue. accounts receivable through barter arrangements or
19
Legal system affect the Group’s ability to enforce its legal rights in Russia, including rights under contracts, or to defend Russia is still developing the legal framework required against claims by others in Russia. to support a market economy. Since 1991, Russian law has been largely, but not entirely, replaced by the new The independence of the judicial system and its legal regime established by the 1993 Federal immunity from economic and political influences in Constitution. The Group’s business is subject to the Russia is subject to doubt. The court system is under- rules of the Russian Civil Code, other federal laws and staffed and under-funded. Judges and courts remain decrees, and orders and regulations issued by the inexperienced in certain areas of business and corporate President, the government, the federal ministries and law, such as international financial transactions. Not all the Central Bank of Russia, which are, in turn, Russian legislation and court decisions are readily complemented by regional and local rules and available to the public or organised in a manner that regulations. The following risks relating to the Russian facilitates understanding. The Russian judicial system legal system create uncertainties with respect to the can be slow or unjustifiably swift, and enforcement of legal and business decisions that the Group makes, court orders can, in practice, be very difficult. All of many of which do not exist to the same extent in these factors make judicial decisions in Russia difficult countries with more developed market economies: to predict and effective redress uncertain. The Group · inconsistencies exist between: (1) federal laws; may be subject to claims and may not be able to receive (2) decrees, orders and regulations issued by a fair hearing. Additionally, court orders are not always the President, the government and federal enforced or duly followed by law enforcement ministers; and (3) regional and local laws, agencies. These uncertainties could have a material rules and regulations; adverse effect on the Group’s business, financial condition and re sults of operations. · a lack of judicial and administrative guidance on interpreting legislation as well as a lack of Liquidation on the basis of formal non-compliance sufficient commentaries on judicial rulings and legislation: Certain provisions of Russian law may allow a court to order the liquidation of a Russian legal entity on the · judges and courts are relatively inexperienced basis of its formal non-compliance with certain in interpreting legislation in accordance with requirements during the formation of such entity or new principles established under reformed during its operation. In certain cases a Russian legal statutes; entity may be liquidated by the registering state · substantial gaps exist in the legal framework authority even without a court decision. due to the delay or absence of implementing regulations for certain legislation; Although some of the Group’s Russian subsidiaries might have failed from time to time to comply fully · a lack of judicial independence from political, with all the applicable legal requirements, Management social and commercial forces; believes that none of the Russian Group companies · alleged corruption within the judiciary and should be subject to liquidation on such grounds, the governmental authorities; Management also believes that the financial condition of each Group company in Russia has been satisfactory · problematic and time-consuming enforcement at all times, and capable of meeting its tax and other of both Russian and non -Russian judicial third party obligations. However, weaknesses in the orders and international arbitration awards; Russian legal system create an uncertain legal · a high degree of discretion on the part of environment, which makes the decisions of a Russian governmental authorities, leaving significant court or a governmental authority difficult, if not opportunities for arbitrary and capricious impossible, to predict. Therefore, investors should not government action; and rely on Management’s interpretation of Russian law. If a Russian court or a governmental authority takes a · bankruptcy procedures are not well position unfavourable to the Group, it may need to developed and are subject to abuse. restructure its operations, which could have a material adverse effect on the Group’s business, financial Additionally, several fundamental Russian laws have condition and results of operations. only relatively recently become effective. The enforceability of some of the more recently enacted Arbitrary government action laws may be subject to doubt and many new laws remain untested. Russian legislation also often Government authorities have a high degree of contemplates implementing regulations that have not discretion in Russia and at times appear to act yet been promulgated, leaving substantial gaps in the selectively or arbitrarily, without hearing or prior regulatory infrastructure. All of these weaknesses could notice, and sometimes in a manner that may not be in
20 full accordance with the law or that may be influenced approvals, consents, registrations or other regulations by political or commercial considerations. Moreover, may lead to severe consequences for the landowners government authorities also have the power in certain and other real estate owners and lessees. circumstances, by regulation or government act, to interfere with the performance of, nullify or terminate If the Russian properties owned or leased by the contracts. Unlawful, selective or arbitrary Group, or any activities relating to such property, is governmental actions have reportedly included denial found not to be in compliance with all applicable or withdrawal of licences, sudden and unexpected tax approvals, consents, registrations or other regulations, audits, criminal prosecutions and civil actions. In this the Group may be prevented from or delayed in using environment, the Group’s competitors may receive such property, and this could have a material adverse preferential treatment from the government, effect on the Group’s business, financial condition and potentially giving them a competitive advantage. results of operations.
Although unlawful, selective or arbitrary government Tax system action may be challenged in court, such action, if directed at the Group or the Company’s shareholders, Generally, taxes payable by Russian companies are could have a material adverse effect on the Group’s substantial and numerous. The tax environment in business, financial condition and results of operations, Russia has historically been complicated by and on the value of the Shares. contradictory pieces of interpretation of tax legislation issued by different authorities. The quality of tax Expropriation and nationalisation legislation has generally improved since the introduction of the Russian Tax Code in 1999, and The Russian government has enacted legislation to Russia has been in the process of replacing legislation protect foreign investment and other property against regulating the application of major taxes such as expropriation and nationalisation. If such property is corporate income tax, VAT and corporate property tax expropriated or nationalised, legislation provides for with new chapters of the Tax Code. In practice, fair compensation. However, there is no assurance that Russian tax authorities often have their own such protections would be enforced. This uncertainty interpretation of the tax laws that rarely favours is due to the apparent lack of political will to enforce taxpayers, who often have to resort to court legislation to protect property against expropriation proceedings to defend their position against the tax and nationalisation, the lack of an independent authorities. Differing interpretations of tax regulations judiciary and sufficient mechanisms to enforce exist both among and within government ministries judgments and widespread corruption among and agencies, creating uncertainties and inconsistent government officials. enforcement. Tax declarations, together with related documentati on, are subject to review and investigation Expropriation or nationalisation of any of the Group’s by a number of authorities, each of which may impose Russian assets or businesses could have a material fines, penalties and interest charges. Generally, an adverse effect on the Group’s business, financial investigation covers the taxpayer’s activities for the condition and results of operations. three calendar years immediately preceding the year in which the investigation is carried out. As previous Uncertainty and contradiction of property law investigations do not exclude subsequent claims relating to the investigated period, the statute of limitations is The Russian legal framework is not yet sufficiently not entirely effective. In addition, in some instances, developed to support private ownership of land and new tax regulations have been given retroactive effect. other real estate to the same extent as is common in some of the more developed market economies of Moreover, financial statements of a Russian group of North America and Europe. It is often difficult to companies are not consolidated for tax purposes. determine with certainty the validity and enforceability Therefore, each of the Company’s Russian subsidiaries of title to land in Russia or to what extent it is pays its own Russian taxes and may not offset its profit encumbered. Moreover, approvals, consents and or loss against the loss or profit of another subsidiary in registrations of various federal, regional and local the consolidated group. In addition, payments of inter- governmental authorities are required for the use of company dividends between two Russian entities are land. It is not always clear which governmental body subject to a withholding tax of 9 per cent , which is or official has the right to lease or otherwise deal with increased to 15 per cent for amounts distribute d to certain land plots; the construction approval foreign shareholders. procedures are intricate and such approvals may be contested or totally cancelled; and the building and Russian transfer pricing rules give Russian tax environmental regulations often contain requirements authorities the right to review prices, make transfer that are impossible to fully comply with in practice. pricing adjustments and impose additional tax liabilities Failure to obtain or comply with the required in respect of transactions between related entities and
21 certain other types of transactions between Overall, President Yushchenko's reform policies are independent parties, if the transaction price deviates by generally expected to have a positive effect on the more than 20 per cent from the market price. The economy and political stability of Ukraine. However, Russian transfer pricing rules are vaguely drafted, he faces several challenges: appeasement of the leaving wide scope for interpretation by Russian tax divergent factions within the eastern and western authorities and courts. regions of Ukraine, recovery of relations with Russia, implementation of unpopular economic reforms and There can be no assurance that current taxes will not be building of a political consensus. There is no certainty increased or additional sources of revenue or income, that President Yushchenko's policies will succeed or or other activities, will not be subject to new taxes, that political stability will be achieved. Political charges or similar fees in the future. In addition to the instability in Ukraine may have negative effects on the Group’s tax burde n, these risks and uncertainties economy and thus on the Group’ business, financial complicate the Group’s tax planning and related condition and results of operations. business decisions, potentially exposing the Group to significant fines and penalties and enforcement On 2 April 2007, after a brief meeting with the leaders measures despite the Group’s best efforts at of Parliament and representatives of the political parties compliance, and could have an adverse effect on the and factions, President Yuschenko signed an Order Group’s business, financial condition and results of "On Pre-Term Dismissal of the Authorities of the operations, and thus the value of the Shares. Verkhovna Rada of Ukraine" no. 264/2007 (the “Order”). The Order provides for immediate dismissal Risks relating to Ukraine of the acting Parliament and subsequent extraordinary Parliamentary elections to be held on 27 May 2007. Set out below is a description of some of the risks relevant to an investment linked to a business operating In response to the actions of the President, the majority in Ukraine. of the Parliament called for an extraordinary session, which was held late in the evening of 2 April 2007. The Political instability extraordinary session of the Parliament was attended by the Party of Regions, the Socialist and the Historically, a lack of political consensus in the Communist parties only. In the course of the Verkhovna Rada (Parliament) of Ukraine has made it extraordinary session the parliamentarians, holding the consistently difficult for the Ukrainian government to majority of votes, have adopted a number of decisions, secure the support necessary to implement a series of namely, but not limited to, the decision to address the policies intended to foster liberalisation, privatisation presidential Order to the Constitutional Court of and financial stability. Since the independence in 1991, Ukraine to decide on the constitutionality of the governmental instability has been a feature of the Order. The Constitutional Court received this petition Ukrainian political scene and, as a result, Ukraine has early on 3 April 2007. In addition, the parliamentarians had thirteen prime-ministers and three acting prime- decided to disregard the presidential Order and to ministers during this period. The various State continue fulfilling their duties. The Parliament has authorities, and the relations with them, as well as the ordered the Government to continue exercising its Ukrainian government's policies and the political powers and not to commence any activities with leaders who formulate and implement them, are subject respect to the organization and financing of the to rapid change. extraordinary Parliamentary elections. The Parliament also voted for the dismissal of the current members of In December 2004, Mr. Viktor Yushchenko was elected the Central Election Commission of Ukraine and President of Ukraine following the invalidation of the appointed the former composition thereof, headed by original election results by the Supreme Court of Mr. Sergey Kivalov, being the representative of the Ukraine after massive demonstrations and strikes Party of Regions and head of the Central Election throughout the country, however at the expense of Commission in 2004. This decision was adopted in relinquishing Presidential appointment powers to the violation of applicable Ukrainian legislation. According Parliament and Prime Minister under a constitution to the Constitution of Ukraine, the Parliament has no reform which became effective in January 2006. authority to appoint the new representatives to the Political disgruntlement has continued to handicap Central Election Commission, as it should be done Ukrainian government since the Presidential election, only upon the proposal of the President. resulting from the realignment of party interests and attempts to manipulate around new constitutional Late in the evening of 2 April 2007, the Government of reforms. Despite the political jostling, the current Ukraine also held an extraordinary session, where government has agreed on moving Ukraine closer to the Order was deemed unconstitutional. Europe, singing a National Unity Accord on major policy issues, including market reforms and aspirations In the light of the above events, the political situation to join the EU. in Ukraine appears to be unstable. As of the day of this
22
Company Description, it is still not clear how and may have negative effects on the economy and thus on when the political situation will stabilize. The recent the Group’s business, financial condition or results of and possible future developments in Ukrainian politics operations. may adversely affect our business, financial condition and results of our operations. Ukraine and the World Trade Organisation
Relations between Ukraine and Russia have been, to a The accession to the WTO is a main priority of certain extent, adversely affected by the presidential Ukrainian foreign policy, and considered an elections in 2004 and related political turmoil, indispensable element in developing of its national particularly in terms of the divergent political economy, the liberalization of foreign trade, and the allegiances held by President Yushchenko’s Our cre ation of a transparent and dependable conditions for Ukraine party and Prime Minister Yanukovich’s Party inbound of foreign direct investment. The WTO of Regions to Russia. Further frictions between working group on the Accession of Ukraine has almost Ukraine and Russia developed due to an increase in oil completed an agreement regarding the accession criteria export duties and gas prices in Ukraine as a result of for Ukraine. As of March 2007, Ukraine had recent disagreements between the Russian gas concluded bilateral negotiations on market access issues monopolist, Open Joint Stock Company "Gazprom" with 49 of the WTO members currently participating and its Ukrainian counterpart, National Joint Stock in the WTO Working Party on the Accession of Company "Naftogas of Ukraine". More than 20 per Ukraine. Reportedly, Ukraine has already passed cent of Ukrainian exports of goods currently pass to majority of legislation required to bring Ukraine’s laws Russia, while much of Russia's energy exports are in line with WTO requirements. delivered to the EU via Ukraine. Multilateral negotiations on agricultural policy have Relations between Russia and Ukraine have also been been included in the framework of the periodic sessions strained periodically by certain disagreements related to between the WTO and Ukraine, which have resulted in the stationing of the Russian Black Sea Fleet in the resolving 95 per cent of the listed tariff issues. The Crimean peninsula of Ukraine, including the amount remaining open issues deal with duties on those payable to Ukraine for such stationing, the return of agricultural products that are most sensitive to certain navigational facilities to Ukraine and Ukraine. compliance with the Ukrainian environmental legislation by the Black Sea Fleet. Further, in January Should Ukraine fail to accede to the WTO or should its 2006, Russia imposed a ban on imports of livestock and accession be delayed, it may have negative effects on the dairy products from Ukraine, citing alleged violations Ukrainian economy and, in consequence, affect of veterinary and sanitary standards by Ukrainian adversely on the Group’ business, financial condition producers. The ban was lifted in relation to a number and results of operations. of Ukrainian companies following the inspections thereof by the Russian authorities, with final settlement Ukraine and European Union of the matter expected upon completion of the The economic and foreign policies of the current inspection process. government of Ukraine are oriented towards the European Union which has already replaced Russia as Any major changes in Ukraine's relations with Russia, Ukraine's largest trading partner. In 2006, the trade in particular any such changes adversely affecting the between Ukraine and the 27 EU member states supply of energy from Russia to Ukraine and/or amounted to about EUR 28 billion. Iron and steel, Ukraine's export revenues derived from transit charges mineral products and chemicals accounted for 64 per for Russian oil and gas, may also have negative effects cent of the Ukrainian exports to the EU, while on the Ukrainian economy and thus may adversely machinery and equipment, and chemicals account for impact the Group’s business, financial condition and 66 per cent of the EU exports to Ukraine. results of operations.
The EU imports from Ukraine are to a large extent No assurance can be given that reform and economic liberalised, apart from certain steel products, the growth will not be hindered as a result of any further import of which is subject to quantitative restrictions disruption of the government's continuity, any further in the EU, and metal scrap, on which Ukraine levies dissent in the government or the Parliament or any export duties. A significant proportion of Ukrainian other changes affecting the stability of the government goods entering the EU market benefit from the General or involving a rejection or reversal of reform policies System of Preferences (GSP). favouring privatisation, industrial restructuring and administrative reform. In addition, there can be no The first step setting out EU’s basic approach to assurance that the amendments to the Constitution will relations with Ukraine was laid down in 1999 in the provide for greater stability or ensure more responsible Common Strategy, which combines all countries government policies. Political instability in Ukraine
23 positions and defines a series of priority areas. The Money Laundering. However, any future allegations of subsequent European Neighbourhood Policy (ENP) corruption in Ukraine or evidence of money sets out a new framework for relations over the coming laundering could have a negative effect on the ability of decade with countries, one of which is Ukraine. The Ukraine to attract foreign investment and thus have a idea behind this initiative is that countries like Ukraine negative effect on the economy of Ukraine which in that do not currently have a perspective of membership turn may adversely affect the Group’s business, but are now sharing borders with the EU would financial condition and results of operations. become part of a zone of prosperity and a ‘ring of friends' with whom the EU enjoys close, peaceful and Economic instability co-operative relations. Thus, in return for effective implementation of political, economic and institutional In recent years, the Ukrainian economy has been reforms, Ukraine and other neighbouring countries characterised by a number of features which contribute should be offered the prospect of gradual integration to economic instability, including limited liquidity with the EU's internal market, accompanied by further caused by a relatively weak banking system, tax trade liberalisation. Consultations were launched with evasion, significant capital flight and low wages. Ukraine on a European Neighbourhood Policy Action Plan in January 2004 and concluded in September 2004. Although the Ukrainian Government has generally The Action Plan is the main tool for ENP been committed to economic reform, the implementation, and was jointly adopted at a special implementation of reform has consistently been EU-Ukraine Co-operation Council on 21 February impeded by a lack of political consensus, controversies 2005. over privatisation (including privatisation of land in the agricultural sector), the restructuring of the energy Should Ukraine fail to develop its relations to the sector, the removal of exemptions and privileges for European Union or should such developments slow certain state-owned enterprises or for certain industry down, it may have negative effects on the Ukrainian sectors and the limited extent of cooperation with economy and, in consequence, affect adversely on the international financial institutions. No assurance can be Group’ business, financial condition and results of given that current reform policies favouring operations. privatisation, industrial restructuring and tax reform will continue to be implemented and, even if Social instability implemented, that those policies will be successful, or that the economy in Ukraine will continue to improve. The failure of the Ukrainian Government and many private enterprises to pay full salaries on a regular basis According to the State Statistics Committee of and the failure of salaries and benefits in Ukraine Ukraine, the rate of inflation for 2006 was 11.6 per generally to keep pace with the rapidly increasing cost cent, higher than the 10.3 per cent in 2005, but lower of living have led in the past, and could lead in the than the 12.3 per cent in 2004. In addition, in 2006, future, to labour and social unrest. Labour and social Ukraine’s GDP growth amounted to 7.0 per cent, unrest may have political, social and economic which is higher than 2.7 per cent recorded in 2005 but consequences, such as increased support for a renewal lower than 12.1 per cent recorded in 2004. Further, of centralised authority, increased nationalism, with industrial output grew by 6.2 per cent in 2006 restrictions on foreign ownership in the Ukrainian compared to 3.1 pe r cent in 2005 and 12.5 per cent in economy, and possibly violence. Any of these events 2004. An economic downturn may have an adverse could adversely affect the Group’s business, financial effect on the Group’s business, financial condition and cond ition and results of operations. results of operations.
Corruption and money laundering Cumulative foreign direct investment remains low for a country the size of Ukraine. As has happened in the External analysts have identified corruption and money past, an increase in the perceived risks associated with laundering as problems in Ukraine. An anti-money investing in Ukraine could dampen foreign direct laundering law came into force in Ukraine in June investment (FDI) in Ukraine and adversely affect the 2003, which significantly improved money laundering Ukrainian economy. No assurance can be given that monitoring procedures. The central bank of Ukraine Ukraine will remain attractive to foreign trade and and financial institutions are now required to take investment. In particular, the climate for FDI may be comprehensive actions to monitor certain financial adversely affected by the plans initiated in early 2005 transactions more closely for evidence of money by the President and the Government to review the laundering. As a result of the passage of this law and privatisation of 22 major companies that they believe amendments to other related anti-money laundering were sold at unfairly low prices under the previous legislation, in February 2004 Ukraine was removed government. However, this tendency seems to be over. from the list of non-cooperative countries and As a result, the 2005 net FDI inflows from the EU to territories by the Financial Action Task Force on Ukraine reached EUR 5.3 billion. However, capital
24 flight remains significant. An improvement of the abroad of all profits and other proceeds in foreign investment climate, notably through a more effective currency legally earned as a result of their investment enforcement of legislation adopted and the completion activity. Normative acts of NBU provide for certain of the reform process, is essential for Ukraine to attract formal requirements to repatriate the profits. Aside more investment. Any deterioration in the climate for from the withholding tax, which amounts to 15 per foreign direct investment in Ukraine could have an cent and certain duties to Pension Fund of Ukraine (in adverse effect on the economy of Ukraine which in the case of currency converting), there are no turn may adversely affect the Group’s business, repatriation restrictions. However, no assurance can be financial condition and results of operations. given that this situation will continue in the future. Any future changes in the legislation restricting The absence of a deep and liquid market for domestic repatriation of profits may adversely affect the Group’s treasury bonds means that Ukraine remains vulnerable business, financial condition and results of operations. should access to international capital markets not be possible for any reason in the future. Under such Legal system circumstances, any failure of Ukraine to receive support from official creditors and international Since independence in 1991, as Ukraine has been financial institutions could adversely affect Ukraine’s transforming from a planned to a market based financing of its budget deficit, the level of inflation economy, the Ukrainian legal system has also been and/or the value of the hryvnia, which in turn may developing to support this market based economy. adversely affect the Group’s business prospects in Ukraine's legal system is, however, in transition and is Ukraine, the financial condition of the Group and therefore subject to greater risks and uncertainties than results of its operations. a more mature legal system. In particular, risks associated with the Ukrainian legal system include, but Ukraine's economy is vulnerable to market downturns are not limited to: and economic slowdowns elsewhere in the world. In · provisions in the laws and regulations that are addition, because Ukraine is a major producer and ambiguously worded or lack specificity or even are exporter of metal and agricultural products, the contradictory and thereby raise difficulties when Ukrainian economy is especially vulnerable to world implemented or interpreted; commodity prices and/or the imposition of import tariffs by the United States, the EU or other major · inconsistencies between and among the export markets. Any of such developments may have Constitution of Ukraine, laws, presidential decrees, negative effects on the economy of Ukraine which in and Ukrainian governmental, ministerial and local turn may adversely affect the Group’s business, orders, decisions, resolutions and other acts; financial condition and results of ope rations. · the lack of judicial and administrative guidance on the interpretation of Ukrainian legislation, Exchange rates, exchange controls and repatriation including the complicated mechanism of exercising restrictions constitutional jurisdiction by the Constitutional Court of Ukraine; In April 2005, the National Bank of Ukraine (‘‘NBU’’) revalued the hryvnia and set the UAH/USD exchange · the relative inexperience of judges and courts in rate at UAH 505 per USD 1000, compared with the interpreting Ukrainian legislation and the general previous UAH 528, in an attempt to address the inconsistency in their interpretation of Ukrainian growing imbalance between the UAH and USD caused legislation in the same or similar cases; by continuing foreign currency inflows into Ukraine · corruption within the judiciary; and and reduced inflationary pressure in the Ukrainian economy. Pursuant to the NBU's guiding monetary · a high degree of discretion on the part of policy principles for 2007, it is expected that the NBU governmental authorities, which could result in will maintain the UAH/USD exchange rate at between arbitrary actions. UAH 495-525 to USD 100 to address the goal of reducing inflation. Any appreciation of the UAH Furthermore, several fundamental Ukrainian laws against the USD may adversely affect Ukrainian either have only recently become effective or are still exports and the economy generally, which may have an pending hearing or adoption by the Ukrainian adverse effect on the Group’s business, financial Parliament. The recent origin of much of Ukrainian condition or results of operations. legislation, the lack of consensus about the scope, content and pace of economic and political reform and The Law of Ukraine on Investment Activity, adopted the rapid evolution of the Ukrainian legal system place on 18 September 1991, guarantees the repatriation of the enforceability and underlying constitutionality of profits. After payment of taxes, duties and other laws in doubt, and result in ambiguities, inconsistencies mandatory payments, foreign investors are guaranteed and anomalies. In addition, Ukrainian legislation often the right to the unimpeded and immediate transfer contemplates implementing regulations. Often such
25 implementing regulations have either not yet been requirements, resulting in delays to or failures in promulgated, leaving substantial gaps in the regulatory enforcement of court orders and judgments. infrastructure, or have been promulgated with substantial deviation from the principal rules and The uncertainties of Ukraine’s legal system pose conditions imposed by the respective legislation, which significant risks to the Group’s operations and growth results in a lack of clarity and growing conflicts with potential in Ukraine, particularly with a view to its regulatory authorities. ability to enforce contracts, defend its land rights and defend itself against unfair competition or arbitrary The independence of the judicial system and its action by authorities. immunity from economic and political influences in Ukraine remain largely untested. Although the Liquidation on the basis of formal non-compliance Constitutional Court of Ukraine is the only body authorised to exercise constitutional jurisdiction and Under Ukrainian law, a court may order the has mostly proven its impartiality of judgment, the liquidation of a Ukrainian legal entity on the basis of its system of constitutional jurisdiction itself remains too formal non-compliance with certain requirements complicated to ensure the smooth and effective removal during the formation of such entity or during its of discrepancies between the Constitution of Ukraine operation. and the applicable Ukrainian legislation, on the one hand, and among various laws of Ukraine, on the other Although some of the Group’s Ukrainian subsidiaries hand. might have failed from time to time to comply fully with all the applicable legal requirements, Management The system of general and specialised courts is believes that none of the Ukrainian Group’s companies understaffed and underfunded. Judges and courts are should be subject to liquidation on such grounds. generally inexperienced in the area of business and Management also believes that the financial condition corporate law. Judicial precedents generally have no of each Group company in Ukraine has been binding effect on subsequent decisions. Not all satisfactory at all times, and capable of meeting its tax Ukrainian legislation is readily available to the public and other third party obligations. However, or organised in a manner that facilitates understanding. weaknesses in the Ukrainian legal system create an Court decisions are not open to public access and, uncertain legal environment, which makes the therefore, may not serve as guidelines in interpreting decisions of a Ukrainian court or a governmental applicable Ukrainian legislation to the public at large. authority difficult, if not impossible, to predict. Very often the courts of different regions and/or Therefore, investors should not rely on Management’s different levels pass diametrically opposed decisions on interpretation of Ukrainian law. If a court or a similar cases, which is confusing foreign investors. governmental authority takes a position unfavourable to the Group, it may need to restructure its operations, Enforcement of court orders and judgments can, in which could have a material adverse effect on the practice, be very difficult in Ukraine. The State Group’s business, results of operations, financial Execution Service, a body independent of the condition and prospects. Ukrainian courts, is responsible for the enforcement of court orders and judgments in Ukraine. Often Tax system enforcement procedures are very time-consuming and Ukraine has a number of laws related to various taxes may fail for a variety of reasons, including the imposed by both central and regional governmental defendant lacking sufficient bank account funds, the authorities. These tax laws have not been in force for complexity of auction procedures for the sale of the significant periods of time, compared to more defendant's property or the defendant undergoing developed market economies, often resulting in unclear bankruptcy proceedings. In addition, the State or non-existent implementing regulations. Moreover, Execution Service has limited authority to enforce tax laws in Ukraine are subject to frequent changes and court orders and judgments quickly and effectively. amendments, which can result in either a friendlier Ukrainian enforcement agencies are bound by the environment or unusual complexities for the Group method of execution envisaged by the relevant court and its business. Differing opinions regarding legal order or judgment and may not independently change interpretations often exist both among and within such method even if it proves to be inefficient or governmental ministries and organisations, including unrealisable. Furthermore, notwithstanding the the tax administration, creating uncertainties and areas successful execution of a court order or a judgment, a of conflict. higher court may reverse the court order or judgment and require that the relevant funds or property be Tax declarations/returns, together with other legal restored to the defendant . Moreover, in practice the compliance areas (for example, customs and currency procedures employed by the State Execution Service do control matters), are subject to review and investigation not always comply with the applicable legal by a number of authorities, which are authorised by
26 law to impose substantial fines, penalties and interest consequences for the Estonian economy as a whole and charges. These circumstances generally create tax risks may have a material adverse effect on the Group’s in Ukr aine more significant than typically found in business and results of operations in Estonia. countries with more developed tax systems. Potential tax liabilities Whilst Management believes that the Group is currently in compliance in all material respects with the Estonia currently enjoys a corporate income tax regime Ukrainian tax laws, it is possible that the relevant under which income tax is deferred until profits are authorities could, in the future, take differing positions distributed. Estonian companies are currently subject with regard to interpretative issues, which may result in to income tax of 22 per cent, however, the effective rate a material adverse effect on the Group’s business and is approximately 28.20 per cent of dividends and other prospects in Ukraine. distributions paid (22/78 of the net amount of distributed profits), which rate is due to decrease over Risks relating to Estonia the next two years. In addition, an Estonian dividend withholding tax of 22 per cent, which rate is due to Estonia has experienced significant political, legal and decrease to 20 per cent by 2009, is currently imposed economic changes and liberalization during the last two on dividends paid by the companies to non-resident decades of transition from the Soviet rule and plan legal persons, holding less than 20 per cent of the shares economy to independence and a market economy. or votes.
For purposes of its accession to the European Union, The European Union has granted Estonia a transition Estonia implemented significant social and economic period expiring on 31 December 2008 following which changes, as well as reforms of its legal and regulatory time Estonia may be required to at least partly adjust its framework. As a result, the volume of Estonian current tax regime. The possibility that Estonia may legislation and other regulations has increased and is change its corporate taxation policy has periodically expected to increase further pursuant to the obligation been subject to political discussion but it is currently to apply European Community law. not possible to assess whether or, if so, when any such change may occur. Any change in Estonian corporate The Estonian civil code and corporate, competition, taxation policy could have a material adverse effect on securities, environmental and other laws have been the Group’s business and results of operations in substantially revised during the last two decades as part Estonia. of Estonia’s transition to a market economy and to meet EU requirements and standards. The new Estonian tax laws and regulations have not been in legislation remains in part largely untested in courts force for significant periods, in contrast to more and no clear administrative or court interpretation developed market economies; therefore, implemented practice has evolved. laws and regulations may be unclear or nonexistent. Accordingly, there is limited case law on the Estonian businesses are in the process of adapting the application and interpretation of these laws. Often, business standards and practices of the European differing opinions regarding legal interpretations exist Union. Many Estonian companies, including Trigon’s both among and within tax authorities, thus creating Estonian subsidiaries, are still adopting and developing uncertainties and areas of conflict. management tools for competition law related risks, corporate governance, internal controls and risk The Group’s tax position may be subject to possible management. review and investigation by tax authorities, authorized to impose severe fines, penalties and interest charges. If Currency and exchange rates for any reason the Group’s tax position were to be The official and only legal tender in Estonia is the disputed by the tax authorities, the possible tax kroon. The kroon is pegged to the euro at the fixed rate liabilities of the Group could have a substantial of EEK 15.6466 for 1 EUR. Although the Bank of material adverse impact on the Group’s operating Estonia has expressed its intention to maintain the results, and therefore could have a material adverse current fixed exchange rate and the currency board impact on the market price for the Shares. system, there can be no guarantee that the Estonian Parliament will not amend the relevant laws and that RISKS RELATING TO TH E ADMISSION TO the fixed exchange rate will be maintained in the TRADING coming years. Foreign investors can open both kroon and foreign currency accounts in banks registered in Volatility of share prices Estonia. Any foreign currency may be freely purchased Prior to the Admission, there has been no public and sold at the market exchange rates. There are no market for the Shares. There can be no assurances capital movement restrictions. Any devaluation or regarding the future development of a market for the revaluation of the kroon may have negative
27
Shares or the ability of holders of the Shares to sell may publish about the Group or its business. The their Shares or the price of any such sale. Prevailing Group has no control over these analysts. If one or market prices from time to time will depend on many more of the analysts who cover the Group downgrade factors, including then-existing interest rates, industry their ratings of the Shares, the price of the Shares may and market conditions, the Group’s operating results decline. If one or more of these analysts cease coverage and cash flows and the market for the securities of of the Group or fail to publish regular reports on it, the companies in the same or similar industries. Company could lose visibility in the financial markets, which in turn could cause the price of the Shares or In recent years, most major stock markets have trading volume to decline. experienced significant price and trading volume fluctuations. These fluctuations have often been Financial turmoil in emerging markets could depress the unrelated or disproportionate to the operating price of the Shares performance of the underlying companies. Accordingly, there could be significant fluctuations in Generally, investing in emerging markets is only the price of the Shares, including a substantial decline, suitable for sophisticated investors who fully appreciate following the Admission even if the Group’s operating that these markets are subject to greater risk than more results meet expectations. developed markets, including in some cases significant legal, economic and political risks. Investors should also note that emerging markets such as Russia and Ukraine Liquidity (and, to lesser extent, Estonia) are subject to rapid Although the Shares are admitted to trading no change and that the information set forth in this assurance can be given that an active trading market for document may become outdated relatively quickly. the Shares will emerge, develop or be sustained after Moreover, financial turmoil in any emerging market completion of the Admission. country tends to adversely affect prices in equity markets of all emerging market countries as investors The average daily trading turnover on the cumulative move their money to more stable, developed markets. First North marketplace (combining lists in As has happened in the past, financial problems or an Stockholm, Copenhagen and Iceland) was EUR 22 increase in the perceived risks associated with investing million in March 2007. A total of 87 companies were in emerging economies could dampen foreign listed on the First North marketplace as of 30 March investment in Russia or Ukraine and adversely affect 2007. The First North marketplaces are substantially the Russian and/or Ukrainian economies. In addition, less liquid and more volatile than established main during such times, businesses that operate in emerging stock exchange markets in countries with highly markets can face severe liquidity constraints as foreign developed securities markets. The relatively small funding sources are withdrawn. Thus, even if the market capitalization and low liquidity of the First Russian and Ukrainian economies remain relatively North marketplaces may affect the ability of stable, financial turmoil in any emerging market shareholders to sell their Shares on First North, which country could seriously disrupt the Group’s business, could increase the volatility of the price of the Shares. as well as result in a decrease in the value of the Shares. The financial turmoil in Russia and other emerging Prices on the First North may also be affected by markets in 1997 and 1998 adversely affected market external factors, such as the performance of world prices in the world’s securities markets for companies markets generally, or other emerging markets in operating in the affected developing economies. There particular, or the imposition of or changes in trading or can be no assurance that renewed volatility stemming capital gains taxes. from these factors, or other similar factors that may arise in other emerging markets or otherwise, will not adversely affect the value of the Shares even if the Offer for sale of substantial number of additional shares Russian and Ukrainian economies remain relatively may depress the Shares’ price stable. Accordingly, investors should exercise particular Sales or issuance of additional Shares into the public care in evaluating the risks involved and must decide market following the Admission could adversely affect for themselves whether, in light of those risks, their the market price of the Shares. In order to decrease the investment is appropriate. Potential investors are urged exposure to such risk, the Company, Trigon Capital to consult with their own legal and financial advisers and certain holders of the Shares have agreed to certain before making an investment in the Shares. lock-up commitments which have been described in “Information on the Group – Shares.” Future payments of dividends on the Shares There is no assurance that the Company will pay Continued analyst cover dividends on the Shares, nor is there any assurance as to The trading market for the Shares will depend on the the amount of any dividend it might pay. The payment research and reports that industry or securities analysts and the amount of any dividend will be subject to the
28 discretion of the Company’s Directors and, ultimately, the General Meeting of Shareholders and will depend on available cash balances, anticipated cash needs, results of operations and financial condition of the Group and any loan agreement restrictions binding the Company as well as other relevant factors. See “Additional information - Dividends.”
Investors cannot be sure of receiving a dividend on their investment in the foreseeable future, if at all. It is possible that investors will not receive any return on their investment in the Company other than possible capital gains.
Enforcing non-Russian or non-Ukrainian judgments A substantial part of the Group’s assets are located in Russia and Ukraine. As a result, investors may not be able enforce a court judgment or arbitral award against the Company, its subsidiaries or their officers and Directors in relation to the Russian or Ukrainian assets without commencing legal proceedings in these countries. These limitations may deprive investors of effective legal recourse for claims related to their investment in the Shares.
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INDUSTRY OVERVIEW livestock feed accounts for half of the total grain demand in Russia.
There is also a strong domestic demand for milk MARKET DRIVERS products in Russia. In the St Petersburg region, the There has been major increase in the global demand for dairy industry has reached high productivity levels, but agricultural produce in recent years, fuelled by global the amount supplied nevertheless remains low trends such as: compared to the rest of the country. This region is inhabited by five per cent of the Russian population, · Global population growth. The world population yet the local dairies produce less than two per cent of has increased by 500 million since 1999, and is the total raw milk output of the country. Several milk forecasted by United Nations to grow by an processing companies have recently announced average of 1 per cent per annum over the next ambitious plans for expansion, which is likely to decade. This translates into 7.6 billion people in increase the demand for raw milk even further. 2020, up from 6.6 billion at the end of 2006. Increase in population results in direct increase in food demand, particularly from developing AGRICULTURAL SECTOR IN ESTONIA, countries such as India, Pakistan, and China, which RUSSIA AND UKRAINE have a limited arable landmass, large parts of which Agricultural sector in the Former Soviet Union in the are poorly cultivated. 1990s · Growing supply/demand imbalances. The U.S. Soviet agricultural production relied on collective farms Department of Agriculture (USDA) estimates that called Sovkhozes and Kolkhozes. The system of the worldwide grain stocks are at their lowest level collective farms was inefficient, which resulted in high in the last thirty years, which indicates a widening levels of crop failure causing persistent food shortages gap between demand and supply. across the country. A major structural change took · Economic prosperity. Sustained economic growth place in the 1990s, caused by factors such as disruption in developing and transition economies has resulted of access to the former Soviet market, rapid in growth in disposable incomes, allowing people appreciation of production cost and dismantling of to change their eating preferences from staple foods trade barriers. As a result, the agricultural sector towards a mix of more expensive, higher value- initially deteriorated sharply. The situation improved added products. Meat consumption, which is highly in the latter part of the decade, with the transition to correlated with economic development, has risen the market economy enabling better rewards for good substantially in Asian countries, primarily India farm management and, eventually, access to new and China. investment. Under these circumstances, many of the most inefficient farms went bankrupt, while the · Climate change. Rising global temperature and soil remaining ones modernized their operations, which erosion is likely to restrain agricultural production resulted in an increase in overall productivity. Evidence growth in traditional producer countries such as the suggests that the recovery was strongly correlated with US, Germany and France. The Black Earth Region the progress of land reform which brought former is less susceptible to extreme weather conditions collective farms into private ownership. and is therefore expected to be in a beneficial position vis-à-vis above-mentioned producer countries. Agricultural sector in Estonia Arable land comprises 1.3 million hectares, or one-third The growing global demand for agricultural produce of the total area of Estonia, of which 830,000 hectares is has been one of the factors leading to the resurgence of presently farmed. Barley, wheat, and rapeseed are the farming industry in Russia and Ukraine. However, most popular crops, grown on approximately half of both countries are increasingly compelled to curb the total cultivated farm land. exports to satisfy the growing domestic demand. The proportion of agriculture in the Estonian GDP has In 2000-2006, GDP in both Russia and Ukraine grew declined from 3.9 per cent in 1997 to 2.4 per cent in on average by seven per cent per year, whilst the 2005. An estimated 3.5 per cent of the labor force corresponding growth in Estonia was more than eight worked in agriculture at the end of 2006 according to per cent. This development has lead into the emergence Statistics Estonia. According to the Estonian Economic of a sizeable middle class in all three countries. In Accounts for Agriculture 2006, livestock breeding Russia, real incomes have risen by two-thirds between accounts for 52 per cent of the total agricultural output 1998 and 2006, which has resulted in an expansion of (three-fifths of it being dairy farming), followed by poultry and pork demand leading to an increase in crop cultivation with 37 per cent. The Estonian production by 10-12 per cent annually. The growth in accession to the European Union in 2004 has meat consumption also impacts grain markets, as
30 introduced both subsidies and a production quota initiatives is the National Project for Development of system (see “Industry overview - Estonian dairy market”). Agriculture (NPDA) which was announced in 2005. Its The former double tariff system between Estonia and key objectives for 2005-2007 include a 7 per cent Russia was replaced by co-operation principles between increase in the meat production and a 4.5 per cent EU and Russia, which have boosted Estonian exports increase in raw milk production, while ensuring that to Russia. The accession to EU has also brought the overall number of livestock does not fall below the stringent safety and hygiene requirements for the food 2005 levels. In contrast to similar initiatives undertaken processing industry, which has compelled large-scale in the 1990s, NPDA does not involve direct financial investments in order to bring facilities into compliance. support to farmers, but rather subsidises investment through leasing and bank lending. The government has earmarked approximately EUR 1 billion for NPDA in Agricultural sector in Russia 2006-2007, most of it being channelled through In 2005, Russia had 77.5 million hectares of land RosAgroLeasing, the state-owned leasi ng company, and growing agricultural crops. This equals two-thirds of RosSelhozBank, its banking counterpart. Both the total arable area. In 1990, the corresponding figure institutions offer subsidised financing to even out some was 117.7 million hectares. Wheat is the dominant crop of the cashflow cyclicality intrinsic to the farming among cereals, planted on 28 million hectares in 2005 business and thus help to stabilize the farmers’ income. according to Ministry of Agriculture of Russia. Other important crops include barley, potatoes and sunflower. Agricultural industry in Ukraine With its mild climate and rich soil in large parts of the In 2003-2005, the Russian real agricultural output grew country, Ukraine has more favourable conditions for by just 2.3 per cent per annum, when the overall agriculture than any other former Soviet Union economy growth was seven per cent per annum on republic. Its arable land comprises 41.8 million average. In 2006, agriculture contributed 3.9 per cent of hectares, or roughly 70 per cent of the total area of the Russia’s GDP, down from 5.7 per cent in 2002 country. The Ukrainian land used for growing cereals according to State Statistics Service of Russia. Slow pace has remained largely constant around 14-15 million of the land reform, a sharp reduction in subsidies, poor hectares since 1990, even though the total cultivated infrastructure and lack of managerial expertise are farming land has declined by one-sixth in the same considered to be the main factors behind the period, being approximately 25 million hectares in continuing stagnation. 2006. In addition to cereals, other crops such as sunflower, potatoes, and sugar beet are also widely The agricultural sector has benefited much less from grown throughout the country. investment than other parts of the Russian economy, in particular the energy and consumer sectors. The cereals The decline in Ukrainian agriculture was longer and and poultry industries have dominated the agricultural more pronounced than elsewhere in the former Soviet investment at the expense of the more capital-intensive Union: USDA estimates that the Ukrainian grain livestock production. As a result, imported meat now production decreased by 50 per cent over the period accounts for one-third of the total meat consumption in 1990-2000, and fertilizer use fell by 85 per cent during Russia. the same period. Agricultural production is still an important part of the Ukrainian economy according to The table below summarizes the development in grain IMF, accounting for 9.5 per cent of its GDP in 2005 cultivation and the number of livestock at Russian (down from 13 per cent in 2002, figures include forestry farms in 1992-2006: and hunting). The sector employs approximately 20 per cent of the total labor force in Ukraine, as stated by 1992 1995 2000 2002 2004 2006 State Statistics Committee of Ukraine. Area under cultivation, million A political debate is ongoing in Ukraine regarding hectares 61.9 54.7 45.6 47.5 43.7 41.5 whether the current restrictions on transfers of Grain production, agricultural land should be abolished (see “Legislation of million tons 106.9 63.4 65.5 86.6 78.1 78.4 Cows, million of 20.2 17.4 12.7 11.8 10.3 9.2 Russia, Ukraine and Estonia related to land and real Pigs and hogs, property – Ukraine”). These restrictions effectively million of 31.5 22.6 15.7 17.4 13.4 15.2 prevent the use of farming land as security for Sheep and goats, financing, which has made loan financing for million of 51.4 28.0 14.7 16.0 17.7 19.0 agriculture very expensive and deterred foreign Source: State Statistics Committee of Russia, Ministry of Agriculture investors from entering into the Ukrainian farming sector. In order to stem the decline, the Russian government has introduced a set of initiatives designed to increase At the beginning of 2007, the Ukrainian Ministry of livestock production. The most prominent of these Agriculture announced its Countryside Development
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Program (CDP), which foresees doubling of farming production. Approximate borders of the Black Earth exports in 2005-2015, alongside a 60 per cent increase in Region can be seen in the map below (Map A). the total volume of agricultural production. Among other things, CDP aims to give an increased role to the The Black Earth Region is exceptional because of its Agricultural Fund, which is responsible for the vast area, richness of soil, beneficial climate and good formation of the State Food Reserve. The total budget access to the market. Its key competitive advantages of CDP for 2007-2015 is EUR 37 billion, of which over other major grain producing areas, such as EUR 20.5 billion has been earmarked for the Southern Australia and the Canadian Prairies, include agricultural sector. predictable climatic conditions, absence of major erosion problems, and access to a large supply of both professional and unskilled workforce for a relatively The Black Earth Region low cost. The high humus content in the Black Earth The so called “Black Earth Region” in Ukraine and soil is important in terms of preserving water and southern Russia is the most significant farming region microorganisms (humus moisture content is between of both countries. It has received its name from dark, 80-90 per cent). highly fertile soil, commonly known as Chernozem, or the Black Earth. According to an estimate by the Volga The climatic conditions of the Black Earth Region is Basin Institute of Ecology, Former Soviet Union well-suited for growing wheat, and it has historically contains roughly half of the world’s Black Earth stock. been the principal crops in the area. According to the This dark soil is rich in humus and minerals. The Ministry of Agriculture of Ukraine, nearly all of the associated “Chernozem belt” stretches from Northeast wheat cultivated in that country is ‘winter wheat’, Ukraine (Donetsk, Kharkov, Poltava, Vinnitsya which is planted in autumn and harvested during regions) across the Russian Central Black Earth Region July/August of the subsequent year. Average wheat (Voronezh, Kursk, Orel, Lipetsk and Belgorod regions) yields in the Black Earth Region have recently and Southern Russia (Rostov, Krasnodar and Stavropol fluctuated between three and five tons per hectare, regions) into Siberia. It was the “breadbasket” of the which is substantially above the national averages Russian Empire, and later the Soviet Union. Following reported for Ukraine and Russia. Rye, barley, corn and the collapse of Soviet Union, many of its cereals farms sunflower are also commonly grown in the region. remain undercapitalized and cannot expand Map A:
Global dairy market DAIRY MARKET IN ESTONIA AND THE ST PETERSBURG REGION According to an estimate of the United Nations Food and Agriculture Organization (FAO), worldwide milk Most of the global dairy trade is done in processed milk production reached 657 million tons in 2006, up by 2.2 products, such as milk powder, cheese and butter, per cent from 2005. Asia overtook Europe as the rather than in raw milk. This is because raw milk has a world’s leading milk production region in 2006 with an rather short useful economic life and transporting milk estimated 34 per cent of the global output. Despite is expensive relative to its selling price. Dairy farming is concerns of a slowdown in the global growth, a local business, with raw milk usually transported to developing economies have continued to expand their processors within a 200-300 kilometre radius around milk production by 5-6 per cent annually. The FAO the farm. International Dairy Product Price Index rose sharply in
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2003-2005, which reflected strong demand and adverse The following table summarizes production of raw climate conditions, before easing in the second half of milk in Estonia: 2006 following increased supplies from Oceania. Although at the end of 2006 the dairy product prices 2000 2001 2002 2003 2004 2005 2006 were slightly down from the 15-year record of Total September 2005, they remained 30 per cent higher than production of in 1998. raw milk, ‘000 tons 629 684 621 611 640 670 690 There is substantial variance in the productivity per Raw milk cow among the major dairy producing countries. production Productivity per cow is typically 6-9 tons in North restricted by America and Western Europe, 3-5 tons in the former EU quota Soviet Union, Oceania and China, and below 2 tons in (active since 2003/04), large countries with large but inefficient dairy sectors, 396 424 497 483 538 570 606 such as India, Brazil and Mexico. ‘000 tons Average purchasing The table below summarizes annual productivity per cow in selected countries in 2006: price of raw milk, EUR/kg 0.175 0.205 0.179 0.184 0.245 0.254 0.243 Number of Country Milk productivity, milking cows, tons per cow per annum 131 129 120 116 115 115 109 ‘000 United States 9.06 Annual Finland 7.90 productivity, 4.7 5.2 5.2 5.3 5.5 5.8 6.2 Estonia 6.20 tons per cow EU-25 5.83 Source: Statistics Estonia, Estonian Ministry of Agriculture Argentina 4.79 China 4.17 European Union subsidies and production quotas Ukraine 3.53 The Estonian dairy industry operates within the Russia 3.30 framework of the EU Common Agricultural Policy (CAP). Effective since 2003, the quota system caps the Brazil 1.64 EU raw milk production on the basis of the 1999 India 1.02 production volumes. The Estonian annual quota for Source: USDA, Statistics Estonia the agricultural year 2006/2007 is 646,000 tons, up 5.5 per cent from 2005/2006. This allows 626,000 tons to be supplied to milk processors (supply quota) and Estonian dairy market 20,000 tons for the direct distribution from the producer to the end user (distribution quota). Estonian Size Agricultural Registers and Information Board (“PRIA”) Large scale dairy farming has a long operating tradition distributed raw milk quota of 632,241 tons to Estonian in Estonia. Total milk production in 1980 was dairy farms for the agricultural year 2006/07. Each approximately twice as large as in 2005, as stated by farm has its share of the national quota, and can obtain Estonian Dairy Association. The dairy industry is additional milk quota either by applying for new quota currently one of the largest and most important sectors from the undistributed reserve, or by acquiring of the Estonian food processing industry, accounting operations of other milk producers with existing quota. for 30 per cent of its total turnover of EUR 1.08 billion Undistributed reserve is formed by any additional in 2005. In 2006, the total raw milk production in quota awarded by EU, by transfer of quota from Estonia amounted to 690,000 tons, a 2.8 per cent existing farms not fulfilling the requirements and by increase from 2005. The output, however, is restrained transfer of quota of bankrupt dairy farms. If the by the European Union (EU) milk production quota, national annual production quota is exceeded, EU may which is set at 646,000 tons for the period between 1 impose a penalty on the Member State, which in turn April 2006 and 31 March 2007. EU milk production recovers it from the farms that have exceeded their quota does not cover raw milk that is consumed within quotas. Since the quota system was introduced for the the farm and is not sold to dairy processors or year 2003/04, Estonia has never fully utilized its quota. marketed directly to end-users. The latter amounted to 84,000 tons or 12 per cent of total raw milk production Estonian producers can apply for investment grants in Estonia in 2006. from the EU structural funds and for operations-related additional direct support, both allocated by PRIA. Operations-related milk subsidies are awarded on per
33 quota basis and amount to EEK 0.26 (1.7 Euro cents) Raw per production quota kilogram in the 2006 calendar milk year. Estonian dairy farms received in total EEK 157.5 quota as Number % % million (EUR 10.1 million) of operations-based of 31 of farms subsidies in 2006. Although the CAP reform planned January 2007 by EU expects a gradual decrease in the aggregate agricultural subsidies, the total farming subsidies to > 5,000 tons 17 1.1 137,710 21.8 Estonian farmers are expected to increase in the short 1,000 – 5,000 term when the direct payments are brought to the level tons 151 9.7 328,914 52.0 of older member states. Direct payments per < 1,000 tons 1,387 89.2 165,616 26.2 production quota kilogram are currently at 40 per cent Total 1,555 100.0 632,241 100.0 of the EU-15 level, but they are set to increase by 10 per cent every year until they reach the EU -15 level in Source: PRIA 2012. The Estonian Rural Development Plan 2007-2013 entitles agricultural producers to investment grants Estonian milk producers generally supply milk to one from the European Union. Approximately EUR 25.6 processor only, except the larger ones who often supply million is to be allocated annually to Estonian two processors. Since 1991, the Estonian milk agricultural producers to encourage acquisition of processing capacity has increased in relation to the production equipment. This subsidy amounts to number of cows, and therefore most farms can easily approximately 40 per cent of the acquisition cost up to sell their produce locally. a maximum of EUR 0.5 million per grant. The following table summarizes ten leading Estonian farms holding milk quotas as at 31 January 2007: Productivity and prices
In recent years, the Estonian raw milk prices have Controlling Quota as of % increased following the EU accession in 2004. The owner 31 January average raw milk price was EEK 3.975 (EUR 0.254) per 2007, tons kg in 2005 and EEK 3.805 (EUR 0.243) per kg in 2006, OÜ Aravete Agro AS Agro Piim 21,604 3.4 net of VAT. This is considerably below the comparable and related farms prices of Finland (EUR 0.33) and Sweden (EUR 0.30) in OÜ Estonia and OÜ Estonia 19,536 3.1 2005, as reported by Eurostat. related farms OÜ Väätsa Agro 15,099 2.4 The average milk productivity per cow in Estonia has increased by a third since 2000, reaching 6.2 tons per OÜ Põlva Agro 12,017 1.9 cow in 2006, although the number of cows is in decline. AS Tartu Agro 10,012 1.6 The current per cow productivity is slightly above the AS Adavere Agro AS Adavere 9,050 1.4 EU-25 average of 5.8 tons, but considerably below the and related farms Agro productivity levels achieved in Finland (7.9 tons) and AS Perevara 8,660 1.4 United States (9.1 tons) according to USDA estimates Trigon Baltic AS Trigon Baltic 8,545 1.4 for 2006. Farming and Farming related farms Structure OÜ Ühinenud OÜ Ühinenud 8,266 1,3 According to PRIA, milk production quota has been Farmid and Farmid related farms distributed between 1,555 dairy farms. Of these, 1,372 farms share the supply quota and 342 have a direct Trigon Farming the Company 8,031 1.3 distribution quota. The dairy production market is (Kaiu, Kärla and related farms) fragmented, although some of the farms have consolidated under one ownership. 89 per cent of dairy Others 511,421 80.9 farms have been allocated an annual quota of less than Total 632,241 100.0 1,000 tons, which does not allow enough scale of Source: PRIA, the remaining 14,000 tons of quota has not been allocated to operations to undertake required investments, as producers, constituting a quota reserve. estim ated by the Group. There is a high degree of competition among Estonian Size breakdown for farms with raw milk quota is milk processors, mostly for supplies of raw milk and presented in the following table: access to the retail market. This encourages improvement in efficiency and development of high value-added products. As a result, dairy processing industry is one of the few sectors in Estonia with a strong export performance. Although the increased
34 competition has led to closing down of smaller dairy according to Ministry of Agriculture. Management plants, the market for raw milk is not particularly estimates that 40 per cent of milk products used in the concentrated: according to the Estonian Dairy St Petersburg region are produced from milk powder. Association, the six largest dairy processors control 66 Management estimates that the quality of locally per cent of milk purchases: Kalev Paide Tootmine and produced raw milk varies widely and several dairy Tere Group (27 per cent), Valio Eesti and Võru Juust (17 farms can not maintain consistent production standard. per cent), E-Piim (15 per cent), and Rakvere Piim (7 per cent) in 2005. Structure The table below summaries key information about the The St Petersburg region dairy market St Petersburg region’s ten largest dairy farms in 2005:
Size Dairy farm Output Milking Productivity According to the State Statistics Service of Russia, re tail tons cows kg / cow sales of milk products amounted to RUB 252 billion Agro-Balt 11,128 1,311 8,488 (EUR 7.3 billion) in 2005, up 20.8 per cent from 2004 Grazhdansky 9,326 1,064 8,765 (approximately nine per cent in real terms). Unimilk, Gomontovo 8,304 1,173 7,079 Petrovsky 8,057 992 8,122 the country’s third largest milk processor, projects a Rabitici 7,694 904 8,511 mid-term real growth rate of four to five per cent per Pervomaiskoe 7,232 1,129 6,406 annum. With robust demand, the gap between demand Prinevskoe 7,055 898 7,856 and supply of quality raw milk is expected to widen: Leninskiy put 6,991 846 8,264 State Statistics Service of Russia reports that the Niva-1 6,980 872 8,005 number of milking cows more than halved in 1993- Rapti 6,834 854 8,002 2006, and further decline is expected by Ministry of St Petersburg Agriculture up to January 2008. region total 566,000 87,000 6,300
The shortage in milk products supply is especially Farms in the northern part of the adjacent Pskov oblast pronounced in the St Petersburg region, the second can also deliver to the St Petersburg market. However, most populous metropolitan area of Russia. A total of the distance from dairy processors seldom exceeds 300 6.2 million people live in this region, which comprises km, as transport costs rise with distance. Therefore, the city of St Petersburg (4.6 million) and the dairy plants need to secure their milk supply through Leningrad oblast (1.6 million) surrounding it. St long-term relationships with farms. In the St Petersburg Petersburg is the political and economical centre of the region, the decreasing supply and growing prices of raw North-Western Federal District, one of the seven milk have resulted dairy processors buying some of federal districts in Russia. ACNielsen marketing region’s largest dairy farms in order to secure their milk research has valued the market for milk products in the supply. Independent dairy farms, which now account St Petersburg region was at approximately RUB 15 for approximately 50 per cent of total production as billion (EUR 432 million) in 2005. According to the estimated by Petmol, are being increasingly offered Dairy Union of Russia, the North-Western Federal interest free loans by milk processors for purchases of District supplies only 54 per cent of its milk products new equipment in exchange for long term supply demand, compared to the nationwide average of 84 per contract. cent. The remaining 46 per cent of the milk products supplies to the North-Western Federal District is either The dairy processing market in the St Petersburg imported (mainly from Finland) or delivered from the region is dominated by four major processors, who other federal districts of Russia. jointly control 80 per cent of the market, as estimated by Delovoi Peterburg. They include Unimilk, Russia’s The Russian Ministry of Agriculture estimates that second largest and Ukraine’s largest dairy processor, there were 9.2 million milking cows in Russia at the which owns the regional market leader Petmol (35 per end of 2006. The total raw milk production was 31.3 cent market share); Piskarevsky Dairy Plant (22 per million tons, up 0.6 per cent from 2005. Milk cent), a management -owned company with its own production is heavily concentrated in the Centra l and dairy farms; Wimm-Bill-Dann, Russia’s leading milk Southern Federal Districts, which have the best climate processor and juice producer, which owns Baltiyskoe for livestock farming. Russian dairy farms are primarily Moloko (16 per cent); and Sevzapmoloko, which in owned by households (52 per cent) and agricultural addition to dairy farms and processing plants owns a organizations (43 per cent) following the privatisation, retail chain (7 per cent). Based on the fragmented data with few resources to improve old-fashioned facilities. available from some of these companies, the total processing capacity of dairies in the St Petersburg In 2005, the approximately 150 dairy farms located region is in the range of 900,000 to 1.1 million tonnes within the St Petersburg region produced 566,000 tons of raw milk per year, which is considerably more than of milk, which is 9.5 per cent less than in 2000 the supply of raw milk available in the region.
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Management believes that the dairy processing capacity Producers’ profitability depends on their access to might expand by 10-15 per cent by 2009, if a number of transport and storage facilities. large processors implement their announced investment plans. As milk farming is capital-intensive, the China is the world’s leading grain producer with a production of raw milk in the St Petersburg region is tenth of the world’s arable land and 19.5 per cent share unlikely to grow fast enough to satisfy this increase in of the global grain production, most of it in rice, demand. largely due to its top position in rice cultivation. The second largest producer is United States (17.1 per cent), followed by the European Union (12.5 per cent) and Productivity and prices India (9.8 per cent). The EU is the global leader in As elsewhere in Russia, productivity per cow in the St wheat production with 25 per cent share of the global Petersburg region has increased substantially in recent production; it also has the highest production efficiency years. The productivity per cow in the St Petersburg of wheat growing among the major producing region was 6.5 tons in 2006 (up 20 per cent from 2000), countries. Over the last three decades, global grain almost double the national average of 3.3 tons. At the consumption has grown steadily alongside with the same time, the production base remains fragmented: rising global population and sustained economic although one-third of the farms listed among Russia’s development. According to USDA, the global wheat 100 Most Efficient Dairy Farms (the annual ratings production in 2006/2007 totalled 591 million tons, compiled by the A.A.Nikonov Institute of Agriculture) down 9.5 per cent from 2005/2006. Most of the are in the Leningrad oblast, none of the twenty largest decrease was due to poor weather conditions in the dairy farms by output are located in the St Petersburg northern hemisphere. As a result, the global grain region. While larger milk farms have benefited from stocks declined to their lowest level in thirty years. the growing demand and received subsidies from the government and investments from the food industry, The benchmark forward wheat prices of Chicago Board the majority of the milk farms in the region remain of Trade EXW wheat futures increased dramatically in inadequately equipped. May 2006, which reflected concerns about expected poor harvest. When the harvest proved poor as According to Petrostat, retail prices for milk products expected and further likely harvest shortfalls were increased on average by 10-13 per cent in 2006. reported in Australia, the prices rose again sharply in Management estimates that the average producer price October 2006 to their highest level in five years. of raw milk in the St Petersburg region was RUB 8.05 Although the FAO has issued an optimistic outlook for (EUR 0.23, excluding VAT) in 2006. The average raw 2007/2008, forecasting favourable conditions for crops milk price for the whole Russia was RUB 7.15 (EUR in major producing countries, the wheat prices 0.21) in the first nine months of 2006, up 9 per cent remained high at the beginning of February 2007, up from the same period in the previous year. 20-30 per cent on the same time a year before.
The table below compares annual grain yields among major producing countries in the 2006/07 marketing GRAIN MARKET IN RUSSIA AND UKRAINE year:
Country / area Yield, tons per hectare Global grain market Wheat Coarse grains Agricultural grains are commonly divided into (i) Germany 7.2 5.9 wheat, a main consumption food which also used for France 6.8 6.9 producing alcohol; and (ii) coarse grain, which category EU-25 5.3 4.5 includes barley, oats, rye, sorghum, corn, rice and China 4.4 5.1 mixed grains. According to industry analysts, the global United States 3.0 8.6 Argentina 2.7 6.0 grain market is dominated by international producers Canada 2.6 3.8 and traders from the major producing countries, whilst Ukraine 2.6 2.6 the local operators have a secondary role in this Russia 1.9 1.8 market. According to the USDA, world grain Australia 0.9 1.3 consumption in the agricultural year 2006/2007 World 2.8 3.2 exceeded 2,045 billion tons, growing 1.4 per cent from Source: USDA 2005/2006. Coarse grain accounted for more than two- thirds of this amount, while wheat accounted for one- third. Russian grain market
Size and structure Harvested crops cannot be transported long distances before they have been cleaned and dried, which makes Russia is one of the world’s leading grain exporters, the market for undried grain geographically limited. despite the economic hardships that followed after the
36 collapse of the Soviet Union. The steep devaluation of Wheat accounts for more than 90 per cent of the rouble in 1998 helped the industry by improving Russian cereals exports. Export volumes fluctuated in export conditions and reduced imports, compounded 2006 due to volatile weather conditions. with generally improving economic conditions in YugTranzitService, a leading Russian grain trader, Russia. Majority of the agricultural land was distributed estimates that India was the largest export market for to farmers on the “Paj” basis (see “Legislation of Russia, Russian grain in 2006/07, with a 23.3 per cent share of Ukraine and Estonia related to land and real property – the total, followed by Egypt (18.4 per cent), Bangladesh Russia”). Regulation allows the farmers to trade the (7 per cent) and Georgia (6.2 per cent). Most of the land after registration has been finalised, which is a export grain is transported through the Black Sea ports significant difference to regulation in Ukraine. of Novorossiysk and Odessa (Ukraine), which are already operating at full capacity. There is currently an investment boom in the Russian cereals industry, caused by access to finance at Productivity favourable terms, large international agricultural companies entering the market and Russian grain As seen from the table below, grain yields have traders expanding downstream. increased since 2000, even though they remain significantly below those in other major producing Major Russian grain companies have been able to access countries. This is partly due to weak agricultural international capital markets, as evidenced by the table planning and mostly due to limited access to financing. below: Lack of working capital results in lack of fertilizers and machinery as well as delaying agricultural farming Company Business Type Issue date Size procedures (e.g. fertilizing, harvesting), which further description lowers the productivity level achieved. Track record of Nastyusha Vertically Bonds December EUR 29.2 large agrogholdings (e.g. RusAgro, Kuban, Razgulay) Grain integrated grain 2006 million holding suggests that the Russian grain yields will improve Razgulay Grain/sugar Bonds October EUR 58.3 when the farming industry receives more investment Group storage and 2006 million and employs more capable personnel. processing Razgulay Grain/sugar IPO March EUR 111.3 The table below summarizes major trends in cereals Group storage and 2006 million production in Russia: processing APC Arkada Vertically Bonds February EUR 20.4 1992 1995 2000 2002 2004 2006 integrated grain 2006 million holding Area under YugTranzitSe Vertically Bonds October EUR 35.0 cultivation, rvice integrated grain 2005 million million hectares 61.9 54.7 45.6 47.5 43.7 41.5 holding Grain production, Source: CbondS, Company information million tons 106.9 63.4 65.5 86.6 78.1 78.4 Average yield, The Institute for Agricultural Market Studies (IAMS) tons per hectare 1.80 1.31 1.56 1.96 1.88 1.89 valued the Russian grain market at EUR 4.7 billion in the 2005/2006 agricultural year. While no reliable Source: Federal State Statistics Service of Russia information is available on the number of grain producers in Russia, the total number of agricultural Prices enterprises is in excess of 26,000, as estimated by the Over the past few years, the Russian central Ministry of Agriculture. government has progressively removed regional barriers to nationwide grain trade, and this has The access to storage facilities is a key issue for the increased the volume and size of the domestic grain further development of the Russian cereals industry. market. The domestic grain prices in Russia are subject According to IAMS, the processing companies control to a high degree of seasonal fluctuation. The prices tend approximately one-third, or 28 million tons of the total to fall at the outset of the growing season in late spring, grain storage capacity of approximately 90 million tons. if a good harvest is forecasted. If harvest proves good, A substantial part of the remaining volume are facilities oversupply may depress prices further in August- designed for temporary grain storage, such as the November. The prices tend to recover at the end of the producers’ warehouses. The market for long-term grain calendar year when supply gradually decreases. The storage is more concentrated, with the top four prices normally remain high until the next sowing operators (Nastyusha, OGO, RusElKo, and Razgulay) season, influenced by the levels of grain stocks. controlling some 16 per cent of the total in 2005, according to Nastyusha Grain Company. Since 2001, the Russian government has occasionally used the Federal Grain Fund to intervene in the grain
37 market in order to suppress excess price volatility. It products market by setting minimum and maximum issues statements regarding harvest results and the level prices for the most common types of crops, such as of stocks and sometimes it also engages in buying or wheat, rye, sunflower and corn, maintaining the State selling grain in order to stabilize the grain prices. The Food Reserve and controlling exports via licensing government grain traders are mostly active in the requirements and quotas. The Ukrainian Agricultural Central Black Earth Region and Southern Russia, Fund is responsible for managing the State Food where access to export markets tends to press prices Reserve and conducting transactions in the organized higher. agricultural market of Ukraine that may have limited effect on prices. In 2006, the Agricultural Fund bought 566,000 tons of wheat and rye for the State Food Ukrainian grain market Reserve. The Group nevertheless estimates that the Size and structure grain market pricing in Ukraine by and large follows the world market despite the minimum prices and According to the State Statistics Committee of transactions of the Agricultural Fund. Ukraine, arable land in Ukraine comprises 70 per cent, or 41.8 million hectares out of the total area of 60.4 To avoid shortage of grain after a poor harvest, the million hectares. An overwhelming majority (90 per Cabinet of Ministers of Ukraine established the quota cent) of the agricultural land has been distributed to amounts for various agricultural products in the second farmers on the “Paj” basis (see “Legislation of Russia, half of 2006, export of which is subject to licensing. Ukraine and Estonia related to land and real property – Allocation of quotas for issuing export licenses is Ukraine”). performed based on applications submitted to the Ministry of Economy. While export controls were The domestic grain market is fragmented, with several established as temporary measures, they are currently thousand players engaged in growing crops, without still applicable for cereals and it is difficult to estimate any company holding more than 2 per cent of the the timing of abolishing the restrictions. market. The table below summarizes major trends in cereals production in Ukraine:
1992 1995 2000 2002 2004 2006 Area under cultivation, million hectares 13.9 14.2 13.6 15.4 15.4 14.2 Grain production, million tons 38.7 33.9 24.5 38.8 41.8 34.3 Average yield, tons per hectare 2.79 2.43 1.94 2.72 2.83 2.41
Source: State Statistics Committee of Ukraine
Most of the Ukrainian export grain is transported through ports in the south-western Ukraine, such as Odessa, Ilyichevsk and Yuzhny.
Productivity A large part of Ukraine lies within the Black Earth Region. Grain farms are on average slightly more productive in Ukraine than in Russia due to the more favourable climate and soil conditions. After a strong performance in 2004 -2005, the grain harvest was weaker in 2006 due to poor weather. Absence of an organized domestic cereals market and restrictions on change of farmland ownership severely limit the access of small and medium-sized agricultural enterprises to financial resources, and in consequence, constrain further improvements in yields.
Prices The Ukrainian central government engages in occasional intervention tactics in the agricultural
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INFORMATION ON THE The Group tries to acquire properties that are located close to each other in a few selected areas. The Group’s GROUP dairy farming operations focus on Estonia and the St Petersburg region. This is partly due to climate and
partly because Management believes in growing SUMMARY demand for raw milk in the St Petersburg region. Management further believes Estonia to be an The Group was established in May 2006 by the Eastern advantageous location for dairy farming compared to European asset manager Trigon Capital to invest in other EU member states. The Group’s cereals farming dairy and cereal farming in Russia, Ukraine and operations are located in the Black Earth region of Estonia. Russia and Ukraine, because of its superior growing conditions. Trigon Capital provides management services to the Group under the Advisory Agreement. Under the The Group expects to expand its Estonian dairy terms of this agreement, Trigon Capital provides to the farming operations by acquiring existing farms, while Group the services of at least three Board of Directors in the St Petersburg region it plans to establish members and general management services. Fo r further completely new dairy farms. The Group plans to information on the terms of the Advisory Agreement expand its cereal farming operations both in Ukraine see “Information on the Company – Organizational and Russia by either acquiring or signing long-term structure and management model – Advisory Agreement rental agreements on farmland currently operated by with Trigon Capital”. The management of the Group’s joint agricultural companies. operating subsidiaries are in the full-tim e employment of the Group. GROUP STRUCTURE Trigon Capital established a pilot project (Trigon Baltic Trigon Agri A/S, a company with limited liability Farming) in 2003 and Trigon Capital still manages this incorporated under the laws of Denmark, is the parent project. This pilot project has enabled Trigon Capital company of the Group. to develop and test its turnaround expertise in restructuring underperforming farms in the Baltic The Company owns all shares in its subsidiaries States. Trigon Baltic Farming is not part of the Group, AS Trigon Farming incorporated in Estonia, but the Group has access to its expertise and experience TC Farming Russia Ltd (“TC Farming Russia”) and through the Advisory Agreement with Trigon Capital. TC Farming Ukraine Ltd (“TC Farming Ukraine”) both incorporated in Cyprus. As at 30 March 2007, the Group controlled in total 23,095 hectares of farmland in Estonia, Russia and TC Farming Ukraine, in turn, is a registered Ukraine. Their operations include: shareholder of all shares in its subsidiaries OOO · two fully operational dairy farms in Estonia Rubezhnoye, OOO Trigon Farming Kharkov and totalling 2,707 hectares of land (in addition to OOO Malopovetskoje Agro, all incorporated in which 281 hectares of land is currently under Ukraine, and 0.1 per cent of the shares in OOO negotiation for use or acquisition); Russian Agro Investors, incorporated in Russia.
· four cereals farms in the Kharkov oblast, Ukraine, TC Farming Russia owns 99.9 per cent of the shares in with a total of 19,261 hectares of land; OOO Russian Agro Investors, incorporated in Russia, · 1,127 hectares in the Pskov oblast, Russia, planned which in turn owns all the shares in its subsidiaries to be developed into a dairy farm. OOO Dobruchi-Ferma and OOO Dobruchi-2, both incorporated in Russia. TC Farming Russia also owns Management believes that concentrating on both dairy 10 per cent of the shares in TC Farming Ukraine. and cereal farming is a strategic advantage: stable revenues from dairy business help to alleviate some of Trigon Farming owns all the shares in its subsidiaries cash flow fluctuation inherent to cereal farming. In the Osaühing Kärla PM (“Kärla”) and Osaühing Kaiu long term, the Group will aim to benefit from (“Kaiu”), both incorporated in Estonia. Kärla owns all combining cereal farming and dairy farming in the the shares in its subsidiaries Osaühing Kärla Saeveski same geographic location. Management also believes (“Saeveski”) and Osaühing Saare Farmer (“Saare that introducing the latest production technology will Farmer”), both incorporated in Estonia. Saare Farmer increase the efficiency of the operations and enhance in turn owns all the shares in Osaühing Lindoria their productivity. The Group benchmarks its dairy (“Lindoria”), incorporated in Estonia, and Lindoria and cereal farming productivity to Trigon Baltic owns 90 per cent of the shares in Osaühing Eikla Agro, Farming. incorporated in Estonia. Kärla owns 97.02 per cent of the shares in Tulundusühistu Kärla PÜ (“Kärla PÜ”), an economic association incorporated in Estonia, either
39 directly (54.96 per cent) or through its subsidiaries an individual, Mrs. Maie Vaikmaa has also been Saeveski (8.49 per cent), Saare Farmer (17.36 per cent), excluded from the members of Kärla PÜ. Following Lindoria (8.79 per cent) and Eikla Agro (7.46 per cent). the described changes, the membership of Kärla PÜ will be as follows: Kärla 54.93 per cent, Saeveski 8.49 The membership of Kärla PÜ is currently being per cent, Saare Farmer 17.36 per cent, Lindoria 8.79 per changed by the Group. Namely, under a resolution of cent and Kaiu 10.43 per cent. The described changes in general meeting of members of Kärla PÜ as of 18 the membership have not been formally finalized as of December 2006, it was decided that Eikla Agro would the date of this Company Description. be excluded from Kärla PÜ’s membership and instead, elect Kaiu as a new member of Kärla PÜ. In addition, After the completion of the above described restructuring in regard to Kärla PÜ, the Group will be structured as follows:
Trigon Agri A/S
100% 90% 100%
TC Farming TC Farming AS Trigon 10% Russia Ukraine Farming Ltd (Cyprus) Ltd (Cyprus) (Estonia)
100% 100% 99.9% 0.1% 100% 100%
OÜ Kaiu OÜ Kärla PM OOO Russian OOO OOO Trigon (Estonia) (Estonia) AgroInvestors Malopovetskoje Farming Kharkov (Russia) Agro (Ukraine) (Ukraine)
100% 100% 100% 100% 100% OÜ Kärla Saeveski OÜ Saare OOO Dobruchi- OOO Dobruchi-2 OOO (Estonia) Farmer Ferma(Russia) (Russia) Rubezhnoye (Estonia) (Ukraine) 54.93% 8.49% 100% 17.36% TÜ Kärla PÜ OÜ Lindoria 10.43% (Estonia) (Estonia) (holdings after 8.79% restructuring)
90%
7 private OÜ EiklaAgro 10% individuals (Estonia)
selecting technology suitable for specific farms COMPETITIVE STRENGTH S acquired. The managers of the existing operations Management believes that Trigon’s main competitive are also actively involved in developing newly strengths are: acquired operations through on-site visits and staff training. · Industry know -how. Trigon has an experienced management team of investment professionals and · Trigon Capital’s track record of turnaround agricultural industry specialists. In its operations in management. Trigon Baltic Farming pilot project Russia and Ukraine Trigon aims to pair local illustrates the positive impact of best-practice regional managers with experienced Estonian management techniques applied to distressed agricultural managers, thus combining Estonian and agricultural assets. Trigon Capital aims to leverage local know-how. The Management benefits from the expertise gathered under the pilot projects over practical experience of utilizing modern production to the management and expansion of the Group. technology within Former Soviet Union and Upon establishment of new operations the Group lays out a set of rigorous performance objectives,
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which are subsequently translated into day-to-day easier in the Former Soviet Union, as the guidance for each employee. agricultural production heritage favours large-scale operations. · Experience in operating in the Former Soviet Union. The Management’s background in · Geographic diversification. The Group focuses on agriculture, modern industry know-how and access a few selected regions where Management believes to capital coupled with the local managers’ the climate and business conditions to be knowledge of environment and extensive contacts favourable: the Black Earth regions of Ukraine and have enabled the Group to manage the difficulties Russia for cereal farming and St Petersburg region of entering a new business environment. The and Estonia for dairy farming. Management supported by Trigon Capital’s · Combination of cereals and dairy farming. Dairy specialists possesses extensive experience in coping farming produces a stable cash flow throughout the with the challenging legal and regulatory year, largely regardless the weather conditions. The environment in the Former Soviet Union. The cereals business, in turn, is highly dependant on Management also benefits from the experience of climate and weather conditions during the growth acquiring assets with fragmented ownership period and harvest, and normally produces cash structure . Furthermore, knowledge of local flow only at harvest time. Combining these two languages and the cultural background will enable operations helps to stabilise some of the cash flow the Management and regional managers to be in the cere als farming and alleviates its cash flow effective in managing large farming units in the intensity. In the long term, the Group will aim to Former Soviet Union. benefit from combining cereals farming and dairy · Access to capital. Most of the farms competing farming in the same geographic location. Benefits with the Group in Russia and Ukraine lack access are of environmental and economic nature, as usage to capital investment that would allow them to for dairy farming will also improve productivity of modernise their production facilities. Trigon’s the fields due to fertilization with manure. access to the international capital markets and knowledge how to utilize corporate banking Strategy for dairy farming relationships is expected to place it in a favourable Due to the constraints imposed by the EU milk quotas, position in comparison to domestic competition in the Group plans to grow in Estonia mainly by Russia and Ukraine. acquiring existing farms, at least in the short to medium · Early mover advantage. Having control over the term. Under the current rules, the purchaser of farm land is the main prerequisite for developing large assets can take over the entire quota of the acquired scale commodity production in the Black Earth farm. If only livestock is transferred, the quota per one Region. Trigon has established a strong market cow awarded to the acquirer is limited to 85 per cent of position in the Kharkov region and aims to repeat the average milk production of cows under this approach in other regions of interest to cement productivity surveillance during the previous quota its production capacity. year. Trigon expects to conduct corporate acquisitions and establish temporary control over operating units in STRATEGY order to acquire the full milk quota of the dairy farm targeted. The Group’s overall business strategy can be summarised as follows: Trigon’s Russian dairy farming strategy is based on · Introducing modern technology. Trigon plans to taking advantage of the low capacity of dairy farms in make substantial investments in more efficient, the St Petersburg region. The farms’ inability to satisfy productivity enhancing technology, machinery and the demand has resulted in shortage of supply of raw equipment in all its farming operations. Usage of milk and high milk prices. The Group expects to start modern production technology furthermore allows supplying milk from its first Russian dairy farm in the Group to be an attractive employer and employ November 2007 and assuming it proves successful, the more capable personnel. Group plans to expand these operations significantly. · Geographic clustering of operations. The Group The existing dairy farms in St Petersburg region are plans to optimise the utilisation of its management either owned by large dairy processors or in such a resources by acquiring farming operations that are poor condition that repairing them would be geographically close to each other as farm clusters. prohibitively expensive. Accordingly, the Group plans · Farm size. Trigon plans to establish only large to buy undeveloped grassland and construct completely farming units (e.g. cereals farms controlling 5,000- new dairy farms on such land. The Group’s primary 10,000 hectares of land), which justify investments objective is to increase its land holdings around its in machinery and equipment, management control existing properties in the north of Gdov region, and use and efficiency. Usage of large operating units is such land for gradual capacity expansion. While the
41 acquisition cost of any individual land unit may vary supply of quality fresh milk. Few dairy farms in the St substantially, Management estimates that suitable land Petersburg region have currently more than 1,000 can be purchased at the average cost of EUR 400-600 milking cows. Management expects that once per hectare. implemented, its current expansion plans will make Trigon a sufficiently large supplier on this market to make it attractive partner for milk processors. Productivity benchmarking Management sets the productivity targets for its existing and new dairy farms with reference to the Strategy for cereals farming industry outlook and its own experience. The Trigon selected the Black Earth region for cereals productivity targets are set by taking into account (i) farming because of its highly fertile soil. The Black the average productivity indicators of those EU Earth region offers an attractive environment because countries that have similar climatic conditions, (ii) the of the availability of fertile farmland at a relatively low track record of Trigon Baltic Farming; and (iii) cost compared with other farming regions in the world. comparable dairy farms in Estonia and the The number of private investors in the Russian St Petersburg region. agricultural sector has risen substantially over the past years, but on the aggregate their operations remain The Group expects to enhance productivity in each of modest compared to the land stock available. its farms comparable to that reached in the Trigon Baltic Farming pilot project. The pilot project reached The Group plans to expand its operations by acquiring productivity of 8.4 tons per milking cow in two years farmland presently managed by joint agricultural from the starting level of 5.3 tons per milking cow. companies, either by purchasing the freehold (in Russia) or through long-term rental contracts (in Ukraine). Following land privatisation, Russian and Trigon’s positioning in the market Ukrainian farming land is often owned by a large Dairy farms reach an important production threshold number of individuals. Other assets of the former when they produce more than 20 tons of raw milk per collective farms (i.e. properties, farming equipment) day. Farms with this capacity can fill a whole milk were also distributed to private individuals, who tanker sent by the customer. This optimises the generally combined the assets into joint agricultural customer’s transport costs and thus gives the farm companies that took over operations of former considerable negotiation advantage over smaller farms. collective farms. Joint agricultural companies generally The Group plans to limit its dairy farming operations have rental agreements with respect to the land that to units that produce at least 20 tons of raw milk per continues to be owned by private individuals. Joint day. agricultural companies generally own the buildings, equipment and livestock in the farm, while at times The Group plans to position its Russian farming those assets are also rented from the private individuals. operations so that it can deliver milk both to the St Petersburg region and to milk processors of the Management is considering further expansion within Pskov region. The Group’s existing properties in the the Black Earth region, primarily in Central Black northern part of the Pskov region are particularly Earth region and the Kuban region in Russia. The suitable for milk production to be sold to local milk Group currently controls 19,261 hectares of farmland processors. targeted for cereals farming, and plans to increase its holding to 120,000 hectares by the end of 2009. In the The Group currently has 1,241 milking cows in Estonia short term, Management expects to have signed leases and it plans to increase its livestock to 4,300 milking for or acquired additional 45,000 hectares of land in the cows (equalling 8,600 dairy animals) in Estonia and Black Earth regions of Ukraine and Russia by the end Russia by the end of 2009. In the longer term, the of 2007. Group aims to increase its raw milk market share from 1.3 per cent to 5 per cent of the Estonian national milk The value of agricultural land lies in the soil quality and production quota. This would make the Group one of production potential. The Group’s land acquisition the leading raw milk producers in the country. process comprises of visual analysis of the current field Management estimates that the current market leader conditions and overview of historic operating results. If controls approximately 3.4 per cent of the national the initial results are acceptable, Management production quota (see “Industry overview – Dairy establishes how much of the land can be utilized for market in Estonia and the St Petersburg region – Estonian farming and whether access to a grain elevator can be dairy market”). achieved for drying the grain in the proximity to the fields. These factors primarily determine the acquisition The Group has not adopted any specific target market decision. Management estimates that suitable land can share for the St Petersburg region, since this market is be purchased in the Russian Black Earth region at the curre ntly expanding in response to the shortage of cost of EUR 400 -600 per hectare.
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When the Group has achieved control over the land, The Group’s strategic objective is to secure access to Management focuses in organizing the day-to-day adequate grain storage facilities. Such facilities are operation of the farm. Soil analysis is outsourced to the essential in order to avoid the additional transaction local providers, who are part of the national program cost caused by middlemen, who buy the harvest from and Management believes their competence to be on a farmers who have no access to storage capacities. By high level. Results of the soil analysis determine the storing its grain in an elevator for 2-3 months before crop selection for specific fields and operating decisions the sale, Trigon can increase its revenues substantially. vis-à-vis fertilizing and other necessary farming Trigon is in the process of purchasing 30,000 tons of processes. The Group usually takes over the existing grain elevator capacity in the Kharkov oblast with an cereals farming operations and field equipment from existing railway link, which also eases the sales the former collective farm or joint agricultural procedure. company that used to cultivate the land previously. The Group normally keeps some of the existing field Management believes the Group to be a leading cereal equipment and adds new equipment where necessary. farmer in Kharkov oblast. One competitor of The Group can generally choose the best employees comparable scale is a subsidiary of the Latvian grain from the joint agricultural companies (see “Information processing enterprise Dobeles dzirnavnieks, with some on the Group – Organizational structure and local farmers also having same scale of operations. management model – Employees”). Management nevertheless believes the Group to have the strongest legal structure as it does not rely on short- Ability to store and dry grain enables a cereal farm to term sub-rental agreements often utilised by achieve better pricing terms for grain sold and is thus a competitors. The Group plans to establish substantial strong competitive advantage vis-à-vis the producers operations also in its other target regions, and thus with no such access. The Group is in the process of acquire more bargaining power with the gra in farming acquiring intermediate storage facilities for all of its customers. operations and an elevator near its farming operations in Kharkov oblast. The Group aims to establish control GROUP HISTORY over storage and drying facilities also in the new areas The asset management company Trigon Capital targeted for cereal farming. established Trigon Farming in May 2006, and raised seed capital funding totalling EUR 12.4 million Productivity benchmarking primarily from Finnish high net worth individuals. Trigon conducted another fund raising in October Despite rich soil and favourable climate conditions, 2006, when the same shareholders extended additional productivity has remained low over the past decade in commitments to invest in the Group. Those the cereals farms of the Black Earth region. commitments have been called up and met in the Management believes that productivity could be amount of EUR 7.1 million in February 2007 in order increased significantly by introducing Western to finance further acquisitions. Trigon Capital remains management and farming practices. a minority shareholder in the Group. The management of the Company is based in Estonia. Farmland acquired by Trigon has typically achieved productivity of three tons per hectare for wheat under The Group made its first purchase in the Gdov region the management of previous owners, which compares in Russia in June 2006, acquiring control over 840 unfavourably with the wheat productivity of 5-6 tons hectares of land via a corporate acquisition of Russian per hectare accomplished by more efficient farms Agro Investors. According to Management, an within the Black Earth Region owned by larger, additional 287 hectares of land in the proximity are vertically-integrated, diversified agricultural producers. currently in the process of acquisition. Estonian dairy The Group believes that with proper management farms in Kaiu and Kärla were acquired in August 2006 techniques the level of at least 5-6 tons per hectare via full corporate acquisitions. should be achieved in the region. Trigon expects those indicators to serve as productivity targets for its cereals In August 2006 the Group acquired 100 per cent of the farming operations in the Black Earth Region. share capital of OOO Rubezhnoje in Ukraine, which was an agricultural company operating in Kharkov Trigon’s positioning in the market /competition region. The Group furthermore established OOO Management expects that most of the grain produced Trigon Farming Kharkov and entered into negotiations on Trigon’s farms will be sold to a domestic end-user or to establish long-term (predominantly 25 years) rental a locally operating trader that may event ually export contracts for 27,452 hectares of land in the northern the produce via the Black Sea ports. The Group’s part of the Kharkov oblast in Ukraine. This land was existing and planned cereal farms are in locations with a operated by eight former collective farms (including relatively easy access to the Black Sea ports. OOO Rubezhnoje) under rental agreements with approximately 5,000 private individuals. Trigon has
43 signed letters of intent and service agreements with Estonian dairy farms in productivity. The Group has joint agricultural companies and entrepreneurs that no ownership interest in AS Trigon Baltic Farming, but operate on this land to negotiate with land owners over the Group has access to the management expertise and transferring the current rental obligation into a long- experience gathered in AS Trigon Baltic Farming term rental agreement with OOO Trigon Farming through its Advisory Agreement with Trigon Capital. Kharkov as a counterparty. OPERATIONS The Company was incorporated in Denmark in March 2007. Pursuant to the shareholders resolution of 2 April Existing operations 2007 the shareholders of the Group swapped their The Group is currently engaged in dairy farming in shares in the Estonian company Trigon Farming into Estonia, and is constructing a dairy farm in the St shares of the Company. For further details on this Petersburg region of Russia. The Group is also engaged transaction see “Information on the Group – Material in cereals farming in Ukraine, where the first crop agreements – Share Swap Agreement”. under the Group’s management will be harvested in 2007. On 12 April 2007 an agreement was signed between Trigon Farming and the Company for the transfer by As of 30 March 2007, the Group controlled a total of Trigon Farming to the Company of all the shares in the 23,095 hectares of farming land in Estonia, Russia and capital of TC Farming Russia and 90 per cent of shares Ukraine. In Estonia the land was controlled by a in the capital of TC Farming Ukraine (the remaining combination of ownership, usufruct and rental 10 per cent are owned TC Farming Russia). The share agreements. In Russia 840 hectares of land was held as a transfer was registered with the registry on 27 April freehold and the acquisition of further 287 hectares 2007. As a result, the Group’s holding companies for its with final registration certificates expected by the operations in Estonia, Ukraine and Russia are direct Management by the beginning of May 2007. By 30 subsidiaries of the Company. March 2007, the Group controlled 19,261 hectares of land in the Kharkov oblast via various arrangements. Trigon Capital provides management services to the Trigon had signed and registered 25-year rental Company under the Advisory Agreement. Under the agreements (with right of first refusal) for 3,574 terms of this Advisory Agreement, Trigon Capital hectares, while rental contracts with respect to further provides general management services, including 10,964 hectares have been signed but not registered. strategic and financial management, structuring of land The Group further controls 1,147 hectares of state- and farm acquisitions and designing financing solutions. owned and unclaimed land via 49 year rental contract Trigon Capital also provides to the Company the with the State Reserve, with no right of first refusal. services of at least three members of the Board of The granting of these lease rights is partially still in Directors, who are in the employment of Trigon process. Trigon has also signed 1-year rental agreements Capital. For further details about the Advisory (part of it sub-rental contracts) with respect to 3,576 Agreement, see “Information on the Group – hectares of land. Management believes that it is in an Organizational structure and management model – advanced stage of securing control on additional 2,101 Advisory Agreement with Trigon Capital”. hectares of farm land in Kharkov Oblast, which is the basis for sowing plan of 21,326 hectares. The aim of the Trigon Capital has experience from managing several Group nevertheless is to sign long-term rental alternative investments, including AS Trigon Baltic agreements in Ukraine with the beneficial owners of all Farming in Estonia, which Trigon Capital has managed of the land under its control and negotiation process since 2003, and which can be seen as a pilot project for for increasing land under control is in progress. the Group. AS Trigon Baltic Farming manages 2,500 Management expects land controlled by the Group hectares of farm land in north-eastern Estonia, which is under long-term rental leases or freehold in the Black primarily used for dairy farming, greenhouses and pig Earth region to increase by an additional 45,000 farming. During its investment phase, AS Trigon Baltic hectares by the end of 2007, of which one third is Farming acquired the assets of eight former collective expected to be brought into full production by the 2008 farms, introduced a new management team to them and Summer/Autumn harvest. modernised their facilities and equipment. As a result, the productivity of the acquired dairy farms increased by 45 per cent in two years, reaching 8.4 tons per milking cow by 2005. At the time of the acquisition, the performance of the farms of AS Trigon Baltic Farming ranked among the poorest quartile in Estonia, whilst since 2005/06 AS Trigon Baltic Farming has consistently ranked among the 10 best performing
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The following table summarizes the land under the Group’s control by country as at 30 March 2007:
In hectares Estonia Russia Ukraine Land in freehold 1,272 840 - Land acquisition process pending - 287 - Land under signed 25-year rental contracts with a right of first refusal - - 14,538 State owned land and unclaimed land controlled via 49 year rental - - 1,147 contract with the State Reserve, with no right of first refusal Land controlled under 1-year rental contracts and sub-rental contracts - - 3,576 Land under short-term rental contracts with an average term of 5 years, 1,331 - - without right of first refusal Land used under oral agreement with local government (approx.) 44 - - Land in usufruct 60 - - Total 2,707 1,127 19,261
Additionally, the Group’s Estonian subsidiary Kärla is The Group’s Russian dairy farming operations are currently negotiating another 281 hectares of land for located in Gdov district, Pskov oblast, 150 km use or acquisition. southeast of St Petersburg. Dobruchi 2 owns farming Dairy farming operations equipment and 840 hectares of farmland that the Group controls through its Russian subsidiary Russian Agro The Group currently owns two operational dairy farms Investments. The acquired land was previously in Estonia and has started preparatory construction operated by the Dobruchansky collective farm, and the work for a new dairy farm in the Gdov region in Group recruited necessary employees for Dobruchi Russia. Ferma from the staff of the Dobruchansky collective farm. The Group brought Estonian specialists to The Group’s two Estonian dairy farms are located in consult and assist in the establishment of operations in Kaiu in Rapla County in Central Estonia and Kärla in Dobruchi Ferma, which in addition to employment Saare County on the island of Saaremaa, respectively. contracts also holds operating agreements. The Kaiu and Kärla dairy farms use their own land to procure silage for the cows and utilize the manure Operations in Gdov district have no existing buildings produced. Kärla farm has been upgraded to take and the Group plans to construct a new dairy farm on advantage of a modern loose-housed farm (see the site. By constructing new facilities Trigon can “Information on the Group – Operations - Technical utilise modern equipment pioneered and tested at the description of operations”). The Kaiu farm operates in a Group’s Estonian farms. Trigon performed field traditional “tied up” setting, but the Group plans to preparation of cultivating 840 hectares in November- convert it into loose-housed system as well. The loose December 2006 and plans to sow forage on 1,127 system allows optimising the use of labour and hectares in May-June 2007. The Group expects to reduction of feed expense. The table below summarises complete construction of one cowshed for 540 cows key information about the Kaiu and Kärla farms as of and support facilities such as silage storage, feed storage, 30 March 2007: workshop, small office building and maternity barn by Kaiu Kärla dairy the end of 2007. The construction work is expected to dairy farm start in May 2007 and Management believes that the farm dairy farm will be operational by November 2007. Land under control, ha 1,729 978* Second cowshed for another 540 milking cows, enlargement of silage storage and shed for calves is Number of dairy animals 1,364 1,150 expected to be constructed in 2008. Number of milking cows 667 574 EU production quota for 3,598 4,930 Each dairy farm of the Group is managed by a unit 2006/07, tons manager, who reports to the regional manager. Raw milk production in 3,112 3,248 Mr. Margus Muld is the regional manager for Estonia 2006, tons and Mr. Heiki Volver is the regional manager for Gdov Number of employees 46 29 region in Russia. Both managers report to the Board of * Additionally, 281 hectares of land is currently under negotiation for use Directors. The Estonian regional manager is employed or acquisition. by Trigon Farming under an employment agreement.
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Under internal regulations, the regional managers are Cereal farming operations authorised to approve expenditures up to USD 10,000 The Group’s cereals farming operations are located in (EUR 7,488), except Mr. Muld, whose authorisation the Kharkov oblast in Ukraine, where it controlled level is EUR 10,000. Expenditure in excess of this limit 19,261 hectares of land as of 30 March 2007. The requires approval of the Board of Directors. The Group Group’s strategy is to concentrate on operating units of expects to increase these authorisation levels as the 5,000-10,000 hectares that allow recruiting better operations of the Group expands. specialists at the operating unit level.
The table below summarizes key characteristics of operational units in Kharkov region:
Operational unit Former collective farming Ha Employees Milking units managed cows Voltshanski 1 Rubezhnoje 3,047 40 - Svitanok 2,129 34 - Slobazhanskoje 2,054 20* - Voltshanski 2 Agralon 2,922 19 - Bogoduhovski 1 Izumrud 3,644 100* - Taverovka 1,544 30* - Mayak 800 24* - Bogoduhovski 2 Sverdlovskoje 5,186 224 400 Total 21,326 491 400
* Employment contracts are in the process of being concluded.
2
1 4
3
1 Voltshanski I 2 Voltshanski II 3 Bogoduhovski I 4 Bogoduhovski II
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Most of the land comprising the Group’s farming monetary transactions except the salary payment to the operations in the Kharkov oblast is rented from the employees, all other transactions are carried out by the landowners under 25-year rental contracts, which Kharkov oblast regional manager, who in turn needs an entitle the Group to a right of first refusal in case the approval for all expenditures in excess of USD 10,000 landowner decides to sell the land. Under the terms of (EUR 7,488). The Group expects to increase this the rental contracts, the Group generally pays a rent of authorisation level as the operations of the Group 1.5-2 per cent of the cadastral value of land per annum. expand. As the timing of the sale of harvested crops is The latter is estimated by Trigon to amount to UAH essential for the cash flow and profitability of cereals 105 – 220 (EUR 15.6 – 32.8) per hectare per annum on farming, the Board of Directors decides when and how average. Cadastra l value of the land is set by the State much of the produce is sold. The Group intends to put authorities of Ukraine and the Group estimates the in place internal procedures according to which value to average UAH 7,000-11,000 (EUR 1,042 – directors of the Group’s Estonian companies need 1,638) per hectare on the land it controls. approval for any expenditures above EUR 5,000 and directors of the Group’s Russian and Ukrainian In August 2006, the Group started the acquisition companies need approval for any expenditures above process of the assets of eight collective farms that USD 5,000 (EUR 3,744). formerly cultivated the land in the Kharkov oblast for which the Group is in the process of signing the rental The Group is not planning to engage in extensive dairy agreements. These assets include field equipment and farming activity in the Black Earth region in order to various facilities vital for farming activity in the focus the management resource on building strong territory of former collective farms. cereal farming operations. However, the Group acquired approximately 1,000 dairy animals (including The Group is also in the process of acquiring a grain 400 milking cows) alongside the other assets of the elevator located within close proximity to the land former collective farms in the Kharkov oblast. controlled by Trigon. This elevator has a storage Management plans to keep these cows and use them for capacity of 30,000 tons and it is linked to the Ukrainian operating a small scale dairy farming operations within railway system. An elevator enables the Group to dry one operating unit, without making any large scale part of the grain after it has been harvested and to store investments. Even though Management recognizes the it until the Group can obtain a premium price for it. potential for some synergies between dairy and cereals Prices are normally depressed during the month after farming in the same geographic location, such as the the harvest and start recovering thereafter. The Group ability to use manure for fertilizing, it does not has procured sufficient intermediate storage facilities envisage large scale investments into dairy farming in for its whole expected produce that allows the Group the Black Earth region in the near term. to store the grain for up to one week, before being transported to the elevator. Intermediate storage Technical description of operations facilities allow for higher efficiency during harvest season, as less trucks are required to organize the Trigon plans to use modern production technology and transportation of grain. farming methods in order to achieve maximum productivity and efficiency in its dairy and cereals According to Management data, as of 30 March 2006, farming operations. the Group had 491 employees in its four operating units in the Kharkov oblast, out of which 317 had Dairy farming operations signed the employment agreements or were employed The key operations of dairy farms include feed via the decree of Management. Management anticipates procurement, livestock supervision, raw milk storage reducing number of employees substantially as the and manure utilization. The Group can improve the operational efficiency increases. productivity of acquired dairy farms significantly by introducing new methods and improving efficiency in The Group envisages the Kharkov oblast regional unit all these operations. to be managed by two co-managers, one Estonian and one local manager. The operating unit managers Approximately half of the feed consumed by the currently report directly to the Kharkov oblast regional Group’s cattle is derived from silage, which requires manager Mr. Asso Mägi, who in turn reports to the dairy farms to cultivate substantial areas of forage Board of Directors. The Kharkov oblast regional crops. Due to its high moisture content, it is costly to manager is responsible for executing all procurement transport silage for more than 5-6 kilometres distance. and sales agreements while the operating unit managers Accordingly, dairy farms benefit from having nearby focus solely on the operational management of the fields where they can grow their own silage supply. farms. The operating unit managers do not conduct Silage is normally stored in special pits or towers.
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Generally, one hectare of cropland is required per one under its control. Approximately one seventh of land milking cow. The Group’s dairy farms use 80 per cent will be maintained as a set-a-side land every year under of their fields for silage production and can also utilize the field rotation principles. the whole area for manure disposal by spreading it on the fields as fertilizer. · Winter wheat. Wheat is an important human food grain and lower quality wheat is also used as a A modern cowshed is one of the main improvements livestock feed. Winter wheat is seeded in the that the Group can introduce to the dairy farms it autumn. It starts growing before the winter, and acquires. Commonly used cowsheds can be divided into lies dormant during the winter. It produces crops two types: those using a tied-up system and those with earlier than spring wheat (which is seeded in the a loose-house system. In the tied-up system, each cow spring) and can normally be harvested around the remains in its stall for most of the time which requires middle of July. Winter wheat produces more crops more labour for feeding, milking and removing and a better quality of grain than spring wheat. manure. In the loose-housed system the cows can move Management plans to grow winter wheat on freely in an open space, which allows better access to approximately two-seventh of the fields in Trigon’s tractors to deliver feed or remove manure. Management cereals farms in the Black Earth region. estimates that a typical loose-housed system requires · Barley. Barley is a major food and animal feed four milkers per 1,000 cows, compared to 20 in a tied- cereal. It is seeded in the spring and harvested in up system. The loose-housed system also enables cows August. Management plans to grow barley on to be grouped according to their productivity cycle so approximately one seventh of the fields in Trigon’s that the content of the feed can be more precisely cereals farms. customized for each group. The Group plans to utilize loose-housed systems in all of its newly built dairy · Corn. Corn is one of the major cereal grains and farms and plans also to convert some of the acquired widely grown throughout the world in temperate farms into this system. and warm climates. It has traditionally used as both human food and animal feed, and more recently as In the loose-housed system, cows are milked in a a raw material for bio ethanol production. Corn specially designed milking area. This allows using does not tolerate cold temperatures and it is seeded centralized milking parlour with shorter pipes that in the spring and harvested in October. minimizes the contamination risk. Fresh milk is Management plans to grow corn on approximately pumped into a tank where it is cooled to below 4°C one seventh of the fields in Trigon’s cereals farms. and stored for up to two days. Management plans to · Sunflower. Sunflower is a plant primarily used for invest in advanced cooling systems, which are expected food products and livestock feed. Like corn, it does to maintain the high quality of milk while minimizing not tolerate cold temperatures, and it is seeded in the bacterial contamination. A milk processing the spring and harvested in October. Management company collects the raw milk cooled down to suitable plans to use approximately one seventh of Trigon’s temperature, directly from the dairy farm with no fields in the Black Earth region for growing additional cost to the producer. sunflower.
· Other Crops. Manages envisages using one seventh Cereal farming operations of the Trigon’s fields in the Black Earth region for The growing season in the Black Earth region normally growing other crops, such as peas, soya beans, starts in second half of March and finishes in second buckwheat and rape-seed. half of October. The climate is characterised by relatively harsh winters and hot summers, which allows Winter wheat was sowed on 6,367 hectares of farmland one harvest per year. in September 2006. Management believes that the Group is entitled to the produce pursuant to the The Group plans to primarily use a seven-field crop arrangements it has made with the previous operators rotation in the Black Earth region to boost (i.e. joint agricultural companies) in the event that the productivity and achieve long-term operational Group did not have long term leases in place by efficiency. Each field is grown with different crops in a September 2006. six-year rotation and the seventh year it is kept idle to let the soil recover its fertility. The purpose of this The table below presents the Group’s sowing plan: rotation is to maximize the productivity of the field without exhausting the soil, and to minimize the use of Crop Area sowed, ha chemical fertilizers and pesticides. Pea 781 Winter wheat 6,367 The Group intends to cultivate primarily winter wheat, Barley 4,506 barley, corn, sunflower and selected local crops and has prepared a sowing plan for 21,326 hectares of farmland Sunflower 3,283
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Corn 2,526 CUSTOMERS Rape seed 163 Dairy farming customers Buck-wheat 394 The Group sells the raw milk produced in its dairy Soya 800 farms directly to milk processors. Trigon can supply Others 1,067 premium quality raw milk all year round and has Area sowed 19,887 invested in modern cooling systems. Customers of the Group usually pay an additional premium for the high Set-a-side land 1,439 nutrition content. A daily production capacity of Total 21,326 around 20 tons gives a dairy farm bargaining power with its customers, as milk processors prefer to be Land that the Group acquired may not have been supplied by larger dairy farms with a more predictable cultivated for several years and is often infested with quality and quantity of produce. Smaller dairy farms weeds. The restoration of such land for agricultural use normally sell their whole production to one processor, starts with spraying it with herbicide in the autumn. As usually within the radius of 200-300 kilometres in order soon as the weed growth has died, the land is ploughed to avoid high transport costs. Large dairy farms can before winter. It is harrowed again in early spring and have several customers at the same time, and deliver rolled after sowing. During the growth season, fertilizer raw milk to different customers on different days of the is added and the land is periodically sprayed with week. herbicides, fungicides and pesticides. The harvest in the Black Earth region usually begins in July and lasts until Estonian dairy farms usually negotiate yearly delivery late October. After the grain harvest is finished in contracts with the milk processors. These contracts October, the fields are prepared for the next year’s provide a fixed price for the raw milk delivered, sowing. supplemented by a discount or a premium for nutrition content. The Group’s Kärla farm in Saaremaa currently After the crop has been harvested, it is transported to supplies all its production to Saaremaa Liha- ja the storage facilities. Access to elevators and Piimatööstus (a major milk and dairy processor) on the warehouses is very important because the grain can be basis of an oral contract that is in force for one year at a left on the field only for a short time. Grain prices tend time, subject to an annual renegotiation. As a rule, raw to fluctuate with weather conditions and they also tend milk is a local business and milk is seldom exported. to be at their lowest during harvesting season when However, during high productivity season producers in farms without access to storage must sell their produce. Saaremaa transport milk to Latvia. The Group’s Kaiu Trigon is in the process of the acquisition of an elevator farm currently supplies its products to Eesti in the Kharkov region with a capacity of 30,000 tons Piimatootjate Ühistu in Estonia under an oral and can store several crops in different sections of the agreement. elevator. As the elevator has a railway connection, Trigon can sell its produce directly from the elevator Several milk processors in the St Petersburg region often without any additional transport cost, depending have already expressed their interest in purchasing milk on the sales method. from the Group, even though the construction of the dairy farm in the Gdov region is only just starting. Introducing modern equipment and machinery can Trigon has had preliminary discussions with Russian substantially improve productivity of cereal farming. milk processors planning new processing capacity in Management estimates that a minimum set of the region, but has not yet entered into any supply machinery required for a 5,000-10,000 hectare field unit contracts. The shortage of raw milk in the St includes five to ten harvesters, three to six seeding Petersburg region gives new dairy farms coming to the machines, three to five large tractors and three to five market a significant bargaining power and Management smaller tractors. Trucks are predominantly used during has chosen to delay entry into a contract in order to the harvest; typically two 20-ton trucks accompany one leverage that bargaining power. harveste r. The Group usually prefers to either buy new domestic equipment or lease second-hand imported machinery. Cereal farming customers Potential customers in the cereals farming can be Unlike in many other countries, it is legal in Ukraine divided into four categories: middlemen, grain traders, to use airplanes for fertilizing fields. The Group plans vertically integrated agricultural holdings and mills. to use this opportunity during wet weather conditions Cereals farms can sell their produce either to traders or and hire subcontractors to fertilize its fields from the directly to the mills. Grain is normally supplied either air. The latter is cheaper and faster than fertilizing from EXW farm or DDU elevator. Selling to the end- ground vehicles, especially during wet weather customer is always the preferred option as it gives conditions. producer a better price for the produce. Traders vary in size: small traders acquire grain straight from the field
49 for the lowest price (they usually target small farmers the total animal feed needed. Dairy farm equipment is who have limited financial resources and no cleaning widely available from a number of international and drying facilities). Medium-sized and large local and suppliers that are also represented in Russia. international traders purchase the produce either from the elevator or at the port. Cereal farming requires the supply of seed, fertilizers, pesticides, and fungicides every season, which are all Trigon can dry and clean the grain and store it until the global commodities and can be purchased locally. market price of the grain is higher. This puts the Group Machinery spare parts and maintenance are also in a significantly better competitive position than farms available locally or can be import ed at a short notice. that must sell their produce directly from the field. When necessary, service of modern equipment will be Because of the railway connection at its elevator, the outsourced to equipment dealers, who are all available Group can sell grain directly from the elevator at FOR locally. (free on rail) terms for direct delivery to ports for export. Farms with these facilities normally conclude a ACCESS TO GOVERNMENT SUBSIDIES supply contract with the buyer for a fixed quantity. As grain is a globally traded commodity, the sale price is The Estonian operations of the Group receive three normally determined with reference to the current main types of farming subsidies from the European world market price. Union: (i) area-related subsidies that are awarded on the basis of the land under cultivation in a given year; (ii) Management plans to sell the Group’s grain produce to quota-linked subsidies that are paid on the basis of the customers who pay the highest price. If the Group can amount of milk produced; and (iii) subsidy relating to achieve a higher price by selling directly to the mills manure storage facilities that is awarded depending on (net of additional costs incurred), Trigon may choose to the number of animals farmed. contract the transportation itself and deliver directly to the end-customer’s facility. Alternatively, Management In both Russia and Ukraine, the authorities provide is considering co-operating with local traders like financial support for purchases of agricultural inputs Kernel Trade, Real, Nadia, Sinton in Kharkov oblast such as fertilizers and pesticides. In addition, the and East-West Grain Company, Agro-Star, Gwentel Russian National Project for Development of Trading, Calipso, Slavjanka and others in Russia. It can Agriculture offers investment incentives and loans at also sell to international traders, such as Luis Dreyfus, subsidised interest rates. The Group has applied for Toepfer, Soufflet, Cargill, Bunge, Nidera, who operate USD 4 million interest free loan and has received a in the region and at the closest ports. confirmation for that amount from the Pskov oblast local government. An interest free loan will most likely be granted by RosSelhozBank. SUPPLIERS Dairy farming requires supplies of livestock, feed, ORGANIZATIONAL STRUC TURE AND equipment and machinery. Livestock procurement is MANAGEMENT MODEL not difficult in Estonia, as the Group can import cows from any EU Member State. Russia has certain Organizational Structure restrictions for livestock imports, but Management A three-person (at minimum) Board of Directors, does not believe that these restrictions will complicate assigned by Trigon Capital according to the Advisory the Group’s planned dairy farming operations in the Agreement, leads the Group’s operations. Board of Gdov region. Directors is in charge of budgeting and trading (centralized sales and purchases) related decisions and Trigon plans to grow all necessary silage and hay on the has delegated daily operational decisions to regional fields adjacent to the dairy farms that makes up half of managers in each country of operations.
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The operating structure of the Group is presented below:
Board of Directors Kaupo Ojavee (CEO)* Ülo Adamson*, Tõnis Leetjõe*
Group HR Group Financial Management, Accounting and Control Virge Aasa * Mare Eltermann*(x), Ilona Valge*, Group Legal KadriLepp *
Kerttu-Kaarina Tombak *(x)
EST: Members of Management Board UKR: Members of Management Board RUS: Members of Management Board
Manager of EST Farms: Margus Muld* Manager of UKR Farms: Asso M ägi *+ Manager of RUS Farms: Heiki Volver*+ Chief Accountant, Accountant
Legal Financial Management, Accounting and Control
Kärla farm Kaiu farm Compliance Officer Ukranian Financial Manager, Chief Accountant, Accountants (2)
Manager: Ülar Tänak* Manager: Lenno Link* HR Specialists Accounant (1)* Accounants (2)* Personnel Specialist Chief Agronomist, Chief Engineer, Chief Animal Husbandry Specialist
Voltshanski I Voltshanski II Bogoduhovski I Bogoduhovski II
Unit Manager Unit Manager Unit Manager Unit Manager Unit Agronomist Unit Agronomist Unit Agronomist Unit Agronomist Unit Engineer Unit Engineer Unit Engineer Unit Engineer
Rubezhnoje Svitanok Slobozanskoje Agrolon Ismurud Taverovka Majak Sverdlovskoje farm farm farm farm farm farm farm farm
Accountants (3+1+1) Accountants (1) Accountants (1+1+1) Accountants (3) Economists (1+1+0) Economists (2) Personnel Specialists (0+1+1) Personnel Specialists (1)
* Estonian (x) Currently position filled by Trigon Capital employee + To be appointed as soon as his labour permit is granted
appointed a regional manager per country, which is the Management Model case of dairy farms in Estonia and Russia, or regional Mr. Ojavee is the Chief Executive Officer and member manager in charge of a region, characteristic to of the Board of Directors and functionally responsible operations in Ukraine. The Group plans to introduce a for the dairy farming and grain farming operations of local regional co-managers in the regions of Ukraine the Group. He is authorized to approving invoices and Russia. exceeding USD 10,000 (EUR 7,488) in regard to Ukraine and Russia and EUR 10,000 in regard to · Estonia has one regional manager, Mr. Margus Estonia, which are above the decision authority of Muld, who is responsible for operational regional managers. Mr. Leetjõe is in charge of production, sales and purchase activities in Estonia. development and all raw material supplies as well as Mr. Muld co-ordinates the activities of two unit grain trading and produce sales related decisions in managers, each of them in charge of the respective cereal farming. Mr. Adamson is responsible for farm unit (i.e. Kaiu and Kärla). 29 employees are financial structuring and management reporting. employed in Kärla farm and 46 respectively in Kaiu Centralized accounting and finance, human resources as of 30 March 2007. and legal functions serve directly under the Board of Directors. Board of Directors needs to consult the · Ukrainian operations have been organized based on Supervisory Board for any investments in excess of geographical representation of operations. Due to EUR 150,000, unless it has previously been accepted by the fact that Trigon’s Ukrainian operations are the Supervisory Board in the investment plan. currently in Kharkov oblast, there is only one regional unit in the country. Mr. Asso Mägi leads Currently Trigon has divided its operations based on the regional unit and the Group expects to hire a three regions of operations – Estonia (Kaiu and Kärla local co-manager once a suitable candidate is found. dairy farms), Kharkov region in Ukraine (four cereals Mr. Mägi is in charge of operational decisions farms) and St Petersburg region in Russia (Gdov, Pskov regarding production, sales and purchases. The unit oblast dairy farm). Depending on the number of farms also includes chief accountant and chief legal officer. or regions and the capacity of operations, Trigon has
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· Land in Kharkov oblast is divided into operating family is regarded as a leading private investment units of approximately 5,000-10,000 hectares, each family in Finland. Mr. Laine holds a B.Sc. (Econ.) with its local unit manager (currently there are 4 degree from the Helsinki School of Economics. unit managers). Chief agronomist and Chief Engineer serve presently all four units, guiding unit Mr. Erkki Myllärniemi. Mr. Erkki Myllärniemi, born specialists in their operations. In case the cereal in 1949, is Member of the Supervisory Board of the farming operations are initiated in another Company. He also holds the position of the main Ukrainian region or oblast, another regional unit is partner and the Managing Director of Umo Capital Ltd established and a similar organizational system is since 1988. Mr. Myllärniemi is also the Managing organized. According to Management, 491 Director and a M ember of the Board in Ulkomarkkinat employees work on the farms currently, but the Ltd, a subsidiary of Umo Capital Ltd., the Chairman of number is expected to decrease in line with the Board in Bevesys Ltd, Mainospyörä Ltd, Thomeko advances in productivity. Ltd, a Member of the Board in Moving Media Nordic and Member of the Board in Amanda Capital group. · Russian operations are presently limited to Gdov Mr. Myllärniemi is a significant private investor in farm in Pskov oblast. Mr. Heiki Volver is the Gdov Finland. regional manager and the Group plans to hire a local co-manager once the operations of the farm Mr. Sakari Kivisaari. Mr. Sakari Kivisaari, born in commence. In case operations in another farm are 1949, is the executive vice president and CFO of initiated in St Petersburg region, a separate Thominvest Oy, a leading private investment group in operating unit is established. In case farm units Finland. During his more than 20 years with the group reach the size of Ukrainian operations, a matrix Mr. Kivisaari has been instrumental in a multitude of organization system will be developed. At the end business, financing and investment transactions. He is a of financial year 2006 Dobruchi-Ferma had 10 board member and chairman in a number of associated employees. Currently 12 employees are employed companies in a various business fields and supervisory in Gdov farm and the number will increase after board member in Ilkka Oyj, a publicly traded the construction process is finished. company. Before joining Thominvest company Mr. Kivisaari worked as cash manager at Outokumpu Oyj Supervisory Board (listed company) for six years and before that he Mr. Joakim Helenius. Mr. Joakim Helenius, born in worked for six years in the head office of Bank of 1961, has been the Chairman of Trigon Capital since Helsinki in various managerial positions in domestic 1992 and the Chairman of the Supervisory Board of the and foreign departments. Mr. Kivisaari holds a B.Sc. Company since 2007. Before joining the firm he was an (Econ.) degree in Finance and Business Administration Executive Director and Member of the Board of Merrill from Helsinki School of Economics. Lynch International Bank since 1989, Vice President of fixed income division in Goldman Sachs International Mr. Pekka Samuelsson. Mr. Pekka Samuelsson, born Limited in 1987-1989 and in 1981-1984, and Senior in 1971, is a partner in Hermitage & Co Oy since 2003. Manager of capital markets in Kansallis Banking Group He is a board member of companies in the Hermitage in 1984-1986. Mr. Helenius has been a Supervisory group as well as in Bon Life Oy, the leading life Board Member of Baltic Republics Fund, Viisnurk, insurance multi agent in Finland and 24 Online Oy. Baltika, EMV, FKSM, Estonian Savings Bank, Mr. Samuelsson has worked for Conventum Corporate Hansapank, Reval Hotelligrupi AS, Koger & Sumberg, Finance Limited 1997-2002, as associate director and a Gutta, Olainfarm, Sylvester and Sanitas. Mr. Helenius director. In 1993-1997 Samuelsson was an equity analyst has a B. A. and M. A. in Economics with honors (cum for Protos Stockbrokers Ltd. Mr. Samuelsson holds a laude) from Cambridge University. Master of Science (Finance) degree from the Helsinki School of Economics and Business Administration. Mr. Pertti Laine. Mr. Pertti Laine, born in 1941, holds several positions of trust in different companies in Finland. Mr. Laine is the Chairman of the Board of Management and other key employees Veikko Laine Ltd, Länsiauto Ltd, United Bankers Ltd and a former Chairman of Finnlines Plc. In addition, Management Mr. Laine is a Member of the Board of Evox Rifa Mr. Kaupo Ojavee. Mr. Kaupo Ojavee, born in 1968, Group Plc and Amanda Capital Plc. Mr. Laine is the is the CEO and Member of the Board of Directors of controlling shareholder of Veikko Laine Ltd, a family the Company. He is the Head of the Dairy Division owned fruit and vegetable wholesaler established in and also responsible for general management of Trigon 1965, holding a leading position in its sector in Finland. Farming Agricultural Investments. Prior to the current During its 40 years of operation Veikko Laine Ltd has position, he was a Chairman of the Board of Trigon actively invested the capital generated through Baltic Farming. He worked as a Project Manager in wholesale business in various investment ventures DeLaval AS until 2004, and as a System Manager in throughout Scandinavia and Eastern Europe. The Laine DeLaval International AB in Sweden until 2002. In
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1996-1999, he worked for Alfa Laval Agri AS, where he Mr. Heiki Volver. Mr. Heiki Volver, born in 1968, is held the position of a Sales Manager and a Product the Gdov Regional Manager in Russia. Before joining Manager for farming equipment. Mr. Ojavee graduated the Group, he worked for Offmar OÜ since 2005, cum laude in 1994 from Estonian University of Life where he held the position of a Development Director. Sciences, where he specialized in Livestock -raising. His He was a Chairman of the Board of Hummuli Agro complimentary education includes Economics and since 2001, and a Chairman of the Board of H.V. Finance in West New Zealand Business School in Metsatöö OÜ since 1999. Mr. Volver is currently Denmark, and several training courses in Sales, studying in the Economics Department of the Estonian Marketing, Product Management, and Project University of Life Sciences. His complimentary Management. education includes training courses in Project Management and Agricultural Accounting. Mr. Ülo Adamson. Mr. Ülo Adamson, born in 1978, is Member of the Board of Directors of the Company, Mr. Margus Muld. Mr. Margus Muld, born in 1975, is being in charge of financial structuring and reporting. the Regional Manager in Estonia. Before joining the Mr. Adamson is also Chairman of the Management Group in 2006, he was a Managing Director of Nigula Board and Chief Operating Officer in Trigon Capital. Piim OÜ. He also worked as a Stock-Raising Manager Mr. Adamson joined Trigon Capital in 1999 and runs and a Veterinarian in Rever OÜ until 2003, and as a the Alternative Investments division of Trigon Capital Veterinarian and a Farm Manager in Vigala Latte OÜ since 2003. Mr. Adamson is also Member of the Board until 2002. In 1999-2001, he was a veterinarian in of Trigon Baltic Farming and Member of the Haapsalu Animal Clinic. Mr. Muld graduated in 2001 Supervisory Board of AS Viisnurk and Quadro Media from Estonian University of Life Sciences, where he Sp. Z.o.o. Mr. Adamson has a MSc degree in Finance specialized in Veterinary Medicine. and Business Administration from Stockholm School of Economics from 1999. Executive compensation Mr. Tõnis Leetjõe. Mr. Tõnis Leetjõe, born in 1975, is According to the Advisory Agreement the Company Member of the Board of Directors of the Company. He does not pay any compensation or bonuses to is also in charge of all raw material, as well as representatives of Trigon Capital acting as members of production trading related to cereal farming. Prior to the Board of Directors, i.e. Mr. Tõnis Leetjõe, Mr. Ülo the current position, he was a Managing Director of Adamson and Mr. Kaupo Ojavee. However, the Agri unit in Kesko Agro Eesti AS since 2003, and a Company shall reimburse or cause its relevant subsidiary Managing Director and a member of the Board of Järva to reimburse to such representatives of Trigon Capital PM OÜ since 2001. In 1998-2000, he was a member of their out-of-pocket expenses relating to the provision of the Board of MMT-Agro OÜ. He held the position of a services (such as travel, transportation and Marketing Manager in Aico -Agro AS until 1999, and in accommodation costs). Mr. Leetjõe, Mr. Adamson and Albina Auto in the United States until 1997. He was Mr. Ojavee will receive their remuneration from Trigon also a President of Taurus US in 1998-1999, and a Capital who may also grant them the right to acquire member of Koeru Commune Council until 2003. He is shares in the Company from Trigon Capital. a Chairman of the Board of Eesti Viljasalv AS, a member of the Board of E-Farmer since its founding, Mr. Ojavee and Mr. Leetjõe expect to spend 100 per cent and a member of EJS (Estonian Hunting Association) of their working time on their duties as members of the since 1993. Mr. Leetjõe graduated in 1999 from Board of Directors, whereas Mr. Adamson expects to Estonian University of Life Sciences, where he spend about 50 per cent of his working time on his duties specialized in Livestock-raising. His complimentary as a member of the Board of Directors. education includes different management training. Following the Completed Offer, all members of the Supervisory Board, except for Mr. Joakim Helenius who Other Key Executives is appointed by Trigon Capital pursuant to the Advisory Mr. Asso Mägi. Mr. Asso Mägi, born in 1971, is the Agreement, shall receive EUR 10,000 per annum in Kharkov Regional Manager in Ukraine. Before joining compensation for serving as a member of the the Group, he was a Managing Director of Supervisory Board. Puidukaubandus OÜ since 2004. He worked as a Marketing Manager in Stimorol Latvia SIA since 2001, There are no direct share-based incentive programs with and as a Managing Director in A-Klaasiekspert OÜ the Board of Directors or Management however, as since 1999. In 1996-1998, he worked for a large described above, Mr. Leetjõe, Mr. Adamson and Mr. privately owned dairy farm in Denmark, where he held Ojavee will receive their remuneration from Trigon the position of a Managing Director. Mr. Mägi Capital who may grant them the right to acquire shares graduated in 1998 from Estonian University of Life of the Company from Trigon Capital. Sciences, where he specialized in Livestock-raising.
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Legal issues Estonia Russia Ukraine Number of employees on Save as disclosed above, no member of the Board of permanent contract 75 12 325 Directors and/or management: Number of employees on 3- - - - · has been convicted in relation to fraudulent month temporary contract offences during the last five years; or Total 75 12 325
· has any unspent convictions in relation to Management estimates the key for efficient operations indictable offences; or to be in hiring qualified regional managers and adding a · is, or has been within the last five year, bankrupt or local co-manager to support the operations. As a rule, the subject of an individual voluntary arrangement, regional managers are expected to be educated or has had a receiver appointed to any asset of such professionals and have a strong agricultural background member; or and extensive sector specific experience from the Baltic States combined with understanding of financing. This · is, or has been within the last five years, a member is to mitigate the risk of mismanagement of farms as of the board of directors of any company which, managerial know -how is one of the main hindrances of while he was a member of the board of directors or productivity in Russia and Ukraine. within twelve months after he ceased to be a member of the board of directors, had a receiver The Group believes that finding well-qualified farming appointed or went into compulsory liquidation, specialists (e.g. agronomists, animal husbandry creditors voluntary liquidation, administration or specialists) is not difficult in the regions of operations company voluntary arrangement, or made any in Ukraine and Russia. Specialists in rural areas have composition or arrangement with its creditors years of sector experience as well as local know-how. generally or with any class of its creditors; or The main benefits offered by the Group comprise of · is, or has been within the last five years, a partner of competitive salary as well as an opportunity to work any partnership which while he was a partner or using modern technology and farming methods. within twelve months after he ceased to be a partner, went into compulsory liquidation, The Group takes over the employees of joint administra tion or partnership voluntary agricultural companies in the Kharkov region under arrangement, or had a receiver appointed to any temporary three month employment contracts, when partnership asset; or possible. The Group uses the three-month period to decide how many employees are needed and to select · has had any public criticism by any statutory or the best employees who may be offered more regulatory authorities (including designated permanent employment. The Group has currently 12 professional bodies); or employees in the Gdov Region and Management · has been disqualified by a court from acting as a projects that its total payroll will be 40 employees by member of the board of directors of any company 2008, which will make the Group the biggest or from acting in the management or conduct of agricultural sector employer in the Gdov region. the affairs of any company; or According to Management, unskilled labor force in Russia and Ukraine is easily available, though in · is involved in any on-going procedures regarding Estonia, scarcity of suitable labor force is an issue. any of the abovementioned procedures.
There are no loans made or guarantees granted or Advisory Agreement with Trigon Capital provided by the Company to or from the benefit of Pursuant to the Advisory Agreement, Trigon Capital is any member of the Board of Directors. No member of the Board of Directors is or has been interested in any the exclusive provider of strategic management services and general management services to the Company, transaction which is or was unusual in its nature or including strategic and financial management, conditions or signification to the business of the structuring of land and farm acquisitions and designing Company and which was effected by the Company and financing solutions. Among the specific services remains in any respect outstanding or unperformed. provided by Trigon Capital are, (i) identify, source, No member of the Board of Directors or his/her evaluate, structure, negotiate and recommend family member has a related financial product investment opportunities and prepare investment referenced to the shares in the Company. proposals on investment opportunities falling within the investment strategy of the Company; (ii) identify, Employees source, evaluate, structure, negotiate and recommend The Group currently employs the total of 412 divestment opportunities and prepare divestment employees with the following geographical breakdown: proposals; (iii) engage external service providers such as lawyers and tax advisors to evaluate investment and divestment opportunities and to provide other related
54 services at the Company’s expense; (iv) use its calendar quarter 3, 2012 and until the termination of reasonable commercial efforts to participate in the the agreement, 0.3875% of the fee base as of the first growth of companies acquired for investment purposes day of such quarter. of the Company including, where it deems appropriate, participating in and advising on the appointment of The fee base computation and the actual advisory fee members to the board of directors or supervisory board computation shall be reviewed by the Company's or a similar organ of those companies or a holding auditor on a quarterly basis at the beginning of each company thereof, or by otherwise co-operating with specific calendar quarter. Fee base means, at any point the management of companies acquired for investment of time and as reasonably determined by Trigon purposes to the extent deemed reasonable by Trigon Capital, the higher of: (i) total contributions to the Capital; (v) monitor the investments of the Company; equity of the Company by its shareholders (whether (vi) arrange the engagement of auditors and book- through subscription of Shares and whether such keeping services for and at the expense of the subscription is paid for in cash or through a Company; (vii) prepare certain reports as set forth in contribution in kind and including any premium paid the agreement and (viii) assist in borrowing such for Shares), and for these purposes the Shares amounts as the Company may deem appropriate. subscribed in connection with the share swap (see Trigon Capital may use sub-advisors and other service “Information on the Group – Material Agreements – Share providers in providing these services to the Company. Swap Agreement”) shall be deemed to comprise a contribution in the equity of the Company in the The agreement limits the Company’s activities by amount of EUR 19 450 431,45; and (ii) the total value requiring prior consultation between the Trigon of consolidated assets of the Company excluding cash Capital, the Board of Directors and the supervisory and cash equivalents valued at cost (i.e. disregarding board prior to, (i) the Board of Directors causing the any depreciation or increase in the value of such assets). Company to directly or indirectly make any investment or to realise any investments in excess of In addition to the advisory fee, Trigon Capital has EUR 150,000, unless previously accepted by the received Warrants to purchase 14,906,516 Shares, which supervisory board in the investment plan; (ii) defining equals to 25 per cent of the aggregate number of Shares or redefining the investment strategies of the Company outstanding immediately after the Completed Offer. from time to time or setting more detailed policies or The number of Warrants will be subject to an restrictions, and (iii) borrowings in a Company or a adjustment in the event of a share split or bonus issue company through which the Company has made or in the Company. holds its long-term investments, for the purposes of leveraging the investment activities of such companies Under the terms and conditions of the Warrants and which are in excess of EUR 150,000. included in the Company’s Articles of Association, all Warrants are issued gratis, in consideration of Trigon Under the Advisory Agreement Trigon Capital is Capital entering into the Advisory Agreement. The entitled to appoint its representatives as members of the Warrants entitle their holder to subscribe for new Board of Directors of the Company and as general Shares in six tranches. Each of the 2,453,258 Warrants manager. Trigon Capital is to ensure that at least three in the first tranche entitles to subscribe for one Share at of its representatives are available for such appointment a subscription price of EUR 1.24 per Share and can be and may instruct such representatives to cause the same exercised at any time between 30 April and 31 May or other representatives of Trigon Capital to be 2010. The second tranche of also 2,453,257 Warrants appointed as members of the board of directors (or can be exercised at any time between 30 April and 31 similar bodies) in holding companies. May 2011, and each Warrant in this tranche entitles to subscribe for one Share at a subscription price of EUR In exchange for the advisory services, the Company 1.31 per Share. Any warrants not exercised in either the will pay Trigon Capital an advisory fee: (i) with respect first or second tranche will be null and void, and to each quarter (or part of a quarter) after the date of cannot be exercised in the later tranches. the Completed Offer in 2007 and until and including calendar quarter 2, 2009 (25 months and part of May The Warrants in the first and second tranches are 2007), 0.5% of the fee base as of the first day of such summarised in the following table: quarter; (ii) with respect to each quarter after and including calendar quarter 3, 2009 and until and Subscription Exercise Number of Tranche Price including calendar quarter 2, 2010 (12 months), Period Warrants 0.4625% of the fee base as of the first day of such (EUR) quarter; (iii) with respect to each qu arter after and 30 April – including calendar quarter 3, 2010 and until and Tranche 1 2,453,258 1.24 31 May 2010 including calendar quarter 2, 2011 (12 months), 0.425% 30 April – of the fee base as of the first day of such quarter; and Tranche 2 2,453,257 1.31 (iv) with respect to each quarter after and including 31 May 2011
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on 20 trading days since the beginning of the exercise Under the terms and conditions of the Warrants, the period. Warrants in the third, fourth, fifth and sixth tranches entitle their holder to subscribe a further 10,000,000 The parties acknowledge and agree that the Company Shares divided equally between these four tranches, for shall bear, and as appropriate, reimburse, all costs, a subscription price equal to the Offer Price per Share. expenses, liabilities and fees relating to its The fourth, fifth and sixth tranche also includes any administration, business and operation, including, all Warrants that the warrantholder has been unable to out-of-pocket costs and expenses of identifying, exercise in any of the earlier of the third, fourth or fifth evaluating, negotiating, making, holding, monitoring tranche. and disposing of investments (including the fees of experts or advisers engaged, introduction, valuers’ and The third and fourth tranches of Warrants can be similar fees and expenses relating to investments or exercised during the six-month periods between disposals which are not consummated). The Company 30 April and 31 October in 2010 and 2011, respectively, shall not reimburse Trigon Capital for any overhead and both the fifth and sixth tranches can be exercised expenses and the Company and the holding companies between 30 April and 31 October 2012. However, shall not pay any compensation or bonuses to Trigon Warrants in the third, fourth, fifth and sixth tranches Capital’s representatives acting as general manager, can be exercised only when the sum of the Share price members of the Board of Directors, the supervisory (as a weighted average) and the total return on the board or any board of directors or similar organ of a investment of the shareholders of the Company since holding company. the Placing (divided by the total number of Shares) has exceeded the specified threshold for 20 trading days The parties stipulated that any amendment to or during the exercise period. The threshold for the third assignment of the agreement requires prior consultation tranche is 152 per cent of the Offer Price, 175 per cent with the Board of Directors and the supervisory board. for the fourth tranche, 201 per cent of the fifth tranche If any amendment to the Advisory Agreement would and 249 per cent for the fourth tranche. increase the fees payable by the Company to the Advisor such consultation shall not be required but The Warrants in the third, fourth, fifth and sixth instead the Board of Directors shall not cause the tranches are summarised in table A below. Company to agree to such amendments to the Advisory Agreement unless such amendments have In addition, any Warrants outstanding can be exercised been approved at a shareholders meeting where at least at any time within six months of the Board of two-thirds of all votes represented have been given in Directors of the Company becoming aware of an favor of such approval. impending mandatory bid for all the Shares in the Company. In this eventuality, the subscription price Trigon Capital will cooperate with the Company to for any Warrants in the first and second tranche will be prepare and send to the Board of Directors and the equal to EUR 1.04 per Share added with 6 per cent supervisory board, annual accounts together with annual compounded interest from 30 April 2007, and annual reports within three months after expiry of the the subscription price for any Warrants in the third, financial year, and three quarterly reports on the fourth, fifth and sixth tranches will be equal to the investment activities and results of the Company offer price determined as part of the of the Completed within two months from the end of calendar quarters Offer (“Offer Price”). However, in this eventuality, any ending at the end of each March, June and September, Warrants in the third, fourth, fifth and sixth tranches such quarterly reports to include an update on the can be exercised only if the Share price (as a weighted business developments of the Company and its average) ha s exceeded the Offer Price added with 15 per investments. cent annual compounded interest since 30 April 2007
Table A:
Number of Subscription price as Threshold as % of Tranche Exercise Period Warrants % of Offer Price Offer Price
Tranche 3 30 April – 31 October 2010 2,500,000 100% 152%
Tranche 4 30 April – 31 October 2011 2,500,000 100% 175%
Tranche 5 30 April – 31 October 2012 2,500,000 100% 201%
Tranche 6 30 April – 31 October 2012 2,500,000 100% 249%
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The Company agreed to indemnify and hold harmless tend to be detrimental to the Company's business Trigon Capital, its associates, officers, directors, interests; (iii) if the controlling interest of Trigon partners, shareholders, agents, advisers and employees Capital is transferred to a third party; or if more than against any damages, losses, costs, claims or expenses, five per cent of the voting shares of Trigon Capital are including any damages, losses, costs, claims or expenses acquired, directly or indirectly, by competitors of the relating to the disposal of an investment, arising out of Company; (iv) if Trigon Capital engages in improper or relating to the services provided by Trigon Capital conduct; or (v) if Trigon Capital otherwise becomes except where any such damage, loss, cost, claim or incapable or unable to provide the services under the expense results from the improper conduct of the agreement or if any other justifiable reason for indemnified parties. The indemnification obligation of immediate termination exists under the law governing the Company shall survive the termination of the the agreement. Trigon Capital may unilaterally agreement with respect to any matter occurred or terminate the agreement at any time with six months action taken prior to such termination. prior written notice to the Company.
The services to be provided by Trigon Capital to the In the event that the agreement is terminated (i) by the Company are not to be deemed exclusive and Trigon Company for any reason other than those referred to Capital is free to render similar services to thi rd parties, above or (ii) by Trigon Capital due to inability to elect provided that its ability to provide the services is not and/or replace the members of the Board of Directors materially adversely affected, and to retain for its own (within 30 days of its request for an election or re- use and benefit fees or other monies payable received election), Trigon Capital shall be entitled to a from such services to third parties. During the term of termination fee equalling three times the last quarterly the agreement the Company shall not engage any other advisor’s fee paid before the termination in addition to person or entity to provide services to the Company in advisor’s fees accrued until the date of termination. relation to its investments except where such services are recommended or approved by Trigon Capital. The Advisory Agreement and any legal disputes arising Trigon Capital shall promptly consult with the out of or relating to it is governed by the laws of supervisory board in any situations where its interests Denmark. conflict with those of the Company. The supervisory board may express its opinion on any actual or Founded in 1994, Trigon Capital is an independent potential conflict of interest brought to its attention by asset management company headquartered in Tallinn, Trigon Capital. No nominated director may directly or Estonia. Trigon Capital has over EUR 750 million in indirectly be involved in any activity, including assets under its management. Trigon Capital’s activities that are part of Trigon Capital’s activities, alternative investment unit focuses on areas such as which compete with the Company and the activities of information technologies, real estate and commercial the Company, unless such activities as are related to AS agriculture. Trigon Baltic Farming.
SHARE CAPITAL AND OWNERSHIP OF The Company may terminate the agreement without SHARES cause only by shareholder resolution by at least a 50 per cent shareholder vote and with six months prior The Company was incorporated under Danish written notice to Trigon Capital of its intent to Companies Act (aktieselskabaloven) on 11 December terminate. For the purposes of termination by the 2006 under the name “KR 471 a/s” with registered Company without cause, the references to the specified number CVR No. 29801843. The Company is majorities of votes and shares of the Company shall be organised with lim ited liability under the laws of deemed to refer to all Shares and votes except for the Denmark. Shares held by Trigon Capital. Alternatively, the Company shall have the right to terminate the The Company has issued a total of 59,627,479 Shares. Advisory Agreement immediately for cause, without Following the Completed Offer the Company is prejudice to any other rights exercisable for damages expected to have at least 100 shareholders. The accrued or any subsequent claims for damage or other following table lists the shareholders expected to hold relief, by written notice to Trigon Capital if, (i) Trigon more than 5 per cent of the Shares in the Company Capital becomes insolvent, is adjudged bankrupt or immediately following the Completed Offer: becomes the subject of dissolution, liquidation or bankruptcy proceedings, whether voluntarily or Name Number of % involuntarily, or if Trigon Capital applies for judicial Shares or extra -judicial settlement with its creditors, makes an Trigon Capital 8,667,074 14.54 assignment for the benefit of creditors, or otherwise Invesco 7,731,000 12.97 discontinues business; (ii) if there occurs any major Veikko Laine Oy 6,245,448 10.47 change in Trigon Capital's control, management, FIM Fonder 4,584,000 7.69 judicial structure or financial position, which would Carmignac 4,000,000 6.71
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Thomcapital Oy 3,520,968 5.90 information about issuers and financial instruments Henderson Global Investors Ltd 3,200,000 5.37 issued, such as redemption date and interest period of a Others 21,678,989 36.35 bond or the face value of a share. The VPC assigns ISIN Total 59,627,479 100.00 codes to every Swedish financial instrument. The VPC The Shares will be admitted to trading as dematerialised administers, on behalf of the issuer, inter alia dividends. securities and are registered with both the depository The payment system contains such information as the and clearing organisation VP Services in Denmark and payment date and the amount of dividend to be paid. the VPC in Sweden. The shareholders registry is Payments to individual investors are stored in the payment system. The VPC informs account holders managed by the VP Services. whenever there are changes to their VPC accounts. A notification by the VPC is not a legal document but The Supervisory Board members Mr. Joakim Helenius, simply information that there has been a change to the Mr. Pertti Laine and Mr. Erkki Myllärniemi hold VPC account. indirectly Shares in the Company.
To the Company’s knowledge, it is not directly or SHARES indirectly owned or controlled by any other Each share has a par value of EUR 1. The Shares are companies, any foreign government or any other freely negotiable instruments and the free natural or legal persons, severally or jointly. There are transferability of the Shares has not been restricted in no arrangements known to the Company which, at a the Company’s Articles of Association. subsequent date, may result in a change in control of the Company. All Shares rank pari passu with each other in relation to right to receive dividend or other distribution of profits VPC – the Swedish Central Securities Depository or assets from the Company. Each Share entitles its holder to cast one vote in the Meeting of Shareholders VPC is the the Swedish Central Securities Depository of the Company. and a part of the NCSD group, the Nordic Central Securities Depository, to which all major actors on the The Company has agreed not to issue or sell Shares or Nordic capital markets are directly or indirectly securities convertible into Shares for 12 months affiliated. NSCD is responsible for providing services to subsequent to signing the Placing Agreement without issuers, intermediaries and investors, as regards the the prior written consent of Skandinaviska Enskilda issuance and administration of financial instruments, as Banken AB (publ), London branch. Trigon Capital has well as clearing and settlement of trades on these agreed not to issue or sell shares of the Company or markets. VPC is owned by Swedish banks and securities convertible into shares of the Company for securities companies Currently the VPC have over 36 months subsequent to signing the Placing 1,100 affiliated users and some 50 affiliated banks and Agreement without the prior written consent of securities companies. The VPC operates under the Skandinaviska Enskilda Banken AB (publ ), London supervision of the Swedish Financial Supervisory branch, except for Shares subscribed for by Trigon Authority and is authorised as a central securities Capital in the Completed Offer in excess of 1,600,000 deposititory and clearinghouse. Securities registered in Shares. Each of the shareholders who held Shares prior the VPC register are dematerialised and all rights to the Completed Offer (other than Trigon Capital) has pertaining to the securities derive solely from agreed not to sell Shares or securities convertible into registration on the VPC Acounts in the VPC register. Shares for 6 months subsequent to signing the Placing Agreement without the prior written consent of The VPC maintains a central register of basic Skandinaviska Enskilda Banken AB (publ), London information and transactions that are registered in the branch. VPC accounts. The VPC System is a real-time system and consists of a number of sub-systems with their own functions. The VPC’s account maintenance system MATERIAL AGREEMENTS comprises basic information about the account holders Due to the nature of the Group’s business, the and the VPC accounts. Changes to a VPC account can contractual relationships created in its ordinary course only be made by accredited account operators with the of business and the limited operating history, the exception of updating address information, which is Company or its subsidiaries have entered into few done automatically via the Swedish Population agreements that Management considers to be material Registration System (“SPAR”). Changes in holdings for the Company. Those agreements that Management resulting from business transactions are registered in considers material, are described below. the business transactions system, which also includes enquiry transactions for account holdings and for monitoring and reconciliation of completed business transactions. Securities information comprises
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Acquisition of shareholdings in the Estonian subsidiaries Ukrainian letter of intent Trigon Farming has directly or indirectly acquired the Trigon Farming Kharkov entered into four Letters of shares in its Estonian subsidiaries under two share Intent with agricultural companies for subsequently purchase agreements. On 3 August 2006 Trigon concluding service agreements. According to the service Farming concluded the Share Sale and Purchase agreements respective counterparties shall be obliged to Agreement for the purchase of 100 per cent of the cause owners of land plots and Pajs to conclude long shares in Kärla. By way of acquisition of the shares of term lease agreements with OOO Trigon Farming Kärla Trigon Farming acquired control over the Kharkov over 23,331 hectares of land. OOO Trigon subsidiaries of Kärla. On 9 August 2006 Trigon Farming Kharkov moreover entered into service Farming concluded the Share Sale and Purchase agreements with two entrepreneurs, obliging the Agreement for the purchase of 100 per cent of the entrepreneurs to cause owners of land plots of 4,121 shares in Kaiu. For further details on these two hectares to enter into long term lease agreements with transactions see Note 29 to the consolidated financial OOO Trigon Farming Kharkov. Management expects statements for the year ended 31 December 2006, lease agreements to be concluded under these attached to this document. agreements for a total of 27,452 hectares of land.
Material Commercial Agreements CORPORATE GOVERNANCE For information on material agreements concerning the It is the Company's declared intention to secure that sale of the Group companies products please see the standards and principles of good corporate “Information on the Group – Operations – Customers”. governance as outlined in the Danish company law will be adhered to at all times. In this respect, Management For details about the Advisory Agreement with Trigon of the Company will actively seek to uphold a Capital, see “Information on the Group – Organizational constructive dialogue with the Company's shareholders structure and management model – Advisory Agreement and other stakeholders. with Trigon Capital”.
Governance of the C ompany Share Swap Agreement The governance of the Company is attended to by: On 2 April 2007, an extraordinary shareholders · The general meeting meeting of the Company was held for the purposes of making the Company a holding (parent) company of · The supervisory board Trigon Farming. · The board of directors
The shareholders meeting passed a resolution for a · The registered CEO capital increase in the Company from EUR 152,151 to Further to the above, Trigon Capital will be the EUR 19,627,479 by means of a non-cash contribution of shares and claims from the shareholders in Trigon Company's advisor and provide management advisory Information on the Farming to the Company of 100 per cent of (i) the services to the Company. See “ Group – Organisational structure and management model shares in Trigon Farming and (ii) the shareholders – Advisory Agreement with Trigon Capital”. claims on Trigon Farming. Ernst & Young, Copenhagen issued a valuation report to the shareholders meeting confirming that the value of the General Meeting shares and shareholders claims to be contributed The general meeting of shareholders has supreme corresponds to, at a minimum, the consideration authority in all matters and things pertaining to the agreed, including the nominal value of the shares to be Company subject to the limits set by statute and by the issued by the Company. Articles of Association. General meetings shall be held in Greater Copenhagen. Each shareholder in Trigon Farming subscribed to the newly issued shares in proportion to their respective Each Share carries one vote in the general meeting. shareholdings in and claims on Trigon Farming. The members of the supervisory board are elected at As of the date of this Company Description all the the general meeting. shareholders in Trigon Farming have transferred all their shares in Trigon Farming and claims on Trigon Farming to the Company. The Company will shortly Supervisory Board submit to the Danish Commercial Register the The supervisory board ("repræsentantskab") consists of application for registering the described share capital 5 members elected at the general meeting to hold office increase. until the next annual general meeting.
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Members of the board of directors and the registered previously accepted by the Supervisory Board in CEO are not eligible to become members of the the investment plan; supervisory board. · defining or redefining the investment strategies of the Company from time to time or setting more The duties of the supervisory board are: detailed policies or restrictions; · to elect/dismiss the members of the board of · borrowings in a Company or a company through directors; which the Company has made or holds its long- term investments, for the purposes of leveraging the · to determine the remuneration to the members of investment activities of such companies and which the board of directors; and are in excess of EUR 150,000; · to supervise the administration of the business of · amending the Advisory Agreement. the company carried out by the board of directors and the registered CEO. The Company is bound by the joint signatures of the chairman of the board of directors and the registered Further, according to the Advisory Agreement, the CEO or by the joint signatures of all members of the supervisory board may advise on any actual or board of directors. potential conflict of interest brought to its attention by Trigon Capital as the Company's advisor. Registered CEO Board of Directors The board of directors has appointed one registered CEO from amongst its members to be in charge of the The board of directors may consist of 3-6 members day-to-day operations of the Company in accordance elected by the supervisory board to hold office until the with the guidelines and directions set out by the board next annual general meeting. At present the board of directors. consists of three members.
The registered CEO is not entitled to enter into According to the Advisory Agreement, the parties transactions of an exceptional nature or of great thereto have undertaken to ensure that person(s) importance without consulting the board of directors. nominated by Trigon Capital are appointed as Further, the registered CEO must ensure that the members of the Board and that such members from keeping of the Company's books and accounts is time to time may be replaced by such persons as Trigon performed in compliance with the rules of the law, and Capital may designate. that the administration of property is carried out satisfactorily. The board of directors has the overall responsibility of managing the Company and elects the registered CEO. The chairman of the board will not be involved in Company's advisor specific day-to-day management. As the Company's advisor, Trigon Capital will, in accordance with the terms of the Advisory Agreement, The board of directors will arrange for the proper provide the Company with management advisory organisation of the activities of the Company, and will services in connection with the investment operations ensure that the keeping of the accounts and the of the Company and supervise the management of administration of property are carried out in a investments on behalf of the Company. satisfactory way. In addition to this, the board of directors will approve transactions which, considering the position of the Company, are of an exceptional Company's auditor nature or of great importance, regardless of the fact that The annual report of the Company will be audited by a such transactions might otherwise fall under the state-authorised public accountant appointed at the registered CEO's duties. general meeting for the period until the next annual general meeting. Before such appointment is made, the The board of directors will in regular intervals inform board of directors will assess the auditor's independence the supervisory board of the Company's investments, and competences. divestments, investment strategies and borrowings.
Further, according to the Advisory Agreement, prior consultation between Trigon Capital, the board of directors and the supervisory board is required for: · the Board causing the Company to directly or indirectly make any investment or to realise any Investments in excess of EUR 150,000, unless
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information about a company’s profitability and is SUMMARY OF FINANCIAL independent of the company’s financing and tax INFORMATION position and depreciation. · Operating Profit margin. Operating profit /
The Company is a recently established company with Revenue. Operating profit margin measures the no historical financial information prior to 11 relationship between different measures of December 2006 available for analysis. The Company profitability and revenue providing information became the parent company of the Group following about a company’s profitability and is independent the restructuring of the Group, see “Information on the of the company’s financing and tax position. Group – Material Agreements – Share Swap Agreement”. · Net Profit margin. Net profit / Revenue. Net Trigon Farming was the parent company of the Group profit margin measures the relationship between until 12 April 2007, and the consolidated financial different measures of profitability and revenue statements of the Group were prepared in Estonian providing information about a company’s kroons in accordance with International Financial profitability. Reporting Standards (“IFRS”). Since 26 March 2007, the accou nting currency of the Group has been Euro. The EBITDA should not be considered as an alternative to financial information of the Company in this operating profit or net income (as determined in Company Description is limited to an unaudited pro accordance with IFRS), as an indicator of operating forma financial information as at 29 March 2007 and performance, or as an alternative to cash flows from operating activities, investing activities or financing the interim financial statements for the period 11 December 2006 to 29 March 2007. activities, or as a measure of liquidity. EBITDA is used as a supplemental measure of operating performance, particularly because it is also an internationally The financial year of the Company runs from 1 January to 31 December. However, as the Company recognized measure that is regularly used by securities analysts, rating agencies, investors and other parties to was established on 11 December 2006, its first financial evaluate a company’s operating performance. EBITDA year will exceptionally run from 11 December 2006 to is also deemed to be a useful indicator of the Group’s 31 December 2007. ability to service indebtedness. EBITDA is not a measure of performance under IFRS and not all The financial information included herein is prepared companies calculate EBITDA or similarly titled and presented in accordance with IFRS. financial measures in the same manner. As such, EBITDA as disclosed by other companies may not be Certain financial and other information set forth in a comparable with the Group’s use of EBITDA. number of tables in this Company Description have been rounded off, for the convenience of readers. Accordingly, in certain instances, the sum of the Revenue numbers in a column may not conform exactly to the The Group effectively started its operations in May total figure given. 2006. The revenue of the Group in 2006 amounted to EUR 877,060, of which 94 per cent was generated in CURRENT TRADING OVERVIEW Estonia as no production has been initiated in Russia and Ukraine. The overwhelming part of revenue, EUR In order to facilitate the discussion on the Group’s 598,469, came from milk sales, while meat sales and sale financial information, the information presented in this of heifers contributed EUR 278,591 to revenue. section is derived from the consolidated financial Government subsidies for agricultural production statements of Trigon Farming for the year ended 31 added a further EUR 117,022 of income to the Group, December 2006 presented in this Company Description which is part of EUR 262,741 of income from other and should be read in conjunction with these sources in 2006. statements. The following amounts in EEK have been converted into EUR using the rate of 1.00 EUR = 15.6466 EEK, the official exchange rate of the Central Expenses Bank of Estonia pegging EEK to EUR under the The Group incurred a total of EUR 2,341,467 of currency board arrangement. operating expenses in the period ended 31 December 2006. Forty-four per cent of the operating expenses Calculation of Financial Ratios: were attributable to the purchase of raw materials and · EBITDA. Earnings before interest, tax, consumables, including EUR 370,176 spent on animal depreciation and amortization. feed and EUR 297,956 on materials for agricultural production. Personnel costs amounted to 16 per cent · EBITDA margin. EBITDA / Revenue. EBITDA (or EUR 363,274) of the total operating costs. margin measures the relationship between different measures of profitability and revenue providing
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Other expenses reached EUR 796,275. Legal and upon the Company’s ability to obtain financing consulting fees of EUR 456,713 constituted the largest through the raising of additional equity or debt part of other expenses. The remainder of the expenses financing or other means. The management is also came from office and administration expenses, land tax hopeful that the on-going operation soon will generate and land rental, as well as transportation expenses. a cash surplus, especially from the on-going operation in Estonia since it’s the longest running operation of the Group, for further investing although it is the belief Profitability of the management that the Group will be loss-making Due to start-up operations in Russia and Ukraine TC in the initial years of operation. The aim of the Farming operations during 2006 have been operating at Company is to sell the cereals in October/November a loss. The operating profit margin of the Group was - to be able to get the highest possible price. This will 61 per cent, EBITDA margin -50 per cent, while net also mean that the Group can expect a better cashflow profit margin reached even -65 per cent. Kärla farm and once it is possible to sell the cererals. Meanwhile the Kaiu farm in Estonia, generated the major part of the Group will mainly rely on the dairy products for cash total Group’s revenue (EUR 625,056 and EUR 400,790, flow. The financing of the investments and the on- respectively) and showed net profit margins of going operations within the first twelve months from 20.4 per cent and 20.2 per cent, respectively. the first trading day on First North will be financed mainly with the shareholder’s equity, especially the Balance Sheet shareholders’ equity raised through the Completed Offer and existing and additional loans. As of 28 February 2007, existing shareholders of the Group had invested additional capital into the Group compared to 31 December 2006 by subscribing to new UNAUDITED PRO FORMA FINANCIAL subordinated loan notes in a total amount of EUR INFORMATION 7,076,936, thus bringing the total investment by shareholders to EUR 19,448,442. Introduction The unaudited pro forma financial information In 2006, the operations of the Group were financed including the unaudited pro forma combined balance mainly by the equity of EUR 11,816,113 (including sheet as at 29 March 2007 and explanatory notes thereto minority interest of EUR 26,842) as of 31 December (the “Unaudited Pro Forma Financial Information”) 2006. Subordinated loan-notes issued by the Group in has been prepared for this Company Description 2006 amounted to EUR 11,399,090 (96 per cent) of the strictly for illustration purposes and as such presents a total equity. The loan-notes are classified as other hypothetical situation and does not present the actual reserves in the equity and are considered to be equity financial position of the Group. The Unaudited Pro instruments of the Group. Additional financing of Forma Financial Information should be read together EUR 1,511,638 was obtained through loans and leases. with the information included in the audited Bank borrowings represent 72 per cent, or EUR consolidated financial statements of AS Trigon Farming 1,090,013, of the total Group’s borrowings, the for the year ended 31 December 2006 and the audited remaining EUR 421,625 being leases. All the bank financial statements of Trigon Agri A/S for the period borrowings are denominated in euro as opposed to 11 December 2006 - 29 March 2007 set forth elsewhere lease contracts which are denominated in Estonian in this Company Description. kroon. The Unaudited Pro Forma Financial Information was The majority of the investments were made in prepared to present the impact which (i) the transaction acquiring existing operating farm assets. The of acquisition by Trigon Agri A/S of AS Trigon acquisition of Estonian farms was conducted at a total Farming described in detail in section “Information on purchase consideration of EUR 2,651,778. Acquisition the Group” of the Company Description, (ii) the events of a Russian holding company that controlled 840 after the balance sheet date described in the audited hectares of land in Russia cost EUR 525,000 according consolidated financial statements of AS Trigon Farming to accounting records. for the year ended 31 December 2006, and (iii) the transaction of the sale of the Shares offered as part of the Completed Offer could have on the financial CASH MANAGEMENT AND FINANCIAL position of Trigon Agri A/S as at 29 March 2007, had POLICIES they taken place on 29 March 2007. The events after The Company’s investments and ongoing operations the balance sheet date include additional issue of will be financed mainly with shareholders’ equity and subordinated loan notes (classified as other reserves) by existing Loans. While Management believes that the AS Trigon Farming to the existing shareholders and proceeds of the private placement will enable it to cash allocations to the purchased assets. The acquire further farming assets, subsequent acquisitions assumptions on which the pro forma adjustments were of further agricultural properties will be dependent based and the sources of information are described in
62 the enclosed explanatory notes. The unaudited pro presented solely for illustrative purposes and does not forma adjustments were based on the information specify what the actual consolidated financial position available and on specific assumptions which, in the of the Group as at 29 March 2007 would have been management’s opinion, are justified given the should the events referred to above have actually taken circumstances. place on that date. It is not the purpose of the Unaudited Pro Forma Financial Information to The Unaudited Pro Forma Financial Information was determine the consolidated financial position in any prepared on the basis consistent with the accounting future periods. policies adopted by Trigon Agri A/S. It has been
Unaudited Pro Forma Combined Balance Sheet as at 29 March 2007 Pro forma adjustments (in thousands of euros) Trigon AS Trigon Issue of Cash Reorganisation Proceeds Pro forma Agri A/S Farming subordinated allocation to from the sale data of as at 29 consolidated loan-notes the purchased of the Shares the Group March as at 31 assets (net of costs) 2007 December 2006 (note 1) (note 2) (note 3) (note 4) (note 5) (note 6) ASSETS
Current assets Cash and cash equivalents 152 2 358 7 077 -3 006 - 47 000 53 381 Receivables and prepayments - 1 215 - 637 - - 1 851 Inventories - 2 451 - 420 - - 2 871 Biological assets - 1 571 - 357 - - 1 929 152 7 594 7 077 -1 592 - 47 000 60 231 Non-current assets Long-term prepaid rents - 959 - 961 - - 1 921 Available-for-sale financial assets - 13 - - - - 13 Property, plant and equipment - 6 672 - 631 - - 7 303 - 7 644 - 1 592 - - 9 236 Total assets 152 15 238 7 077 - - 47 000 69 467
LIABILITIES
Current liabilities Trade and other payables - 1 108 - - - - 1 108 Borrowings - 120 - - - - 120 Provisions for other liabilities and charges - 273 - - - - 273 - 1 500 - - - - 1 500 Non-current liabilities Trade and other payables - 107 - - - - 107 Borrowings - 1 392 - - - - 1 392 Provisions for other liabilities and charges - 56 - - - - 56 Deferred income from EU subsidies - 367 - - - - 367 - 1 922 - - - - 1 922 Total liabilities - 3 422 - - - - 3 422
EQUITY Capital and reserves attributable to equity holders of the Company Ordinary shares 152 972 - - 18 503 40 000 59 627 Share premium - - - - - 7 000 7 000 Other reserves - 11 415 7 077 - -18 491 - 0 Retained earnings - -598 - - -11 - -609 152 11 789 7 077 - 0 47 000 66 018 Minority interest in equity - 27 - - - - 27 Total equity 152 11 816 7 077 - - 47 000 66 045 Total equity and liabilities 152 15 238 7 077 - - 47 000 69 467
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value of the ordinary shares and the net assets of Explanatory notes: AS Trigon Farming; however, an adjustment in the amount of EUR 11,440 was made to retained 1. Trigon Agri A/S financial information used to earnings to compensate the rounding effects prepare the Unaudited Pro Forma Financial between the shareholders’ contribution in Trigon Information was extracted from the audited Agri A/S and the equity of AS Trigon Farming. financial statements of Trigon Agri A/S for the period 11 December 2006 - 29 March 2007 6. Reflects the adjustment as the result of the sale of included elsewhere in this Company Description. the Shares at the Offer Price, being EUR 1.25 per share. The net proceeds from the offer of the 2. As described in section “Information on the Shares were allocated between ordinary shares Group” of this Company Description, Trigon (based on nominal share value) and share premium Agri A/S has acquired interest in AS Trigon (the remaining part of proceeds less the assumed Farming and its subsidiaries in exchange for shares expenses relating to the offer amounting to EUR that were issued to AS Trigon Farming 3,000 thousand). shareholders. For accounting purposes the transaction will be treated as a reorganisation of the group and therefore will not cause changes in the carrying amounts included in the consolidated financial statements of AS Trigon Farming. For the purposes of the unaudited pro forma combined balance sheet, the information on the balance sheet of AS Trigon Farming was extracted from the audited consolidated financial statements of AS Trigon Farming for the year ended 31 December 2006 included elsewhere in this Company Description. All amounts were converted from EEK to EUR using the exchange rate of EUR 1 = EEK 15.6466 being the prevailing exchange rate as at 31 December 2006.
3. As described in the notes to the audited consolidated financial statements of AS Trigon Farming for the year ended 31 December 2006, according to shareholders’ agreement dated 1 November 2006 the existing shareholders of the Group have invested additional capital into the Group by subscribing to new subordinated loan notes (which are classified as other reserves) in a total amount of EEK 110,730 thousand. The amount was fully paid during January 2007. The amount was converted from EEK to EUR using the exchange rate of EUR 1 = EEK 15.6466 being the prevailing exchange rate as at 31 January 2007.
4. During the period from 1 January 2007 to 28 February 2007 the Group has purchased fixed assets in the amount of EEK 24,908 thousand and current assets in the amount of EEK 22,127 thousand. Consequently, the cash balance has decreased by EEK 47,035 thousand due to these purchases. All amounts were converted from EEK to EUR using the exchange rate of EUR 1 = EEK 15.6466 being the prevailing exchange rate as at 28 February 2007.
5. Reflects the adjustments in the amount of EUR 19,475,328 to equity balances of Trigon Agri A/S as the result of the reorganisation on 2 April 2007. There were no differences between the nominal
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LEGISLATION OF RUSSIA, Russian Land Code, state-owned and municipally- owned land plots may be sold or leased to Russian and UKRAINE AND ESTONIA foreign persons or legal entities. However, certain land RELATED TO LAND AND REAL plots are withdrawn from circulation and may not be sold or leased (e.g. nature reserves and land used for PROPERTY military purposes). Other land plots may be restricted in the sense that they may not be transferred to private ownership, but they may be leased (e.g. land of a Set forth below is a description of some provisions of particular cultural heritage). Foreign nationals and Russian, Ukrainian and Estonian legislation relating to foreign entities may acquire the ownership land in the land and other real estate. This description, however, is same way as Russian citizens or Russian entities, with not complete and is qualified in its entirety by reference the exception of land categorised for agricultural use, to applicable legislation in each of these three countries. land located close to the Russian border and certain other categories of land. The description of the Russian, Estonian and Ukrainian legislation is based on the legislative acts currently in Russian law attaches high value to agricultural land force and common practice of the law enforcement plots and grants them special protection through bodies. The legislation review is valid as of 28 March significant restrictions on the sale, use and change of 2007. Moreover, the law enforcement practice is use of such land plots. Russian regions and, in some provided for reference purposes only and should not be cases, local authorities have pre-emptive rights to used as basis for decision -making since it is not uniform purchase agricultural land plots offered for sale. As a and is subject to changes. rule, only agricultural land plots of poor quality can be transferred to non -agricultural use, subject to certain restrictions such as the fact that the transferor of such RUSSIA land plots must pay an amount as compensation for the Russian legislation regulating the ownership and loss of agricultural production calculated using rates leasehold rights to land plots and other real estate generally determined according to the quality of the objects includes the Civil Code, the Russian Land Code land plots concerned and using other methods set by and other federal and regional laws and regulatory acts. the Russian government. The withdrawal of Currently the majority of land is not privately owned, agricultural land plots of good quality from agricultural but is still held by the state. According to the Russian use is permitted only in certain cases, such as when the legislation all state land shall be divided into federal, land plot cannot be used for agricultural purposes or its regional or local land, however the majority of land has cadastre value is lower than the average regional not been divided yet. See "Risk Factors – Risk factors cadastre value of the land. Outstandingly productive relating to doing business in Russia, Ukraine and the land plots may be included in a list of land plots which Baltic States - Risks relating to the Russian Federation - cannot be withdrawn from agricultural use under any Uncertainty and contradiction of property law ". circumstances.
Russian law provides for the creation of a unified Leasing of land in Russia cadastre that records the details of land plots such as their measurements and boundaries. As a general rule, The participants of land relations can be citizens, legal only land plots with a state cadastre number may be entities and R ussian Federation. Provisions of land laws subject to transactions. Most land in Russia has not yet are applicable to foreign citizens and legal entities been incorporated into the cadastre. except for special cases mentioned below.
All land is categorised as having a particular use: Leasing of land in Russia should be formalized by a agricultural land; settlement land; land for use by written agreement that is subject to a state registration industrial enterprises, power companies, transportation if the lease period is equal or exceeds one year. The companies or communication companies; security amount of the rental fee is subject to the parties’ zones; forestry land; waterfront land; and reserved land agreement except for a lease of state owned lands. (i.e. land which is owned by the state and which can be transferred to any of the other categories). Land must In major cases, a lessee can transfer its rights and be used in accordance with its categorised purpose. Use obligations under its lease agreement to a third party, of land for the purpose contradictory to its category in including, pledge of lease rights, contribution to a share some cases may lead to termination of rights to a tract capital of a company or entrance into a sublease of land. However, the categorised purpose of land can agreement within the lease period without prior be changed. The Russian Land Code sets out the main consent of a landlord but with subsequent notification principles to be followed when changing the of the landlord, unless otherwise stipulated by the lease categorised purpose of land, and various federal laws agreement. A sublessee has the same rights as the lessee regulate the procedure for such a change. Under the in respect of rights to the land.
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A lease of a tract of land can be terminated on the registration results in the transaction being deemed grounds and in the order stipulated by the Civil Code void. Russian law recognizes the rights to land and of Russian Federation: upon mutual agreement of the other real property that arose prior to establishment of parties, upon respective decision of a court in case of the registration procedure, however, it is impossible to significant breach of terms of lease by the other party transfer those real property rights that have not been or in case of refusal of one party to fulfil its obligations duly registered until such rights have been so registered. under a lease agreement if such refusal is acknowledged by law or the agreement between the parties. Obtaining land plots for agricultural purposes The lease for a parcel of land can be terminated upon Local authorities have pre-emptive rights to purchase request of a landlord improper land use contradictory agricultural tracts of land offered for sale. Russian law to the permitted usage, use in the manner that reduces provides for possibility of local authorities to establish the quality of land, failure to use agricultural land for a limitation of the minimum size of tracts for agricultural purpose generally within 3 year. agricultural purposes owned by one physical or legal entity. Upon expiration of a lease period, the lessee has a right The ownership title of state owned lands for of first refusal to enter into a new lease agreement for agricultural purposes to physical and legal entities can the land except in cases where the buildings located on be transferred to a winner of the respective tender. An the land are to be sold. If the buildings on the tract are exception exists for lessees of lands who can obtain the to be sold, then the new owner of the building receives ownership title to the leased land upon expi ration of 3 the same rights for the tract of land. years after concluding a lease agreement provided that the land has been used properly. In certain cases a tract of land can be withdrawn for state purposed with provision of the following Licensing of farming activities in Russia guarantees: substitution of a similar parcel of land, Activities which are subject to state licensing in Russia reimbursement of the cost of buildings located on the are listed in the Federal law “On licensing of certain withdrawn land and reimbursement of losses including types of activities”. Since 1 January 1 2006 activities lost profit. cattle breeding and production and use of livestock products (material) are excluded from the list of State registration of rights to real property and certain activities subject to state licensing. No other activities transactions related to farming are found in the mentioned list. Certain rights to real property (including land plots and buildings) and related transactions are subject to state It should be noted, however, that products of farming registration in the Unified State Register of Rights to activities, such as meat, milk and goods made thereof Real Property and Transactions Therewith. The are subject to certification on compliance with quality following require registration: the right of ownership and safety standards in Russia. of buildings and facilities; the right of ownership of land plots; the disposal of real property pursuant to a Restrictions on foreign-controlled companies regarding trust; servitudes; business sale and purchase agreements acquisition, ownership, use or sale of agricultural property in relation to real property; mortgage agreements; and According to the Federal law “On circulation of land land plot and building lease agreements concluded for a for agricultural purposes” foreign citizens, foreign legal term of 1 year or more. Such rights to real property entities, stateless persons, as well as Russian legal only arise at the time of their state registration. Rights entities in which more then 50 per cent of the charter to real property and related transactions are registered capital belong to foreign citizens, foreign legal entities, by the state authorities in the relevant territory where or stateless persons can not hold ownership title in the property is situated (e.g. in Moscow registration is agricultural land. Such entities can only lease tracts of carried out by the Chief Department for the City of agricultural land. Moscow of the Federal Registration Service). It is possible for members of the public to search the No other restrictions with regard to ownership or use register. The register contains the sufficient of agricultural property by foreign-controlled information on the real property, i.e. information on companies are currently in force in Russia. the owner, address, cadastre number, square, encumbrances of the real property. However if a court The Government it currently working on a draft law determines that information on the register is false, a “On procedures for making, in the Russian Federation, person who enters into a transaction relying on such foreign investment into commercial organizations information may lose its property rights. having strategic significance for the Russian Federation’s national security”. According to this draft A failure to register a transaction with real property, or law a purchase by foreign investors of shares (shares of with real property rights, which requires state
66 participation) in Russian companies which have relating to compliance with various land use standards; strategic significance for the national security shall be and not allow the pollution of, littering on or subject to prior approval of state bodies. The draft law degradation of the land plot. Regional or local contains a list of activities which should be recognized legislation, or an investment or lease agreement entered as having strategic significance for the national security. into with the local or regional authorities, may also Currently farming activities do not fall within the impose various financial and other liabilities on the scope of the draft law. However, the draft law is still owner or leaseholder, such as the financing of local being discussed within the Russian Government and if engineering, transportation and social infrastructure, submitted to the State Duma, will pass three readings, and the reimbursement of expenses incurred by the thus, changes to the draft law are possible, including previous tenants of the land plot. changes to the list of strategic activities.
Land and real property taxation Other forms of state regulation of agricultural activities in A significant part of the tax burden for companies Russia involved in the Russian real estate sector is caused by Thought cattle breeding is not subject to licensing any the taxation of land and real property as described in more, some restrictions in this field still exist. Thus, more detail below. according to the Federal Law “On cattle breeding”: The Russian Tax Code sets out the terms of a property · brood animals and brood livestock are subject to tax which must be paid by Russian and non-Russian state registration with the State Brood Service; organisations carrying out business activity via · livestock products (material) can belong only to permanent establishments or owning real property in those natural and legal persons which are engaged Russia. The tax rate is set by the regional authorities in the field of agriculture; but may not be higher than 2.2 per cent. In Pskov Oblast and most major regions the tax rate is currently · livestock products (material) should comply with 2.2 per cent. In accordance with the Law of Pskov established standards and norms; compliance is Oblast “On the Oblast Budget for 2007 year” the tax evidenced by certificates issued by the State Brood rate is 2.2 per cent for organizations of wholesale and Service; retail trade, activity of restaurants, cafe, bars, financial · sale of livestock products (material) are allowed activity, operations with real estate and tax rate is 1.9 only if such livestock products (material) comply per cent for organizations of other activity. The taxable with a certificate of standards; base is the average annual net book value of the property (generally calculated as the cost as stated in · export and import of livestock products (material) the statutory accounts less statutory depreciation). In requires permission from a special state body in general, the taxable base includes fixed assets, in the division of cattle breeding. particular real estates objects excluding land and certain The use of livestock products (material) not in non-productive types of property. The property tax is compliance with the above mentioned requirements is mainly payable on a quarterly basis. an administrative offence; penalties may reac h 30,000 roubles for legal entities and 3,000 roubles for their Federal law provides for a land fee to be paid for the officials. use of land and sets out general rules for the assessment of the land fee and the basic fee rates. The land fee can Relations with employees are governed by special be charged in the form of a tax or a rent payment, regulation – Rules on protection of labour in the field depending on the type of right concerned. The fee rate of cattle breeding. The Rules have been adopted by the depends on the type of land involved. Federal law Ministry of labour and Agriculture in 2000 and are still authorises local authorities to establish specific local fee in effect. rates.
As an illustration, in the Gdov Region of Pskov Oblast Liabilities of owners there is a land fee in the form of a tax which varies Owners and leaseholders of and plots and buildings from 0.3 per cent to 1.5 per cent of the cadastre value of have to comply with federal, regional and local the land depending on the type of land involved. The legislation which includes various environmental, 0.3 per cent is applied if the tract is used for agricultural public health, fire, residential and urban planning purposes, either used or allocated for residential requirements. The owner of a building will usually bear construction, for a personal subsidiary farm, gardening, all liabilities that may arise in connection with the horticulturing or animal breeding. And the tax rate is building. Owners and leaseholders are required to use 1.5 per cent in all other cases. There is also a land fee in the land plot in accordance with its intended use; not the form of rent payments, the basic rates of which are cause harm to the Regulation of Real Estate in Russia established by the Acts of Administration of Gdov environment; assume the liability and financial costs Region according to the type of lessee and purposes for
67 which the land is used. In addition, local authorities are to enterprises and organisations which are under state empowered to require payment of a separate fee for the or municipal ownership. Accordingly, all individuals right to conclude a rental agreement, which may be of a and legal entities, who possessed perpetual use rights as significant amount. of 1 January 2001, were required to re -register their rights as either ownership or lease rights by 1 January The land fee in the form of a tax is payable mainly on a 2005. However, this requirement was recently quarterly basis. The terms for the payment of a land fee invalidated by the Constitutional Court of Ukraine in the form of rent payments depend on the specific until the Parliament of Ukraine adopts the rent agreement between the lessee and the state implementing legislation required for such re- authorities. registration.
Land is divided into various categories based upon its UKRAINE approved purpose of use, such as residential, industrial Ukraine recognises the private ownership of real estate. and agricultural. Residential land includes land plots for Ukraine's Constitution, together with the Civil Code, residential or public use. Industrial land is used for Ukrainian Land Code and other laws, uphold and industrial, mining, transportation and other protect the right to own private property. Currently commercial enterprises. Land must be used in the majority of land in Ukraine is not privately owned, accordance with its categorised purpose. Agricultural but is still held by the State. See "Risk Factors — Risk land is to be used for farming and other agricultural factors relating to doing business in Russia, Ukraine purposes. Under Ukrainian law, land may only be used and the Baltic States - Risks relating to Ukraine". in accordance with its approved category of use.
The Law of Ukraine "On Ownership", dated 7 Presently, some complications remain, thereby Febr uary 1991, as amended (the "Law on Ownership") hampering the development of the property market in specifically recognises private ownership of real Ukraine. First, there is a lack of transparency in the property by Ukrainian residents, foreign individuals, process by which land and operations are allocated. foreign legal entities and others. The Law on Often, the overlap of local and municipal agency and Ownership specifically permits the use of privately bureaucratic roles exacerbate opportunities for owned property for commercial purposes, including corruption. leasing of such property, and permits the retention of revenues, profits and production derived from the Second, there are significant restrictions on the use of commercial use of property. Moreover, the Ukrainian certain categories of land, especially agricultural land. courts are responsible for protecting property rights The Ukrainian Land Code distinguishes between the according to applicable Ukrainian legislation. different types of land such as agricultural and non- agricultural and depending on the designation, different Ukrainian law distinguishes between ownership rights ownership restrictions and rights apply. with respect to land and buildings. These are treated separately so that, upon the transfer of ownership rights relating to a building, the ownership of the Leasing of land in Ukraine underlying land may or may be not transferred, All Ukrainian and foreign individuals, entities and depending on the agreement of the parties. states may lease land in Ukraine. Non-residents have the same rights as Ukrainian residents to lease land, there are no special limitations for them. The new Legal developments affecting real estate Ukrainian Land Code establishes two types of land On 25 October 2001, the Parliament of Ukraine leases: short-term (up to five years) and long-term (up adopted a new Ukrainian Land Code which came into to 50 years, the maximum lease term permitted under effect on 1 January 2002. The Land Code introduced Ukrainian law). It also allows subleasing arrangements, into law the general right to own land. Under prior subject to the lessor's consent. Land lease relations are law, only Ukrainian citizens were permitted to own regulated in more detail by the Law of Ukraine "On land in Ukraine, and land sale transactions were the Lease of Land", dated 6 October 1998, as amended permitted only under very limited circumstances. The (the "Land Lease Law"). Ukrainian Land Code also permitted the mortgage of privately-owned land. According to the Land Lease Law, land lease agreements must be in writing and upon parties The Ukrainian Land Code provides for different basic consent may be notarized. Notarization is executed by rights with respect to land: (i) the right of ownership; a notary who is qualified in the district in which the (ii) the right of permanent use; (iii) lease rights; and (iv) tract of land is located. The lease agreements must servitudes (i.e., easements). It also classifies land contain the following issues: ownership among private and municipal and state ownership. The right of permanent use is only available
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· the subject matter of the lease (i.e., its location and lease agreement shall be renewed for the same term and size); on the same conditions. · the term of the agreement; The ownership of leased land may not automatically · the amount of the rent and the terms and means of pass to the lessee under the terms of a lease agreement. payment; However, under the Land Lease Law, the lessee has a first refusal right in the event that the lessor seeks to · the purposes of the lease; sell the leased property. Under this right, the lessee · the terms of maintenance of the leased property; must pay the price at which the land is offered for sale. If a property is auctioned by the lessor, the lessee's offer · the terms for the transferring of the land plot by must match the highest bid in order for the lessee to be the lessor to the lessee; able to exercise its right of first refusal. · the terms for the returning of the land plot by the lessee to the lessor; Under the Ukrainian Land Code, leased property must be sold by auction if no real property (i.e., buildings or · a description of all existing restrictions and structures) are situated on it. Leased property, owned encumbrances; by the state or a municipality with completed buildings · provisions allocating the risk of damage or loss; and or structures, may, however, be sold without going to a public land auction, and the parties may agree on a · liability. market value at which the right of first refusal may be If a lease agreement does not contain any of the above exercised. terms, it is considered to be invalid under the law. A lease agreement shall also include the following Under Ukrainian law, the lessee has a pre -emptive right documents as its integral parts: to extend the lease, provided it has fulfilled all of its obligations under the original lease. However, the · plan of layout of the land; Ukrainian courts have held that a lessee has no right to extend the lease in the event that the lessor decides to · cadastral plan of the tract of land reflecting all no longer lease the subject property. restrictions (encumbrances) and servitudes; · the act of demarcation of land tract boundaries; According to the existing practice in Ukraine, land plots may be leased to private entities for specific · the act of transfer and acceptance of the land plot; purposes, such as residential use, the construction of a · project of land plot allocation, if required by law. shopping mall or agricultural use. If the purpose of the land use is changed, the lessee must apply to the State Every land lease agreement is required to be registered or local authority that granted the original land lease with the state authorities. The state registration is for a change of the designated land use category. This carried out by the local district department of land requires the lessee to go through the regular land cadastre. The following documents are required for state allocation process by filing for the required approvals registration: from the architectural, fire, sanitary, ecological and other authorities. However, changing the specific · the application for registration; purpose of agricultural land is possible only in very · the land lease agreement; seldom cases. · the plan of layout of the land plot; Leasing of real property other than land (buildings and · the decision of local authority on lease of the land structures) plot. The Civil Code contains general provisions governing The law also allows the lessee to sublet the tract of land the leasing of movable and real property. In particular, upon consent form the lessor. A sublease agreement has according to Article 793 of the Civil Code, the lease of to meet the same requirements stipulated by the law as a building (or other capital structure) or part thereof a lease agreement and is also a subject to state must be concluded in writing, and must be notarised registration with the local district department of land and registered with the State if entered into for a period cadastre. of more than three years.
The Law “On Lease of Land” simplified the procedure State registration of rights to real property and certain for renewing the lease agreement of land. It provides transactions that in case the lessee continues to use the land after the expiration of the term of the lease agreement and in Ownership rights to real property are perfected upon case that the lessor does not submit any written the registration of the sale and purchase agreement with objections within one month after the expiration, the the State Register of Transactions. In addition to the
69 registration with the State Register of Transactions, the Moreover, non-residents have a right to participate in property rights to a building must also be registered non-agricultural land privatization. However, the sale with the local Bureau of Technical Inventory (which is of municipal or state owned non-agricultural land to now a register of the State Register for the rights on the foreigners must be approved by the Cabinet of immovable property), while the property rights to land Ministers of Ukraine and Parliament. In certain cases plots must also be registered with the local Department the approval of Parliament may be required. for Land Cadastre. According to the Ukrainian Land Code, legal entities Information concerning encumbrances on real property are restricted from purchasing tracts of agricultural land is contained in the following State registers: of more than 100 hectares until the year 2015. However, the law does not specify whether the · the Uniform Register of Prohibitions on the restriction limits the size of a single tract to 100 Alienation of Real Estate; hectares or the ability of a single legal entity to acquire more than 100 hectares of farmland. The Ukrainian · the State Register of Mortgages; Land Code establishes a moratorium on the sale- · the Register of Encumbrances of Movable Property purchase of agricultural lands until 1 January 2008. (in respect of tax liens); and · the Land Cadastre. Licensing of farming activities in Ukraine In the near future, the State Register of Rights to Real In general, the agricultural production need not be Property and Their Limitations is expected to come licensed. However, the Law of Ukraine “On Licensing into existence. It will contain consolidated information of Certain Kinds of Business Activities” envisages that on all property rights to real estate as well as the the licenses should be obtained in order to the conduct limitations of such rights. the following activities connected to agricultural production: manufacture of pesticides and agrochemicals (regulators of plant growing solely), Obtaining ownership title to land whole and retail sale of pesticides and agrochemicals Ukrainian law distinguishes between agricultural and (regulators of plant growing solely); cultivation, use of non-agricultural land. Ukrainian citizens and Ukrainian the plants that contain narcotic substances for the legal entities, established by Ukrainian citizens or industrial purposes; designing, construction of new and Ukrainian legal entities generally can obtain ownership renovation of existing land-improvement systems; title to agricultural and non-agricultural land. wholesale of seeds; and manufacture, storage and sale of tribal (genetic) resources, conducting of the genetic The title to agricultural land cannot be sold or examination of origin and anomaly of animals. transferred to foreign citizens, persons without citizenship, foreign legal entities or foreign states Liabilities of owners (Article 22 of the Ukrainian Land Code). Agricultural Owners of land plots and buildings must comply with lands inherited by such persons are subject to disposal within one year. various environmental, public health, fire, residential, urban planning and other requirements of Ukrainian law. The owner of a building generally bears all Non-agricultural land can be owned by legal entities established by Ukrainian citizens or Ukrainian legal liabilities that may arise in connection with the building. Owners and leaseholders are required to use entities, by so called “joint ventures” and by foreign the land in accordance with its intended use, not to legal entities and by Ukrainian and foreign citizens and persons without citizenship. The wording of the cause harm to the environment, to assume the liability relevant provisions of the Ukrainian Land Code is and financial costs relating to compliance with the ambiguous, and it is unclear to what extent a Ukrainian various land use standards and not to allow the legal entity that is wholly-owned subsidiary of a foreign pollution of, littering on or degradation of the land. company is allowed to own land in Ukraine and it is unclear what the meaning of a “joint venture” is. Land and real property taxation Foreign legal entities and joint ventures are allowed to Owners of land and those with permanent rights to use acquire non-agricultural land within the boundaries of land must pay a land tax, and lessees must pay the inhabited localities only in situations where they ground rent as set forth in the lease agreement. acquire real estate or where they construct buildings for Currently, the land tax is one per cent per annum of entrepreneurial purposes. Foreign legal entities and the normative monetary value of the land, which is joint ventures may acquire non-agricultural land updated periodically. Tax is paid on a monthly basis at outside the boundaries of inhabited localities only if one-twelfth of the annual tax amount. they also acquire a building which situated on the land.
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The determination of the normative monetary value of Property interests and units may generally be the land is carried out by authorised licensing transferred and encumbered without restrictions. organisations in accordance with the methodology However, the Restrictions on Acquisition of Property adopted by the Cabinet of Ministers of Ukraine. This Act sets forth some exceptions to the general rule and methodology accounts for various factors, including, limits certain things such as the right to transfer but not limited to, the location of the land and the property that includes agricultural or forest land more purpose for which the land is to be used. The valuation than 10 ha. For more detailed information regarding of a particular land plot is carried out at least once these restrictions, please see “Restrictions on foreign- every five years with respect to agricultural land, and at controlled companies regarding acquisition, ownership, use least once every seven years with respect to non- or sale of agricultural property”. In situations laid out in agricultural land. With each new valuation, the original the Real Property Expropriation Act, the Government valuation is adjusted pursuant to a formula adopted by of Estonia may decide to expropriate real property the Cabinet of Ministers of Ukraine. without the owner’s consent in the public interest for fair and immediate compensation. The expropriation The normative monetary value of land is not uniform proceedings normally take years and are most across Ukraine and may greatly differ from place to commonly used on land that is needed for building place depending on the factors affecting the valuation. roads or other infrastructural objects of major Furthermore, the valuation of land, which is the basis importance. for the computation of the land tax, fluctuates from year to year. Leasing of land in Estonia and other types of use
ESTONIA Lease The transfer and leasing of real property interests and The land lease in Estonia is regulated by the Law of units located in Estonia is regulated by the General Obligations Act. In a commercial lease contract, one Principles of the Civil Code Act, the Law of Property person undertakes to grant the use of the object of the Act and the Law of Obligations Act. The establishment commercial lease contract to another person who is of encumbrances such as mortgages and servitudes, is also entitled to the fruits received from the object. The regulated by the Law of Property Act. The real lessee is required to pay a fee (rent). property interests and units as well as real rights (e.g. the right of superficies) are registered according to their The Act also defines an agricultural lease contract as a location in the Land Register departments that are contract that concerns enterprises designated mainly maintained by the county courts. A real property for agricultural production, including non-agricultural interest may be registered in the Land Register as enterprises connected with agricultural production, production land, profit yielding land, business land, agricultural property interests or parts thereof. Upon residential or public land. the lease of an agricultural property interest, the lease contract is presumed to include the accessories and Construction on land is regulated by the Building Act rights relating to the property (e.g. the agricultural and it is within the authority of the local governments inventory, machines and animals used for its to restrict or limit the construction through the use of management and the products of the plot of land which legislation such as building regulations. According to are necessary for the continuation of management until the Building Act, the local government approves the the next harvest). The lessor of the agricultural land or use of a building by issuing the authorisation for use enterprise has the right of security over things brought and the building can only be used for the purposes onto the land or the enterprise by the lessee and over delineated by the authorisation. Additionally, the the fruits of the object of the commercial lease contract official in charge of building surveillance is authorised in order to secure the claims of the lessor arising from to issue the owner of the building a precept if the the commercial lease contract. The right of security building is used without authorisation of use. In case does not secure future claims for compensation. the precept is not complied with, the owner of the building may be fined with penalty payment of up to The agricultural lease agreement need not be in written EEK 10,000 (approx. EUR 639) which can be imposed form. However, it may be difficult for the parties to repeatedly. If a building is built without a building enf orce any legal remedies against each other in an oral permit, it is at risk for demolition. Several legal acts, agreement. Furthermore, oral land lease agreements e.g. the Water Act and the Nature Conservation Act may have an effect on the companies receiving environmental limitations on the owner’s actions on environment -friendly production support from the the property. The exact extent of the restrictions Estonian Agricultural Registers and Information Board depends greatly on the location of the property and the (PRIA). In situations where more than one person surrounding environmental conditions. applies for a subsidy relating to specific tract of land (e.g. both the owner and the lessee), it is impossible for the lessee to prove its lawful right to use the land and
71 the subsidy may be granted to the other applicant or systems, and to pay the taxes, interest and claimed back from the lessee if it has already been encumbrances relating to the land. given. A usufruct generally extinguishes upon dissolution of Upon the lessee’s request, it is possible to make a the usufructuary. The Law of Property Act, however, notation in respect of the lease agreement in the Land stipulates that a usufruct of a legal person extinguishes Register. Under the Law of Obligations Act, a lessee of in every case after 100 years after the creation of the real property may demand a notation regarding the usufruct. A usufruct may also be terminated lease agreement be made in the Land Register. A prematurely by an agreement between the usufuctuary notation entered in the Land Register ensures that the and the owner of the property. A usufructuary also has actual owner of the real property or a person for whose the right to demand termination of the usufruct by benefit the real property is encumbered with a limited giving six months prior notice, provided that the real right, shall permit the lessee to use the property usufructuary compensates the owner of the property pursuant to the lease agreement and that the new for any damage caused as a result of the termination of owner does not have the right to cancel the lease the usufruct. The owner of the property may demand agreement pursuant to the provisions of the Law of the termination of the usufruct if the usufruct has lost Obligations Act. This Act stipulates that upon the importance for the usufructuary or the damage to the transfer of rights and obligations arising from a lease owner caused by the usufruct is significantly greater agreement to a new lessor, due to the transfer or than the benefit of the usufruct to the usufructuary. encumbrance of the leased property, the new lessor may cancel the lease agreement within three months by A usufruct is not transferable but the rights and giving the lessee three months (applicable to real obligations arising from a usufruct may be exercised by property) prior written notice thereof unless the another person unless otherwise provided by law or the agreement can be cancelled earlier according to its transaction by which the usufruct is established. terms. If, in the case specified above, the new lessor cancels a lease agreement entered into for a specified Right of superficies term before the term of the agreement expires, the previous owner shall be liable for any damage caused Another important use of real property is the right of by termination. superficies, anything which is placed on the ground so as to be attached to it, such as buildings. Land may be According to the Law of Obligations Act, if, in the case encumbered with the right to superficies so that the of an agricultural lease contract, entered into for at least person for whose benefit such right is constituted three years, neither party gives notification at least two (superficiary) has a transferable and inheritable right for months before the expiry of the contract that the party a specified term to own a building permanently does not wish to extend the contract, the contract is attached to the underlying land. A superficiary shall presumed to have become concluded for an unspecified pay the owner for the right to the superficies unless term. An agricultural lease agreement for an unspecified otherwise agreed. The right of superficies shall be term may be cancelled by either party by giving at least entered in the Land Register. one year's notice. However, the contract may be cancelled only such that it expires on 1 April or 1 Only one right of superficies may be established on October. Where the leased area is less than 2 ha, a lease each unit of land. In addition to the land under a agreement for an unspecified term may be cancelled by building, the right of superficies extends to other parts either party by giving six months notice. of the land which are necessary for use of the building.
A transaction (including real right contract) by which Usufruct the right of superficies is established must be notarised. Property used for agricultural purposes are commonly encumbered with a usufruct. A usufruct encumbers real The right of superficies may only be established for a property in a way that the person for whose benefit the term of 99 years. Upon expiry of the term the owner of usufruct is established (usufructuary) is entitled to use the land and the superficiary may extend the right of the property and to acquire the fruits thereof. The real superficies by agreement, but for not more than 99 right contract by which the usufruct is established and years. Extension of the right of superficies shall be entered in the Land Register must be notarized. entered in the Land Register.
Main obligations of the usufructuary are to maintain State registration of rights to real property and certain the intended purpose of land and use the land transactions prudently, to cultivate and use the land taking into account good agricultural practice and legal acts, to All real property interests shall be entered in the Land maintain soil fertility and the condition of the land, to Register maintained by county courts, unless otherwise secure the proper condition of the land improvement provided by law. An independent registry part is
72 opened for each immovable entered in the Land Obtaining land plots for agricultural purposes Register and a separate number (registered immovable There are no special regulations concerning the transfer number) is assigned thereto. The Land Register also of tracts of land used for agricultural purposes. It includes entries concerning restricted real rights should be noted that only and that has been registered encumbering the registered land (servitudes, real in the Land Register as a profit yielding land may be encumbrances, rights of superficies, rights of pre- used for agricultural purposes. One plot of land may emption), mortgages, restrictions on real property have several purposes and they can be amended by the ownership, notations concerning the restrictions and local government upon application by the owner. For restrictions on the right of disposal of the owner of the additional information concerning limitations on the registered property and other notations concerning transfer of property that may be used for agricultural ownership. If a real right entered in the Land Register is purposes please see “Restrictions on foreign-controlled deleted, it shall be presumed to have extinguished. companies regarding acquisition, ownership, use or sale of agricultural property”. The Land Register is public. Everyone has the right to examine the information entered in the Land Register and to receive extracts therefrom pursuant to the Licensing of farming activities in Estonia procedure provided by law. No special license is required for carrying out farming activities in Estonia. However, all legal persons offering The “Strong Land Register principle” states that the their products in retail or wholesale trade must register information entered in the Land Register is presumed their respective operations with the Register of correct. The Law of Property Act states that if a person Economic Activities. acquires a property interest or a limited real right on the basis of information entered in the Land Register, Restrictions on foreign-controlled companies regarding the information entered into the Land Register is acquisition, ownership, use or sale of agricultural property deemed to be correct with regard to the acquirer unless an objection is entered in the Land Register concerning The laws of Estonia do not restrict the right of companies to acquire and use agricultural property the correctness of information or the acquirer knew or should have known that the information entered in the based on the origin of the company. Restrictions on the size of property, type of property (agricultural or Land Register was incorrect. A transaction concluded based on the information of the Land Register is forest), property used for national defense etc. apply to deemed to be valid even if it becomes evident after the both Estonian and foreign companies. transaction that the seller had no right to transfer the ownership of the property. The burden is on the real The Restrictions on Acquisition of Property Act sets owner of the property to prove that the acquirer knew forth that a legal person who is not entered in the or should have known of the incorrectness of the Estonian Commercial Register may only acquire profit- information entered in the Land Register. yielding land comprised of agricultural or forest land with the authorization of the county governor. Following the entry into force of the amendments to the Estonian Law of Property Act Implementation Act This Act further stipulates that property that is on 1 March 2006, buildings are no longer transferable designated as profit yielding land and comprised of without the land on which they stand. The buildings agricultural or forest land of ten or more hectares, may are entered in the Building Register after a construction be acquired without limitations only if the acquiring permit has been issued by a local government. The company is registered in the Estonian Commercial Building Register includes all relevant information Register and has engaged in the manufacturing of concerning the buildings (e.g. measures, expertises agricultural produce within the meaning of the Rural carried out regarding the buildings etc.). The Register is Development and Agricultural Market Regulation Act public and maintained by the Ministry of Economic in Estonia for the last three consecutive financial years. Affairs and Communications and is used only for Property may be acquired under the same conditions informational and statistical purposes. Compared to the by a legal person of the European Economic Area Land Register, the Building Register has no legal member state provided that a branch of such legal importance as such and one cannot regard the person has been entered in the Estonian Commercial information in the Building Register as completely Register. If a person does not meet the requirements set accurate even though the local governments and other out above, it may acquire such property only with the persons that input information into the Building authorization of the county governor. Register are obliged to ensure its accuracy, there is no adequate guarantee. Even though there is no The restrictions of the described Act apply to some corresponding principal to “Strong Land Register” with extent also to transactions by which a legal share of an respect to the Building Register, it still is used in immovable is acquired, or by which an immovable transactions as a source of information concerning the shall be encumbered with a usufruct for longer than ten building transferred together with a parcel of land.
73 years or for an unspecified term, or by which an with a right of superficies and the building was immovable is encumbered with the right of superficies. constructed by a superficiary, then the latter shall be held liable for the damage. The Act is not applicable to transfer of property owned by the Estonian state, acquisition of apartment The building owner shall be liable also for damage ownership or upon encumbering property with the caused as a result of danger arising from the building right of superficies in apartments. due to the production, storage or transmission in the building of energy, flammable, toxic, caustic or For national defense reasons it is prohibited for any environmentally hazardous substances. person who is not an Estonian citizen, citizen of an EEA member state, legal person of Estonia or legal Land and real property taxation person of the EEA member state to acquire property without the authorization of the Government of Land owners (and in some cases land users) are under Estonian in the following areas: an obligation to pay land tax. Land tax is a tax based on the assessed value of land. In valuing the land, it is · the sea islands, except Saaremaa, Hiiumaa, Muhu divided into value zones, areas that share a similar value and Vormsi; level and value pricing mechanism. The value of land in each value zone shall be determined by types of · in the county of Ida-Virumaa: the cities of Narva, intended purpose represent in the value zone. Narva-Jõesuu and Sillamäe and the rural municipalities of Alajõe, Iisaku, Illuka, Toila and The rate of land tax is 0.1-2.5 per cent of the assessed Vaivara; value of land annually and it is established by the local · in the county of Tartumaa: the rural municipalities government council not later than 31 January of the of Meeksi and Piirissaare; taxation year. Land tax is to be paid in instalments of not less than one third of the total amount, by 15 · in the county of Põlvamaa: the rural municipalities April, 15 July and 15 October of each year. of Mikitamäe, Orava, Räpina and Värska; · in the county of Võrumaa: the rural municipalities In general, the land tax is paid by the owner of land but of Meremäe, Misso and Vastseliina. there are exceptions where the land tax is paid by the land-user. Most importantly, upon the encumbrance of Liabilities of owners land with a right of superficies or a usufruct, land tax shall be paid by the superficiary or usufructuary. Owners of tracts of land and buildings must comply with various environmental, safety, public health, fire, Upon transfer of a property interest and encumbrance residential, planning and other requirements under of property with limited real rights, state fees are Estonian law. charged under the State Fees Act. Moreover, capital gains received from the sales of property may be subject The Waste Act, for example, sets forth that the person to Estonian income tax. who disposes of waste into the environment shall be liable for the damage that results from it. If the polluter cannot be identified within one year from the time the pollution took place or the pollution must be removed immediately, the owner of the property must remove the pollution at his or her own expense.
The owner of the land must take into consideration the requirements arising from the Environmental Impact Assessment and Environmental Auditing Act and order environmental impact assessments, if necessary, for activities that fall into the scope of this Act, such as irreversible conversion of forest land or wetlands with a total area of more than 100 ha.
According to the Law of Obligations Act, a property owner shall be liable for damage caused by the collapse of the building that stands on the property and for damage caused by loosened and falling parts of the building, unless the owner proves that the damage is caused by force majeure or an act of the person who suffered the damage. If the property is encumbered
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ADDITIONAL INFORMATION
DIVIDEND POLICY The Company does not intend to pay dividends until it has developed profitable agricultural operations capable of generating positive cash flow for the Company. It is anticipated that dividend payment in the near future is unlikely.
NO LITIGATION The Group is not involved in any legal or arbitration proceedings which may have or have had a significant effect on the Company’s financial position and or prospects and, so far as the Directors are aware, there are no such proceedings pending or threatened against the Company.
NO DEPENDENCY ON INTELLECTUAL PROPERTY RIGHTS There are no patents or other intellectual property rights, licences or particular contracts, other than already mentioned, which are of fundamental importance to the Company’s business.
RELATED PARTY TRANSACTIONS No material transactions with related parties have been entered into by the Group companies, except for the intra -group loan agreements between the Group companies.
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SUMMARY OF APPLICABLE board. The articles of association must contain more specific provisions as to the composition of the DANISH COMPANY LAW supervisory board and the members’ term in office.
The supervisory board shall supervise the The sections below relate solely to Danish company administration of the business of the company carried law. Thus, aside from a few exemptions, the securities out by the board of directors and the management regulation governing companies listed on First North is board. The articles of association may prescribe that, not described. wherever possible, the members of the board of directors shall give advance notice to the supervisory board of certain specified measures which do not form PUBLIC LIMITED COMPA NIES part of the day-to-day business of the company. The incorporation of Danish Public Limited Moreover, the articles of association may provide that Companies ("aktieselskaber", abbreviated as "A/S") is the election of the board of directors and the fixing of governed by the Act on Public Limited Companies (the their remuneration shall be determined by the Companies Act). The current Companies Act conforms supervisory board. The supervisory board may not be to EU legislation in this area. The Danish Commerce granted other powers. and Companies Agency's unofficial translation of the Companies Act into English is available on the website There are no requirements regarding the nationality of http://www.eogs.dk/sw 302950.asp. Please note that the members of the supervisory board, board members the current translation is not fully updated with the and the managing director(s), and these persons may latest amendments. reside anywhere in the world.
Management structure Auditors The Public Limited Company must have a two-tier All companies are required to elect one or more management structure comprised of a board of auditors who are either "registered" or "state directors (with at least three members) and at least one authorised" by the Ministry of Economic and Business managing director. Shares may be issued in Euros. Affairs.
The board of directors has the overall responsibility of managing the company whereas the managing director Payment for shares is charged with the day-to-day management of the Shares may not be issued at a discount but may be company's affairs. No more than half of the directors issued at a premium, and such premium is considered a may also serve as managing directors and a managing distributable reserve. director cannot be appointed as chairman of the board. Payment for shares can be made either in cash or by The chairman of the board should not be involved in contribution of assets other than cash. The company specific day -to-day management, thus the positions of cannot be registered until the subscribed capital chairman and chief executive cannot be combined. (together with any premium) has been paid-up in full.
Managing director(s) are appointed by the board, shareholders therefore have only an indirect influence Treasury shares on the appointment or dismissal of the person(s) Public Limited Companies are allowed to purchase charged with day-to-day management of the company. shares issued by the company itself (treasury shares), provided that the board of directors has obtained The company’s articles of association may further authorisation from the general meeting to purchase prescribe that the company shall have a supervisory treasury shares and that such purchase of treasury board ("repræsentantskab") in addition to the board of shares can be covered by the company's free reserves. directors. This supervisory board shall be elected by the The company may not at any point in time hold company in a general meeting. The articles of treasury shares representing more than 10 per cent of association may prescribe that one or more members the company's share capital (including a subsidiary's shall be appointed in a different manner provided that shares in its parent company, regardless of whether said the majority of the members of the committee of subsidiary is Danish or foreign) and the total share shareholders are elected by the company in general capital held by individuals, other than the company, meeting. may not be less than DKK 500,000. The company cannot exercise voting rights attached to treasury The supervisory board shall have at least five members. shares. Members of the management board and the board of directors are not eligible to serve on the supervisory
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Shareholder's loans that the agreement can be implemented with the full The Companies Act prohibits the granting of loans or intended effect. security to a shareholder. If the shareholder is a controlling shareholder in the form of a company Pre-emption rights incorporated in Denmark, in another EU Member All shareholders have pre -emption rights entitling them State or in an EEA Member State, the prohibition to subscribe for new shares in the company in an generally does not apply. amount proportionate to their existing shareholdings. Shareholders may, subject to certain majority List of shareholders requirements, agree to waive this right. Pre-emption Public Limited Companies must keep a register of all rights apply only in cases where the capital increase is shares in the company and if shares are required by the to be issued for cash. company's articles of association to be registered shares, the shareholder's name must be recorded. If the General meetings Company issues bearer shares, the shareholder may Annual general meetings must be held in due time nevertheless request that his shares be registered in his making it possible for the company to comply with the name. Companies are also required to keep a separate deadline for filing the annual report. Extraordinary register listing shareholders holding 5 per cent or more general meetings can be convened at any time with the of the share capital or voting rights. The register of notice period prescribed by the articles of association. shareholders is not available to the public, but the articles of association may allow shareholders access to General meetings may be held either completely the share register. Information about holders of virtually, where everyone participates electronically, shareholdings of 5 per cent or more is public. e.g. by phone, the Internet or another medium with a similar function, or partially virtually where some Voting rights participate electronically while others participate in Unless otherwise stated in a company's articles of person. association, each shareholder is entitled to one vote per share. Some companies maintain two (or more) classes Board meetings may also be held virtually if this is of shares (usually called "A"-shares and "B"-shares) with consistent with the performance of the board's duties. the articles of association stating that one class of shares It is also possible to hold a board meeting in writing if carries increased voting rights. There is a maximum the meeting is limited to specific matters and it is limit of 10:1 on the difference in voting power between consistent with the nature of these matters. However, the different classes of shares. in both cases any member of the board of directors or a managing director may object to a written meeting and A company's articles of association may provide that a require that a physical board meeting be held. shareholder who has acquired shares by transfer is not entitled to exercise voting rights for those shares at A company may also elect to introduce electronic general meetings unless the shares have been entered in communication between the company and its the register of shareholders or unless the shareholder shareholders, e.g. by convening the general meeting by has applied for their registration and has substantiated e-mail. his acquisition prior to the general meeting. Notices of general meetings may be given no more than four Some matters, including amendments to articles of weeks prior to the meeting, and, in the absence of any association, capital increases, capital decreases and provision in the articles of association, no later than mergers, require that at least two-thirds of the votes eight da ys before the general meeting. cast as well as the per centage of voting share capital represented at the general meeting assent thereto.
Shareholders' agreements Dividends Company legislation has no provisions dealing specifically with the content of shareholders' Distribution of dividend can be made once a year at the agreements; such agreements are permitted. ordinary general meeting. Furthermore, the Shareholders' agreements are not required to be, and shareholders may authorise the board of directors to may not be, registered with the Danish Commerce and decide to distribute extraordinary div idend payments. Companies Agency. The articles of association must authorise the board to distribute extraordinary dividend payments in order for Shareholders' agreements are not generally binding on the board to do so. the company itself except perhaps in very few specific circumstances and shareholders who are parties to such Profits carried forward from previous financial years as agreements should consider carefully how to ensure well as profit accrued during the current financ ial year
77 as recorded in the interim accounts and free reserves available on -line, upon payment of a fee, to any (irrespective of whether such reserves have been interested party and, more extensively, to those who released in the current financial year) are generally subscribe to the Danish Commerce and Companies eligible for dividend payments. Agency's on -line information system, "CVR". This information includes summary extracts of the full list of board members, managers, auditors, rules of Annual report signature, financial year and when the latest annual The annual report must be audited by an independent report was filed. Copies of the annual reports are also auditor and approved by a ge neral meeting to be held available on-line whereas copies of the Articles of in due time so that the annual report may be received Associations may be available by mail within a few by the Danish Commerce and Companies Agency in days (or by fax the same day by payment of a special due time. The financial year must, in general, cover a fee). 12-month period.
Management liability In general, the basis for board members' and managers' liability is the general rule in Danish law regarding liability for negligence. Board members and managers must therefore exercise their d uties loyally and with the necessary due care and attention.
The typical situations where liability may arise can roughly be categorised as follows:
· neglect of specific clearly defined duties imposed by the Companies Act, the Financial Statements Act, the company's articles of association or basic fundamental legal principles;
· the pursuit by board members or management of their own interests, or, at least, interests not related to those of the company;
· failure to perform duties in a proper and businesslike manner.
To date, Danish courts have been reluctant to impose liability, unless clear specific duties, such as those in the first category above, have been breached.
Reporting requirements and continuing obligations Corporate reporting requirements are not substantially different from those common elsewhere. Any change in the company's address, in company management or of the company's auditor must be notified to the Danish Commerce and Companies Agency within 14 days from the date of the decision. The annual report must be filed with the Danish Commerce and Companies Agency without undue delay after it has been approved at the general meeting. Other changes, including amendments to the company's articles of association, must be reported to the Danish Commerce and Companies Agency within four weeks from the date of the decision.
Access to Public Records The company registration system is now fully computerised and a fair amount of information is
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TAX CONSIDERATIONS Denmark has concluded income tax conventions with approximately 80 countries, including Switzerland, Norway, Japan, Australia, the United States, certain countries in Africa, Latin America, the Middle East, the TAX CONSIDERATIONS IN DENMARK Far East and all members of the European Union. The following is a summary of material Danish tax considerations relating to the acquisition, possession A separate regime for reduction of withholding tax is and sale of shares for investors who are Danish tax available to private individuals who are tax residents of residents and investors who are not Danish tax the United States, Canada, Germany, the Netherlands, residents. Belgium, Luxembourg, Norway, Sweden, Ireland, Switzerland, Greece and the UK. In order to qualify The summary does not purport to be an exhaustive under this regime, a shareholder must deposit his/her description of all of the tax considerations that may be shares with a Danish bank, and the shareholding must relevant to the acquisition, ownership, or sale of shares. be registered and administered by VP Securities Investors are responsible for keeping themselves Services ("Værdipapircentralen A/S"). In addition, such updated on new legislation as well as proposed shareholder must provide certification from the legislation. relevant foreign tax authority as to the shareholder’s tax residence and eligibility under the relevant treaty. A Investors should consult their own t ax advisers in order special form prepared by the Danish tax author ities gain clarification of the tax consequences associated must be used. The shareholder can agree with the with pu rchasing, owning, or selling of shares in light of relevant deposit bank that the bank procures the their particular circumstances, including the effect of relevant form. any state, local, or other national laws. In addition, it may be possible for the company paying The summary does not inc lude a description of the tax dividends or VP Securities Services to enter into an consequences to professional investors, pension funds, agreement with the Danish tax authorities under which etc. The summary is based on the laws, regulations, the company will only be required to withhold tax at court rulings and decisions in effect in Denmark as of the rate provided for by the relevant double taxation 10 May 2007, all of which are subject to change, in treaty. some cases with retroactive effect. No dividend tax is withheld on dividends paid to companies holding 15 per cent or more of the Taxation of investors who are not tax residents of Company’s share capital for a consecutive period of not Denmark less than one year, during which period dividends are Taxation of dividends distributed. It is a condition, however, that such company is covered by the EU Parent/Subsidiary Under Danish law, dividends paid in respect of shares Directive or a double-taxation treaty between Denmark in Denmark are generally subject to Danish and the country in which the company is based and withholding tax at the rate of 28 per cent, irrespective that, under the treaty, Denmark must waive or reduce of whether the non-resident shareholder is a private the Danish dividend tax. The ownership requirement individual or a company. Non-residents of Denmark will be reduced to 10 per cent for 2009 and onwards. are not subject to additional Danish income tax in respect of dividends received on shares in Denmark irrespective of whether they hold the shares in Capital gains taxation connection with a trade or business conducted from a A non-resident of Denmark will normally not be permanent establishment in Denmark. subject to Danish tax on any gains realised on the sale or other disposition of the shares irrespective of Non-resident shareholders are normally eligible for a whether such shareholder holds the shares in refund of a part of the withholding tax where the connection with a trade or business conducted from a shareholders are entitled to claim a reduction of Danish permanent establishment in Denmark. withholding tax under a double taxation treaty. Shareholders who are eligible to claim such reduction and who observe certain specific certification rules may Taxation of investors who are tax residents of Denmark apply to the Danish tax authorities for reimbursement Taxation of dividends – private individuals of withholding tax, which will reduce the effective Danish withholding tax rate to 15 per cent in most Investment of excess funds cases. In practice, non-resident shareholders may expect to receive a refund within approximately one month Dividends paid to investors who are residents of from the date on which the Danish tax authorities Denmark, for tax purposes, are generally subject to a receive the claim for refund. withholding tax of 28 per cent.
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Dividends paid to private individuals are taxed as share derived by the individual or married couple income. In 2007, share income is taxed at the rate of 28 respectively. per cent on the first DKK 45,500 (the amount is subject to annual adjustment) and at the rate of 43 per cent on Shares listed on First North are unlisted shares for share income in excess of DKK 45,500 (for cohabiting Danish tax purposes. Losses on unlisted shares may be spouses a total of DKK 91,000). Accordingly, provided deducted from the share income for the year. If the that the amount of divide nds received ot gether with share income for the year is negative, the tax value of other share income does not exceed DKK 45,500 DKK the negative share income (28 per cent/43 per cent, see (for cohabiting spouses a total of DKK 91,000) private above) may be deducted in the final tax for the year. individuals do not pay any tax on the dividends beyond Any remaining amount may be carried forward and the 28 per cent that is normally withheld by the deducted in the final tax for future years. Company. Negative share income of a cohabiting spouse may be Investment of pension savings deducted from positive share income of the other spouse. According to certain rules, the tax value of any Private individuals who invest pension savings pay remaining amount may be deducted in final tax of the pension return tax at a fixed rate of 15 per cent of the cohabiting spouses. aggregate net return on their pension savings, including dividends. Pension return tax is generally settled by the Investment of pension savings pension institution and must not be stated on the individual’s tax return. Gains on shares acquired for pension savings are subject to 15 per cent pension return tax. The gains are made Taxation of dividends – companies up once a year at market price, normally at the difference between the value of the shares at the A company that owns less than 15 per cent of the beginning and the end of the year. nominal share capital of a company is only taxed on 66 per cent of dividends received. As the Danish corporation tax rate is 28 per cent, this corresponds to Capital gains taxation – companies an effective tax rate of 18.48 per cent. Subject to additional documentation, the rate of withholding tax Shares held for less than three years can be reduced from 28 per cent to 18.48 per cent for companies that own less than 15 per cent of the shares Gains realised by a company on shares held for less in a company. than three years are taxed at the rate of 28 per cent. Losses in excess of the tax-exempt dividends received on the shares in question during the period of ownership A company which owns more than 15 per cent of the can generally be offset against gains from the sale of nominal share capital of a company for a consecutive other shares held for less than three years and can be period of not less than one year, within which period carried forward without any time restrictions. Certain the dividends are distributed, is not taxed on dividends contributions and dividends within a group of received. companies including the company having issued the shares in question are included when calculating the The 15 per cent ownership requirement will be reduced dividends from the company having issued the shares in to 10 per cent for 2009 and onwards. question.
Capital gains tax – private individuals Shares held for three years or more
Gains realised by companies on the sale of shares held Investment of excess funds for three years or more are exempt from tax. Losses are The rules on taxation of private individuals were not deductible and cannot be offset against any capital changed effective 1 January 2006. Special transition gains. rules ap ply to shares which were sold on 1 January 2006 or later and which had been acquired on 31 Determination of period of ownership December 2005, at the latest. These rules are not described herein. If the shares were bought on several occasions, the shares acquired first are generally deemed to be sold Gains from sales of shares acquired after 1 January 2006 first (the FIFO principle). are taxed as share income at the rate of 28 per cent on the first DKK 45,500 in 2007 and at the rate of 43 per Determination of gains/losses cent on income in excess of DKK 45,500 (for If shares have been bought on several occasions, the cohabiting spouses DKK 91,000). The amounts of DKK purchase price in the event of a part sale is made up 45,500 and DKK 91,000 include all share income
80 according to an average purchase price (the average method).
Share transfer tax There is no Danish share transfer tax.
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VEDTÆGTER/ARTICLES OF ASSOCIATION
for/of Trigon Agri A/S CVR-nummer 29801843/Company reg.no. 29801843
VEDTÆGTER/ARTICLES OF ASSOCIATION
1. NAVN NAME
1.1 Selskabets navn er Trigon Agri A/S. The name of the Company is Trigon Agri A/S.
1.2 Selskabet driver tillige virksomhed under binavnet The Company also carries on business under the Trigon Farming A/S. secondary name of Trigon Farming A/S.
2. HJEMSTED REGISTERED OFFICE
2.1 Selskabets hjemsted er Københavns Kommune. The registered office of the Company is situated in the Municipality of the City of Copenhagen.
3. FORMÅL OBJECTS
3.1 Selskabets formål er at være et holding selskab og The object of the Company is to be a holding indirekte - via selskabets sub-holding selskaber - at company and to indirectly through its sub-holding foretage, administrere og afhænde investeringer i companies to make, manage and dispose of landbrugssektoren i Central- og Østeuropa. investments in the farming sector in Central and Eastern Europe.
4. SELSKABETS KAPITAL SHARE CAPITAL
4.1 Selskabets aktiekapital udgør EUR 59.627.479 fordelt The share capital of the Company is EUR på 59.627.479 aktier a EUR 1. 59,627,479 divided into 59,627,479 shares of EUR 1.
5. SELSKABETS AKTIER SHARES
5.1 Aktierne skal optages til notering eller handel på et The shares shall be admitted to listing or trading on reguleret ma rked eller på en OMX First North a regulated market or on an OMX First North markedsplads som dematerialiserede aktier. Aktierne market place as dematerialised securities. The skal registreres i Værdipapircentralen A/S i shares shall be registered with VP Securities Danmark og udstedes til ihændehaveren. Services in Denmark and be issued to bearer.
5.2 Selskabets aktiebog føres af VP Investor Services A/S The Company's register of shareholders shall be (VP Services A/S), Helgeshøj Allé 61, P.O. Box 20, managed by VP Investor Services A/S (VP Services DK-2630 Taastrup, der er valgt som aktiebogsfører A/S), Helgeshøj Allé 61, P.O. Box 20, DK-2630 på selskabets vegne. Taastrup, which, on behalf of the Company, has been selected as manager of the Company's re gister of shareholders.
5.3 Aktierne er omsætningspapirer. Der gælder ingen The shares shall be negotiable instruments. No
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indskrænkninger i aktiernes omsættelighed. restrictions shall apply to the transferability of shares.
5.4 Ingen aktionær er forpligtet til at lade sine aktier No shareholder shall be obliged to have his shares indløse helt eller delvist. redeemed in whole or in part.
5.5 Der udstedes ikke aktiebreve. Share certificates will not be issued.
5.6 I henhold til et oprindeligt tilsagn afgivet af Pursuant to a primary commitment made by the selskabets aktionærer har generalforsamlingen den shareholders of the Company, the general meeting 10. maj 2007 besluttet vederlagsfrit at udstede has on 10 May 2007 decided to issue 4,906,515 4.906.515 tegningsoptioner, der giver ret til at tegne warrants cost free, which gives the right to op til 4.906.515 nye aktier af nominelt EUR 1, til de subscribe for up to 4,906,515 new shares of berettigede i henhold til Bilag 1 uden fortegningsret nom inal EUR 1, to the entities entitled hereto in for de eksisterende aktionærer. Samtidig besluttede Appendix 1 without pre-emptive rights for the generalforsamlingen den dertil hørende existing shareholders. Simultaneously, the general kapitalforhøjelse på op til EUR 4.906.515. Vilkårene meeting decided the capital increase of up to EUR for udstedelsen af disse tegningsoptioner fremgår af 4,906,515. The terms of the issue of these warrants vedtægternes Bilag 1. are described in Appendix 1.
5.7 Generalforsamlingen har endvidere den 10. maj 2007 Further, the general meeting has on 10 May 2007 besluttet vederlagsfrit at udstede 10.000.000 decided to issue 10,000,000 warrants cost free, tegningsoptioner, der giver ret til at tegne op til which gives the right to subscribe for up to 10.000.000 nye aktier af nominelt EUR 1, til de 10,000,000 new shares of nominal EUR 1, to the berettigede i henhold til Bilag 1 uden fortegningsret entities entitled hereto in Appendix 1 without pre- for de eksisterende aktionærer. Samtidig besluttede emptive rights for the existing shareholders. generalforsamlingen den dertil hørende Simultaneously, the general meeting decided the kapitalforhøjelse på op til EUR 10.000.000. capital increase of up to EUR 10,000,000. The Vilkårene for udstedelsen af tegningsoptioner terms of the issue of warrants are described in fremgår af vedtægternes Bilag 1. Appendix 1.
6. SELSKABETS LEDELSE GOVERNANCE OF THE COMPANY
6.1 Selskabets ledelse varetages af: The governance of the company is attended to by: - Generalforsamlingen - The general meeting of shareholders - Repræsentantskabet - The supervisory board - Bestyrelsen - The board of directors - Direktøren - The registered CEO
7. GENERALFORSAMLINGEN, POWERS, LOCATION AND KOMPETENCE, STED OG INDKALDELSE CONVENING OF GENERAL MEETINGS
7.1 Generalforsamlingen har den højeste myndighed i The general meeting of shareholders has supreme alle selskabets anliggender, inden for de grænser authority in all matters and things pertaining to the lovgivningen og disse vedtægter fastsætter. Company subject to the limits set by statute and by these Articles.
7.2 Selskabets generalforsamlinger afholdes i General meetings shall be held in Greater Storkøbenhavn. Den ordinære generalforsamling Copenhagen. Annual general meetings shall be held skal afholdes hvert år i så god tid, at den reviderede in time for the audited and adopted annual report og godkendte årsrapport kan indsendes til Erhvervs- to be submitted to and received by the Danish og Selskabsstyrelsen, så den er modtaget i styrelsen Commerce and Companies Agency no later than inden udløbet af maj måned. by the end of May.
7.3 Ekstraordinær generalforsamling til behandling af et Extraordinary general meetings shall be convened bestemt angivet emne skal indkaldes senest 2 uger within two weeks after receipt of a written efter, at det skriftligt er begæret af bestyrelsen, requisition to transact any particular business revisor eller aktionærer, der ejer 1/10 af submitted by the board of directors, the auditors, aktiekapitalen. or shareholders representing one tenth of the share
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capital.
7.4 Generalforsamlinger indkaldes af bestyrelsen med General meetings shall be convened by the board mindst 8 dages og højst 4 ugers varsel. Indkaldelse of directors, giving no less than eight days' and no skal ske ved bekendtgørelse indrykket i et more than four weeks' notice. The notice shall be landsdækkende dagblad samt ved almindeligt brev announced in a national newspaper and by eller e-mail til alle i aktiebogen noterede aktionærer, ordinary mail or e-mail to all and any of the som har fremsat begæring herom. Indkaldelsen skal shareholders entered in the register of shareholders tillige ske i Erhvervs- og Selskabsstyrelsens edb- who have so requested. The notice shall also be informationssystem. given in the Danish Commerce and Companies Agency's electronic information system.
7.5 Forslag fra aktionærerne til behandling på Any proposals from the shareholders to be generalforsamlingen skal være skriftlige og være considered at the general meeting shall be modtaget af bestyrelsen senest ved udgangen af submitted in writing to the board of directors no februar måned. later than by the end of February.
7.6 Selskabets generalforsamlinger er ikke åbne for General meetings of the Company shall not be open to the public. offentligheden.
8. GENERALFORSAMLINGEN, AGENDA OF GENERAL MEETINGS DAGSORDEN
8.1 Senest 8 dage før generalforsamlingen skal No later than eight days before the general dagsordenen og de fuldstændige forslag, der skal meeting, the agenda, the complete proposals to be behandles på gene ralforsamlingen, og for den considered at the general meeting and, provided it ordinære generalforsamlings vedkommende tillige is not an extraordinary general meeting, the audited revideret årsrapport fremlægges til eftersyn for annual report shall be made available for inspection aktionærerne på selskabets kontor og samtidig sendes by the shareholders at the office of the Company til enhver noteret aktionær, som har fremsat and sent to any registered shareholder upon begæring herom. request.
8.2 På den ordinære generalforsamling skal dagsordenen The agenda of the annual general meeting shall være følgende: include the following items:
1. Bestyrelsens beretning om selskabets virksomhed i 1. The directors' report on the activities of the det forløbne regnskabsår Company during the past financial year
2. Godkendelse af den reviderede årsrapport 2. Adoption of the audited annual report
3. Meddelelse af decharge til bestyrelsen og 3. Resolution to discharge the board of directors direktionen and the management of its responsibilities
4. Anvendelse af overskud eller dækning af 4. Resolution on the distribution of the profit or underskud i henhold til den godkendte årsrapport loss recorded in the annual report adopted by the general meeting
5. Valg af medlemmer til repræsentantskabet 5. Appointment of members of the supervisory board 6. Valg af revisor 6. Appointment of auditor
7. Eventuelle forslag fra bestyrelsen eller aktionærer 7. Any proposals from the board of directors or shareholders.
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9. GENERALFORSAMLINGEN, GENERAL MEETINGS, VO TING STEMMERET OG MØDERET RIGHTS, AND RIGHT OF ATTENDANCE
9.1 Hver aktie på EUR 1 giver én stemme. Each share of EUR 1 shall carry 1 vote.
9.2 Hver aktionær er berettiget til at deltage i Each shareholder may attend the general meeting generalforsamlingen sammen med en rådgiver eller with an adviser or be represented by a proxy ved fuldmægtig, som kan udøve stemmeret på holder, who may exercise the voting right on aktionærens vegne. Fuldmagten skal være skrif tlig, behalf of the shareholder. The instrument of proxy dateret og må ikke være givet for mere end 1 år. shall be in writing and duly dated, and shall be issued for no more than one year.
9.3 En aktionær, der har erhvervet aktier ved Any shareholder having acquired shares through a overdragelse, kan ikke udøve stemmeret for de transfer may only vote on the shares acquired at erhvervede aktier på generalforsamlinger, der er general meetings subject to the shares being indkaldt, uden at aktierne er noteret i aktiebogen, registered in the Company's register of eller aktionæren over for selskabet har anmeldt og shareholders or the shareholder having notified t he dokumenteret sin erhvervelse. Company of its acquisition of the shares and establishing good title thereto.
9.4 Enhver aktionær er berettiget til at møde og stemme Any shareholder shall be entitled to attend and to på generalforsamlingen, når aktionæren senest 5 dage vote at a general meeting provided, however, that før dens afholdelse har anmodet om et adgangskort the shareholder has applied for an admission card til generalforsamlingen. Adgangskort udstedes til to such general meeting not later than five days den, der ifølge aktiebogen er noteret som aktionær. prior thereto. Admission cards shall be issued to For aktionærer, der ikke er noteret i aktiebogen, skal anyone who is re gistered as a shareholder in the aktionæren dokumentere sin aktiebesiddelse ved en Company's register of shareholders. Any ikke mere end 5 dage gammel depotudskrift fra shareholder who is not so registered shall Værdipapircentralen A/S eller det kontoførende document his shareholding by means of a statement institut (depotstedet) og samtidig afgive en skriftlig of account which is not more than five days old erklæring om, at aktionæren ikke efter udfærdigelsen issued by VP Securities Services or the account- af udskriften har afhændet sine aktier eller agter at holding bank (custodian bank) and shall at the same gøre dette, før generalforsamlingen er afholdt. time issue a written statement to the effect that after the date of issue of the statement of account the shareholder has not sold the shares and does not intend to do so before the general meeting has been held.
10. GENERALFORSAMLINGEN, DIRIGENT, GENERAL MEETINGS, CHAIRMAN, BESLUTNINGER OG PROTOKOL RESOLUTIONS AND MINUTE BOOK
10.1 Bestyrelsen udpeger en dirigent, der leder The board of directors shall elect a chairman to forhandlingerne og afgør alle spørgsmål vedrørende preside at the meeting and to determine all sagernes behandling og stemmeafgivning. questions pertaining to the transaction of business and the voting thereat.
10.2 På generalforsamlingen træffes alle beslutninger ved Unless otherwise provided for by the Danish simpelt flertal, medmindre andet følger af Companies Act (aktieselskabsloven), all resolutions aktieselskabsloven. at the general meeting shall be adopted by a simple majority of votes.
10.3 Over forhandlingerne på generalforsamlingen føres A summary of the business transacted at the general meeting shall be entered in a minute book en protokol, der underskrives af dirigenten. and shall be signed by the chairman of the meeting.
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11. REPRÆSENTANTSKAB SUPERVISORY BOARD
11.1 Repræsentantskabet består af 5 medlemmer, der The supervisory board consists of 5 members vælges af generalforsamlingen. Repræsentantskabet elected by the general meeting. The supervisory vælger sin formand. board elects its chairman.
11.2 Bestyrelsesmedlemmer og selskabets direktør må Members of the board of directors and the ikke være medlem af repræsentantskabet. registered CEO shall not be eligible to become members of the supervisory board.
11.3 Repræsentantskabets medlemmer vælges for tiden The members of the supervisory board are indtil næste ordinære generalforsamling. appointed to hold office until the next annual general meeting.
11.4 Repræsentantskabets opgaver er: The duties of the supervisory board are: - at vælge/afsætte medlemmerne af bestyrelsen - to elect/dismiss the members of the board of - at fastsætte vederlaget til medlemmerne af directors bestyrelsen - to determine the remuneration to the - at føre tilsyn med bestyrelsens og direktionens members of the board of directors forvaltning af selskabets anliggender - to supervise the administration of the business of the company carried out by the board of directors and the management
11.5 Repræsentantskabet er beslutningsdygtigt, når over The supervisory board shall constitute a quorum halvdelen af samtlige medlemmer er til stede. when more than half of the members are present. Repræsentantskabet træffer sine beslutninger ved Resolution s by the supervisory board shall be simpelt flertal. Formandens stemme er afgørende ved passed by a simple majority of votes. In case of stemmelighed. equality of votes, the chairman shall have the casting vote.
11.6 Repræsentantskabet skal vedtage en forretningsorden The supervisory board shall draw up rules of om udførelsen af sit hverv. procedure governing the performance of its duties.
11.7 Generalforsamlingen kan beslutte, at The general meeting may decide that the members repræsentantskabets medlemmer skal vederlægges for of the supervisory board shall be remunerated for deres arbejde. Vederlagets størrelse fastsættes på den their work. The size of the remuneration is decided ordinære generalforsamling. on the annual general meeting.
12. BESTYRELSE BOARD OF DIRECTORS
12.1 Bestyrelsen består af mellem 3-6 medlemmer valgt af The board of directors consists of 3-6 members repræsentantskabet for tiden indtil næste ordinære elected by the supervisory board to hold office generalforsamling. For hvert bestyrelsesmedlem kan until the next annual general meeting. An alternate tillige vælges en personlig suppleant. director may be appointed for each director.
12.2 Bestyrelsen vælger sin formand. Selskabets direktør The board of directors elects its chairman. The må ikke vælges til formand. registered CEO may not be appointed chairman.
12.3 Bestyrelsen er beslutningsdygtig, når over halvdelen The board meeting shall constitute a qu orum when af samtlige bestyrelsesmedlemmer er til stede. more than half of the directors are present. Bestyrelsens beslutninger træffes ved simpelt flertal. Resolutions by the board of directors shall be Formandens stemme er afgørende ved stemm elighed. passed by a simple m ajority of votes. In case of equality of votes, the chairman shall have the casting vote.
12.4 Bestyrelsen skal vedtage en forretningsorden om The board of directors shall draw up rules of udførelsen af sit hverv. procedure governing the performance of its duties.
12.5 Referater af bestyrelsesmøder skal indsættes i en Minutes of the board meetings shall be entered in a
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proto kol, som skal underskrives af de minute book and shall be signed by the directors bestyrelsesmedlemmer, som er til stede på møderne. present.
13. DIREKTION REGISTERED CEO
13.1 Bestyrelsen ansætter 1 direktør til at varetage den The board of directors shall appoint 1 registered daglige ledelse af selskabets virksomhed. CEO to be in charge of the day-to-day operations of the Company.
13.2 Direktøren skal vælges blandt medlemmerne af The registered CEO shall be elected amongst the bestyrelsen. Formanden for bestyrelsen kan ikke members of the board of d irectors. The chairman is vælges som direktør. not eligible to be elected as the registered CEO.
14. TEGNINGSREGEL POWER TO BIND THE COMPANY
14.1 Selskabet tegnes af bestyrelsens formand i forening The Company is bound by the joint signatures of med direktøren eller af den samlede bestyrelse. the chairman of the board of directors and the registered CEO or by all members of the board of directors.
15. REVISION AUDITING
15.1 Selskabets årsrapport revideres af en statsautoriseret The annual report of the Company shall be audited revisor valgt af generalforsamlingen for tiden indtil by a state-authorised public accountant appointed næste ordinære generalforsamling. at the general meeting for the period until the next annual general meeting.
16. REGNSKABSÅR, ÅRSRAPPORT MV. FINANCIAL YEAR, ANNUAL REPORT, ETC.
16.1 Selskabets regnskabsår er kalenderåret. Første The financial year of the Company shall be the regnskabsår løber fra stiftelsen den 11. december calendar year. The first financial year runs from the 2006 til den 31. december 2007. incorporation on 11 December 2006 to 31 December 2007.
16.2 Årsrapporten skal give et retvisende billede af The annual report shall give a true and fair view of selskabets aktiver og passiver, dets finansielle stilling the assets and liabilities of the Company, its samt resultatet, jf. årsregnskabsloven. financial position an d profit and loss, cf. the Danish Financial Statements Act (årsregnskabsloven).
17. EKSTRAORDINÆRT UDBYTTE EXTRAORDINARY DIV IDEND
17.1 Bestyrelsen er bemyndiget til at træffe beslutning om The board of directors may make an extraordinary uddeling af ekstraordinært udbytte i distribution of dividend pursuant to the provisions overensstemmelse med a ktieselskabslovens regler. of the Danish Companies Act.
Således vedtaget på generalforsamlingen den 10. maj Adopted by the general meeting on 10 May 2007. 2007.
Som dirigent: Chairman:
Jens Steen Jensen Jens Steen Jensen
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BILAG 1 TIL VEDTÆGTERNE FOR TRIGON AGRI A/S
APPENDIX NO. 1 TO THE ARTICLES OF ASSOCIATION OF TRIGON AGRI A/S
Vilkårene for udstedelse af tegningsoptioner, jf. vedtægternes pkt. 5.6-5.7, er følgende: The terms governing the granting of warrants (subscription rights), see Articles 5.6-5.7 of the Articles of Association, are as follows:
1. UDSTEDELSE AF GRANTING OF WARRANTS TEGNINGSOPTION ER 1.1 Tegningsberettiget til tegningsoptionerne er AS The right to subscribe for the warrants shall vest Trigon Capital (Estland, registreringsnr. with AS Trigon Capital (Estonia, registration no. 10179709), jf. 5.1. 10179709), cf. 5.1.
1.2 Den tegningsberettigede kan tegne 4.906.515 The holder of the subscription right may subscribe tegningsoptioner ("Gruppe I-tegningsoptioner"). for 4,906,515 warrants ("Group I-warrants). Each Hver tegningsoption giver ret til at tegne en aktie warrant shall entitle the holder to subscribe for one i selskabet af nominelt EUR 1. Tegning af aktier i share in the Company of a nominal value of EUR 1. udnyttelsesperiode (I -A), jf. 2.1, sker til EUR 1,24 In exercise period (I -A), see Article 2.1 the pr. aktie. Tegning af aktier i udnyttelsesperiode (I- subscription price per share shall be EUR 1.24. In B), jf. 2.1, sker til EUR 1,31. Tegning af aktier i exercise period (I-B), see Article 2.1, the subscription udnyttelsesperiode (I -C), jf. 2.1, sker til EUR 1,04 price per share shall be EUR 1.31. In exercise period med tillæg af 6% p.a. (rentes rente på 12 måneders (I -C), see Article 2.1, the subscription price per share basis) fra 30. april 2007 frem til dagen for shall be EUR 1.04 with the addition of 6% p.a. selskabets modtagelse af formular i forbindelse (compound interest on the basis of 12 months) from med udnyttelse, jf. 2.4. 30 April 2007 until the date of receipt by the Company of an exercise form, see Article 2.4.
1.3 Den tegningsberettigede kan endvidere tegne Further, the holder of the subscription right may 10.000.000 tegningsoptioner ("Gruppe II - subscribe for 10,000,000 warrants ("Group II- tegningsoptioner"). Hver Gruppe II- warrants"). Each Group II-warrant shall entitle the tegningsoption giver ret til at tegne en aktie i holder to subscribe for one share in the Company of selskabet af nominelt EUR 1. Tegning af aktier a nominal value of EUR 1. The subscription price sker til kurs 125 pr. EUR 100 (EUR 1,25 pr. per share shall be 125 per EUR 100 (EUR 1.25 per aktie). share).
1.4 Der betales intet vederlag for tegningsoptionerne, No consideration shall be payable for the warrants as da tegningsoptionerne udstedes i henhold til en the warrants are granted under an advisory rådgivningsaftale. agreement.
1.5 Tegningsoptionerne tegnes ved underskrift på The warrants may be subscribed for by signing the generalforsamlingsprotokollatet den 10. maj 2007. minutes of the general meeting on 10 May 2007.
2. UDNYTTELSE AF EXERCISE OF WARRANTS TEGNINGSOPTIONER 2.1 Tildelte Gruppe I-tegningsoptioner kan udnyttes i The Group I-warrants may be exercised in the perioderne (I -A) 30. april til 31. maj 2010 med op following periods, (I-A) 30 April to 31 May 2010 up til 2.453.258 tegningsoptioner, og (I-B) 30. april til to 2,453,258 warrants, and (I-B) 30 April to 31 May 31. maj 2011 med op til 2.453.257 2011 up to 2,453,257 warrants. If Group I-warrants tegningsoptioner. Såfremt G ruppe I- remain unexercised during (I-A), the number of tegningsoptioner ikke er udnyttet i (I -A), forøges warrants that may be exercised in (I-B) shall not be antallet af tegningsoptioner, der kan udnyttes i (I- increased. B), ikke.
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Såfremt en direkte eller indirekte erhverver af If a direct or indirect acquirer of shares in the aktier i selskabet bliver forpligtet til at give alle Company is obliged to offer all of the shareholders selskabets aktionærer mulighed for at afhænde in the Company the option to dispose of their shares deres aktier på identiske betingelser, skal samtlige on identical terms, then all outstanding warrants udestående tegningsoptioner kunne udnyttes i en shall be exercisable in a period (I-C) of 6 months periode (I-C) på 6 måneder fra den dag, hvor from the day when the board of directors of the selskabets bestyrelse blev bekendt med denne company became aware of this obligation. forpligtelse.
2.2 Tildelte Gruppe II-tegningsoptioner kan udnyttes The Group II-warrants may be exercised in the i perioderne (II-A) 30. april til 31. oktober 2010, following periods, (II-A) 30 April to 31 October (II-B) 30. april til 31. oktober 2011 og (II-C) 30. 2010, (II-B) 30 April to 31 October 2011 and (II-C) 30 april til 31. oktober 2012, med op til 2.500.000 April to 31 October 2012, with up to 2,500,000 tegningsoptioner i (II-A), op til 2.500.000 warrants in (II -A), up to 2,500,000 warrants in (II-B) tegningsoptioner i (II-B) og op til 5.000.000 and up to 5,000,000 warrants in two separate tegningsoptioner fordelt på to separate trancher á tranches of 2,500,000 warrants each in (II-C). 2.500.000 tegningsoptioner i (II-C). Udnyttelse af Exercise of the tranche in (II-A) is subject to the tranchen i (II-A) er betinget af, at Aktionærafkast condition of Shareholder Return exceeding more udgør mere end 152 % af tegningskursen, jf. 1.3, than 152 % of the subscription price, see Article 1.3, på 20 handelsdage i (II-A). Tilsvarende gælder for on 20 trading days in (II-A). The tranche in (II-B) and tranchen i (II-B) og de to trancher i (II-C), idet the two tranches in (II-C) are accordingly subject to Aktionærafkast skal udgøre mere end 175 % i (II- the said condition, the Shareholder Return exceeding B) og henholdsvis 201 % og 249 % i de to trancher more than 175 % in (II-B), and 201 % and 249 % i (II-C) i alle tilfælde i forhold til tegningskursen, respectively in the two tranches in (II-C) in all cases jf. 1.3. of the subscription price, see Article 1.3.
Aktionærafkast på en handelsdag beregnes som Shareholder Return on a trading day shall be summen af (i) slutkursen som et vægtet calculated as the sum of (i) the final price as a gennemsnit af alle dagens handler, og (ii) værdien weighted average of all trades on that day, and (ii) the af samtlige udlodninger til selskabets aktionærer, value of all distributions to the shareholders of the herunder udbytte, køb af egne aktier og Company, including dividends, buy back of shares kapitalnedsættelse, med fradrag af bruttobeløbet and capital decrease, with the deduction of the gross af udbytteskat indeholdt af selskabet i forbindelse amount of dividend tax withheld by the Company, med udlodningerne, divideret med det totale antal divided by the total number of shares in the aktier i selskabet. Company.
Så fremt udnyttelse ikke kan ske i (II-A) som følge If exercise cannot take place in (II-A) due to the af, at betingelsen om Aktionærafkast ikke condition on Shareholder Return not being fulfilled, opfyldes, forøges tranchen i (II-B) med 2.500.000 the tranche in (II-B) shall be increased by 2,500,000 tegningsoptioner. Såfremt udnyttelse tilsvarende warrants. If exercise accordingly cannot take place in ikke kan ske i (II-B), forøges 201 % -tranchen i (II- (II-B), the 201 % tranche in (II-C) shall be increased C) med 2.500.000 tegningsoptioner, hvis by 2,500,000 warrants, if the condition on betingelsen om Aktionærafkast ikke opfyldes i Shareholder Return is not fulfilled in (II-A), and by (II-B), henholdsvis med 5.000.000 5,000,000 warrants respectively, if the condition on tegningsoptioner, hvis betingelsen om Shareholder Return is not fulfilled in (II-A) and (II- Aktionærafkast ikke opfyldes i (II-A) og (II-B). B).
Såfremt en direkte eller indirekte erhverver af If a direct or indirect acquirer of shares in the aktier i selskabet bliver forpligtet til at give alle Company is obliged to offer all of the shareholders selskabets aktionærer mulighed for at afhænde in the Company the option to dispose of their shares deres aktier på identiske betingelser, skal samtlige on identical terms, then all outstanding warrants udestående tegningsoptioner kunne udnyttes i en shall be exercisable in a period (II-D) of 6 months periode (II-D) på 6 måneder fra den dag, hvor from the day when the board of directors of the selskabets bestyrelse blev bekendt med denne Company became aware of the obligation. Exercise forpligtelse. Udnyttelse er betinget af, at is subject to the condition that the final price of the slutkursen på aktierne, vægtet gennemsnit af alle shares, weighted average of all trades, on 20 trading handler, på 20 handelsdage i udnyttelsesperioden days in the exercise period exceeds the subscription overstiger tegningskursen, jf. 1.3, med tillæg af 15 price, see Article 1.3, with the addition of 15 % p.a. % p.a. (rentes rente på 12 måneders basis) fra den (compound interest on the basis of 12 months) from
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30. april 2007 og frem til dagen for selskabets 30 April 2007 until the date of receipt by the modtagelse af formular i forbindelse med Company of an exercise form, see Article 2.4. udnyttelse, jf. 2.4.
2.3 Tegningsoptionerne kan udnyttes helt eller The warrants may be exercised in whole or in part, delvist, dog skal udnyttelse ske med minimum subject to a minimum exercise of 100,000 per 100.000 tegningsoptioner pr. gang. subscription.
2.4 Udnyttelse af tegningsoptioner skal ske ved, at en Warrants may be exercised by completing and af selskabet udarbejdet formular i udfyldt og signing a form drawn up by the Company and underskrevet stand ved telefax eller anbefalet brev forwarding it to the Company's address by telefax or sendes til selskabet på selskabets adresse. Betaling registered mail. Payment for the shares subscri bed af de tegnede aktier skal ske ved kontant for shall be made in cash to the Company's account indbetaling til selskabets konto senest 14 dage not later than 14 days after the Company's receipt of efter, at selskabet har modtaget ovennævnte the above form. formular.
2.5 Såfremt formular ikke modtages i behørig stand If the form is not received as provided for in Articles eller betaling ikke sker rettidigt, jf. 2.1-2.2, anses 2.1-2.2, or payment is late, the warrants shall be de omhandlede tegni ngs-optioner ikke for deemed unexercised, and any notice of exercise of udnyttet og eventuel meddelelse om udnyttelse af warrants on the basis of the form shall be deemed tegningsoptioner i henhold til formular anses for not given. The Company shall return any amount bortfaldet. Selskabet skal hurtigst muligt paid as soon as possible. returnere eventuelle indbetalte beløb.
2.6 Udnyttelse af tegningsoptioner er betinget af, at The exercise of warrants shall be subject to the den tegningsberettigede har åbnet en depotkonto, holder of the warrant having opened a custody som kan godkendes af selskabet, hvortil de account to be approved by the Company, to which tegnede aktier kan overføres. Enhver omkostning the shares subscribed for may be transferred. All i forbindelse med nævnte depotkonto bæres af costs pertaining to the custody account shall be paid den tegningsberettigede. by the holder of the warrant.
2.7 Selskabet skal snarest muligt anmelde den The Company shall register the capital increase with foretagne kapitalforhøjelse til Erhvervs- og the Danish Commerce and Companies Agency Selskabsstyrelsen. Selskabet skal snarest muligt without delay, and shall as soon as possible after such efter kapitalforhøjelsens registrering overføre de registration transfer the shares subscribed for to the tegnede aktier til den tegningsberettigedes depot, custody account of the holder of the subscription jf. 2.6, idet formularen udarbejdet af selskabet, jf. right, see Article 2.6, as specified in the form drawn 2.4, skal indeholde nærmere bestemmelser herom. up by the Company, see Article 2.4.
2.8 For aktier tegnet ved udnyttelse af In addition, shares subscribed for by the exercise of tegningsoptioner gælder endvidere, warrants shall be subject to the following conditions:
at størstebeløbet af den kapitalforhøjelse, der that the maximum nominal amount of the capital kan tegnes aktier for i henhold til Gruppe increase effected by the issue of shares based I-tegningsoptioner, er nominelt EUR on Group I-warrants shall be EUR 4,906,515, 4.906.515 og mindstebeløbet nominelt and the minimum nominal amount shall be EUR 100.000, EUR 100,000;
at størstebeløbet af den kapitalforhøjelse, der that the maximum nominal amount of the capital kan tegnes aktier for i henhold til Gruppe increase effected by the issue of shares based II-tegningsoptioner, er nominelt EUR on Group II-warrants shall be EUR 10.000.000 og mindstebeløbet nominelt 10,000,000, and the minimum nominal EUR 100.000, amount shall be EUR 100,000;
at der for de nye aktier skal gælde samme that pre-emption right applying to the existing fortegningsret som for de eksisterende shares shall also apply have no pre -emption aktier ved fremtidige kapitalforhøjelser, right to the new shares;
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at de nye aktier skal være that the new shares shall be negotiable omsætningspapirer, instruments;
at de nye aktier skal noteres eller optages til that the new shares shall be listed or admitted for handel som dematerialiserede aktier, trade as dematerialized shares, shall be registreres i en værdipapircentral og lyde registered with a securities centre and shall be på ihændehaver, bearer shares;
at de nye aktier skal noteres i selskabets that the new shares shall be recorded in the aktiebog, Company's register of shareholders;
at der for de nye aktier skal gælde samme that the pre-emption right applying to the existing fortegningsret som for de eksisterende shares shall also apply to the new shares in aktier ved fremtidige kapitalforhøjelser, connection with future capital increases;
at de nye aktier giver ret til vedtagne that the new shares shall confer upon the holder udbytteudlodninger og andre rettigheder i the right to receive dividend upon decision selskabet fra tidspunktet for and other rights in the Company from the kapitalforhøjelsens registrering, date of registration of the capital increase;
at såfremt der forinden udnyttelse af that if any changes have been made to the rights of tegningsoptioner er sket ændringer af the shares in respect of which the warrants rettighederne gældende for aktier, som may be exercised before the warrants are tegningsoptionerne giver ret til, jf. exercised, see the Company's Articles of selskabets vedtægter, skal de nye aktier Association, the new shares shall carry the have samme rettigheder som de same rights as the existing shares at the time eksisterende aktier på tidspunktet for of the exercise; udnyttelsen,
at de nye aktier udstedes i stykstørrelser à that the new shares shall be issued in EUR 1, og denominations of EUR 1; and
at såfremt den nominelle størrelse af that if the nominal amount of the shares in respect aktierne, som tegningsoptionerne giver ret of which the warrants may be exercised is til, ændres inden udnyttelse af changed before the warrants are exercised, the tegningsoptioner, skal den nominelle nominal amount of the new shares shall be størrelse af de nye aktier ændres changed accordingly. tilsvarende.
3. TEGNINGSOPTIONERNES OPHØR EXPIRY OF THE WARRANTS 3.1 Gruppe I-tegningsoptioner, der ikke er udnyttet i Any Group I-warrants that remain unexercised udnyttelsesperioderne (I -A) eller (I -B), jf. 2.1, during the exercise periods (I-A) or (I-B), see Article ophører samtidig med udløbet af (I-A) 2.1 shall expire upon expiry of (I-A) and (I-B) henholdsvis (I-B). Gruppe I-tegningsoptioner, der respectively. Any Group I-warrants that remain ikke er udnyttet ved udløbet af unexercised during the exercise period (I-C), see udnyttelsesperioden (I -C), jf. 2.1, kan fortsat Article 2.1 shall survive the expiry of (I-C) and may udnyttes enten i periode (I-A) eller (I-B) eller hvis be exercised either in period (I-A) or (I-B) or if a new en ny udnyttelsesperiode (I-C) indtræder. exercise period (I-C) occurs.
3.2 Gruppe II-tegningsoptioner, der ikke er udnyttet i Any Group II-warrants that remain unexercised udnyttelsesperioderne (II-A), (II-B) eller (II-C), jf. during the exercise periods (II-A), (II-B) or (II-C), see 2.2, ophører samtidig med udløbet af (II-C). Article 2.2 shall expire upon expiry of (II-C). Any Gruppe II-tegningsoptioner, der ikke er udnyttet Group II-warrants that remain unexercised during ved udløbet af udnyttelsesperioden (II-D), jf. 2.2, the exercise period (II-D), see Article 2.2 shall survive kan fortsat udnyttes enten i periode (II-A), (II-B) the expiry of (II-D) and may be exercised either in eller (II-C) eller hvis en ny udnyttelsesperiode (II- periods (II-A), (II-B) or (II-C) or if a new exercise D) indtræder. period (II-D) occurs.
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4. RETSSTILLING VED FUSION, LEGAL POSITION UPON MERGER, SPALTNING M.V. DEMERGER, ETC. 4.1 Såfremt aktiekapitalen i selskabet forhøjes ved If the share capital of the Company is increased by a udstedelse af fondsaktier eller ved udstedelse af bonus issue or an issue of shares at a subscription aktier med en tegningskurs, der er lavere end price that is lower than the market value of such markedskursen, eller såfremt den nominelle værdi shares, or if the nominal value of the shares is af aktierne ændres, skal antallet af uudnyttede altered, the number of warrants that remain tegningsoptioner på tidspunktet for beslutning unexercised at the time of the resolution on the herom og/eller udnyttelseskursen justeres således, bonus issue or capital increase and/or the exercise at enhver uudnyttet tegningsoption repræsenterer price shall be adjusted to the effect that any den samme værdi som umiddelbart forinden unexercised warrants shall represent the same value beslutningen. Bortset fra justeringen af antallet af as immediately before the resolution. Apart from the tegningsoptioner, skal alle øvrige rettigheder og adjustment to the number of warrants, all other pligter for de tegningsberettigede forblive rights and obligations of the holders of the warrants uændrede. Ingen andre ændringer i selskabets shall remain unaltered. No other change in the kapital eller udstedelse af konvertible gældsbreve, Company’s capital, nor any issuance of convertible optioner eller tegningsoptioner eller opløsning debt instruments, options or warrants, nor any ved fusion eller spaltning, skal berettige de dissolution, including dissolution by merger or tegningsberettigede til at kræve en justering af de demerger, shall entitle the holders of warrants to uudnyttede tegningsoptioner. require adjustment to the number of warrants outstanding.
4.2 Regulering af antal tegningsoptioner og/eller Any adjustment of the number of warrants and/or udnyttelseskurs, jf. 4.1, skal foretages af selskabets of the exercise price, cf. Article 4.1 above, shall be statsautoriserede revisor. made by the Company's state-authorized public accountant.
5. BEGRÆNSNINGER RESTRICTIONS 5.1 Tegningsoptionerne kan ikke overdrages, bortset The warrants shall be non-transferable, except for fra overdragelse til (i) en af AS Trigon Capital's transfers to (i) any Associate of AS Trigon Capital; associerede virksomheder, (ii) personer, som er (ii) any person employed by or in the service of AS ansat hos, eller arbejder for AS Trigon Capital Trigon Capital or any of its Affiliates and, at the eller dets associerede virksomheder, og som på time of the transfer resolution, taking part in tidspunktet for beslutningen deltager i levering af provision of services under an advisory agreement ydelser i henhold til en rådgivningsaftale med with the Company; and (iii) any company or entity selskabet, og (iii) selskaber eller virksomheder, controlled by any person referred to in (ii). der kontrolleres af de under (ii) nævnte personer.
5.2 Tegningsoptionerne må ikke underkastes The warrants may not be made subject to any debt kreditorforfølgning eller nogen anden form for enforcement or any other enforcement proceedings. tvangsfuldbyrdelse.
5.3 Tegningsoptionerne må ikke pantsættes over for The warrants may not be charged to any third party. tredjemand.
5.4 Selskabet kan suspendere muligheden for The Company may suspend the right to exercise the udnyttelse i en periode, hvis en sådan suspension warrants for any period if deemed necessary by the efter selskabets skøn er nødvendig for at selskabet Company to comply with any statute or delegated kan overholde love eller administrative legislation, including in respect of securities trading. forskrifter, herunder vedrørende værdipapirhandel.
6. OMKOSTNINGER COSTS 6.1 Selskabet afholder omkostningerne i forbindelse The Company shall pay all costs relating to the issue med udstedelse af tegningsoptioner og senere of the warrants and the subsequent exercise thereof, udnyttelse heraf, jf. dog 2.6. Omkostningerne, cf. however Article 2.6. The costs to be paid by the som selskabet skal afholde, anslås at andrage EUR Company are estimated at EUR 10,000. 10.000.
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7. TVIST DISPUTES 7.1 Enhver tvist, som måtte opstå i anledning af Any dispute arising out of or in connection with vilkårene for tegningsoptionerne, skal afgøres ved these terms governing the warrants shall be settled voldgift ifølge "Regler for behandling af sager ved by arbitration in accordance with the "Rule s of Det Danske Voldgiftsinstitut (Danish Arbitration Procedure of the Danish Institute of Arbitration)". Medlemmer af voldgiftsretten Arbitration". The arbitrators shall be appointed by udpeges af instituttet i overensstemmelse med de the Institute under these rules. The dispute shall be anførte regler. Dansk ret og det engelske sprog settled in accordance with Danish law, and the skal anvendes under voldgifts-sagen. language of the arbitration proceedings shall be English.
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INDEX TO FINANCIAL STATEMENTS
Page Interim Financial Statements of Trigon Agri A/S for the period 11 December F-1 2006 to 29 March 2007 Balance Sheet F-1 Income Statement F-2 Statement of Changes in Equity F-3 Cash Flow Statem ent F-4 Notes to the Financial Statements F-5 Auditor’s Report F-8 Consolidated Financial Statements of AS Trigon Farming for the year ended 31 F-9 December 2006 Consolidated Balance Sheet F-9 Consolidated Income Statement F-10 Consolidated Statement of Changes in Equity F-11 Consolidated Cash Flow Statement F-12 Notes to the Consolidated Financial Statements F-13 Auditor’s Report F-39
94 INTERIM FINANCIAL STATEMENTS OF TRIGON AGRI A/S FOR THE PERIOD 11 DECEMBER 2006 – 29 MARCH 2007
Balance sheet
(in Euros) Note As at 29 March 2007
ASSETS Current assets Cash and cash equivalents 5 152,151 152,151 Total assets 152,151
LIABILITIES
EQUITY Capital and reserves attributable to equity holders of the Company A-class shares 6 152,151 Retained earnings - Total equity 152,151 Total equity and liabilities 152,151
The notes on pages F-5 to F-7 are an integral part of these interim financial statements.
F-1 INTERIM FINANCIAL STATEMENTS OF TRIGON AGRI A/S FOR THE PERIOD 11 DECEMBER 2006 – 29 MARCH 2007
Income Statement
(in Euros) 11 December 2006 – Note 29 March 2007
Revenues - Operating costs - Operating profit - Net financial income/expense - Profit before income tax - Net Profit for the period -
The notes on pages F-5 to F-7 are an integral part of these interim financial statements.
F-2 INTERIM FINANCIAL STATEMENTS OF TRIGON AGRI A/S FOR THE PERIOD 11 DECEMBER 2006 – 29 MARCH 2007
Statement of changes in equity
(in Euros) Retained Note Share capital Total earnings Balance at December 11, 2006 67,018 - 67,018 Issue of share capital 6 85,133 - 85,133 Total contributions by owners 152,151 - 152,151
Result for the period - - - Total recognised income and expenses for the period - - -
Balance at 29 March 2007 152,151 - 152,151
The notes on pages F-5 to F-7 are an integral part of these interim financial statements.
F-3 INTERIM FINANCIAL STATEMENTS OF TRIGON AGRI A/S FOR THE PERIOD 11 DECEMBER 2006 – 29 MARCH 2007
Cash flow statement
(in Euros) 11 December 2006 - Note 29 March 2007 Cash flows from financing activities Proceeds from issuance of A -class shares 6 152,151
Net (decrease)/increase in cash, cash equivalents and bank overdrafts 152,151 Cash, cash equivalents and bank overdrafts at beginning of the period - Cash, cash equivalents and bank overdrafts at March 29, 2007 152,151
The notes on pages F-5 to F-7 are an integral part of these interim financial statements.
F-4 INTERIM FINANCIAL STATEMENTS OF TRIGON AGRI A/S FOR THE PERIOD 11 DECEMBER 2006 – 29 MARCH 2007
NOTES TO THE FINANCIAL STATEMENTS
1 General information
The Company was established on 11 December 2006 and the current set of interim financial statements is the first set for the Company.
Trigon Agri A/S (“the Company”) will become the holding company of Trigon Agri Group after the current owners of AS Trigon Farming (Estonia) have made contributions in kind of their shares and subordinated loan-notes/certificates of subscription in change of shares in Trigon Agri A/S.
The Com pany is a limited liability company incorporated and domiciled in Denmark. The address of its registered office is Sundkrogsgade 5, DK-2100 Copenhagen.
The current set of financial statements is prepared in English for presenting together with the Company Description for issuing new B-class shares. The Company will prepare its financial statements in accordance with IFRS, as adopted by the EU, and the additional Danish requirements for financial statements for the financial year 2007, which will be the first financial year for the Company.
These financial statements were authorised for issue by the Board of Directors on 30 March 2007.
The principal accounting policies applied in the preparation of these interim financial statements are set out below.
2 Accounting principles
2.1 Basis of preparation
The interim financial statements of Trigon Agri A/S have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU. The interim financial statements have been prepared under the historical cost convention.
Standards, amendments and interpretations effective in 2007 or later but not relevant
The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after respectively 1 June 2006, 1 November 2006 and 1 January 2007 but are not relevant to the Company’s operations:
· IFRIC 8, Scope of IFRS 2 effective for annual periods beginning on or after 1 June 2006. · IFRIC 9, Reassessment of embedded derivatives effective for annual periods beginning on or after 1 November 2006. · IFRIC 10, Interim Financial Reporting and Impairment, effective for annual periods beginning on or after 1 January 2007. · IFRIC 11, IFRS 2 - Group and Treasury Share Transactions, effective for annual periods beginning on or after 1 March 2007. · IFRS 8 Operating Segments, effective for annual periods beginning on or after 1 January 2009.
F-5 INTERIM FINANCIAL STATEMENTS OF TRIGON AGRI A/S FOR THE PERIOD 11 DECEMBER 2006 – 29 MARCH 2007
2.2 Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short -term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
2.3 Share capital
All shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
3 Financial risk management The company has not started its activities yet, therefore no financial risk factors exist.
4 Critical accounting estimates and judgments
The company has not started its activities yet, therefore no accounting estimates and judgements have been made to prepare this set of financial statements.
5 Cash and cash equivalents
(in Euros) 29 March 2007 Cash at bank and on hand 152,151 152,151
6 Share capital
(in Euros) A-class shares
At December 11, 2006 67,018 Additional shares issued 85,133 At 29 March 2007 152,151
The Company was founded on December 11, 2006 with total ordinary share capital at foundation of DKK 500,000 (EUR 67,018). At the foundation, the Company had only one class of shares and all shares were ordinary shares. As of March 27, 2007 the Company’s share capital was changed to be Euro nominated, the outstanding shares were changed into A- class shares and the share capital was increased with issue of additional A-class shares for cash.
As of March 29, 2007, the total authorised number of A-class shares is 152,151 shares with a par value of 1 Euro per share. Each A-class share carried 10 votes per share. All issued shares were fully paid.
F-6 INTERIM FINANCIAL STATEMENTS OF TRIGON AGRI A/S FOR THE PERIOD 11 DECEMBER 2006 – 29 MARCH 2007
7 Events after the balance sheet date
(a) Share swap between current owners of AS Trigon Farming and Trigon Agri A/S
On April 2, 2007, the Company will issue 19,475,328 new A-class shares with a par value of Euro 1 per share, which will be subscribed for by the existing shareholders of the Estonian investment company AS Trigon Farming with a non- monetary payment. The non-monetary payment consists of contribution in kind of 152,151 shares and 289,086,900 subordinated loan-notes/certificates of subscription in AS Trigon Farming, representing all outstanding shares and subordinated loan-notes/certificates of subscription in AS Trigon Farming. As a result, the total share capital of the Company will increa se by EUR 19,475,328 to EUR 19,627,479, consisting of 19,627,479 A-class shares with a par value of Euro 1 per share.
(b) Issuing of B-class shares
The Company plans to further increase its share capital with the issuance of B-class shares during the second quarter of 2007. The proceeds of the share capital issue are planned to be used for carrying out investments in the agricultural sector in Russia, Ukraine and the Baltic countries.
During the restructuring the Cypriot companies TC Farming Ukraine and TC Farming Russia owned by AS Trigon Farming will be transferred to subsidiaries of Trigon Agri A/S.
F-7 INTERIM FINANCIAL STATEMENTS OF TRIGON AGRI A/S FOR THE PERIOD 11 DECEMBER 2006 – 29 MARCH 2007
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Trigon Agri A/S We have audited the accompanying interim financial statements on pages F-1 to F-7 of Trigon Agri A/S for the period 11 December 2006 to 29 March 2007 (the “Interim Financial Statements”), which comprise the balance sheet as of 29 March 2007 and the income statement, statement of changes in equity and cash flow statement for the period 11 December 2006 – 29 March 2007 and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Interim Financial Statements Management is responsible for the preparation and fair presentation of the Interim Financial Statements in accordance with International Financial Reporting Standards as adopted by the EU. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the Interim Financial Statements that are free from material misstatement, whether due to fraud or error; selecting and appl ying appropriate accounting policies; and making accounting estimates that are reasonable in the circum stances.
Auditor’s Responsibility Our responsibility is to express an opinion on the Interim Financial Statements based on our audit. We conducted our audit in accordance with Danish Auditing Standards. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the Interim Financial Statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Interim Financial Statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Interim Financial Statements, whether due to fraud or error. In making those risk assessments, the auditor considers interna l control relevant to the Entity’s preparation and fair presentation of the Interim Financial Statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiv eness of the Entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the Interim Financial Statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the Interim Financial Statements gives a true and fair view of the financial position at 29 March 2007 of the Company and of the results of the Company’s operations and cash flows for the period 11 December 2006 - 29 March 2007 in accordance with International Financial Reporting Standards as adopted by the EU.
Niels Jørgen Lodahl, State Authorised Public Accountant PricewaterhouseCoopers, Statsautoriseret Revisionsaktieselskab
Copenhagen, 30 March 2007
F-8 CONSOLIDATED FINANCIAL STATEMENTS OF AS TRIGON FARMING FOR THE YEAR ENDED 31 DECEMBER 2006
Consolidated balance sheet
As at 31 December (in thousands of Estonian kroons) Note 2006
ASSETS Current assets Cash and cash equivalents...... 5 36,892 Receivables and prepayments ...... 6 19,003 Inventories ...... 7 38,347 Biological assets...... 8 24,583 118,825 Non-current assets Long-term prepaid rents ...... 6 15,011 Available-for-sale financial assets ...... 9 197 Property, plant and equipment ...... 11 104,394 119,602 Total assets 238,427
LIABILITIES Current liabilities Trade and other payables ...... 12 17,336 Borrowings ...... 13 1,876 Provisions for other liabilities and charges ...... 14 4,264 23,476 Non-current liabilities Trade and other payables ...... 12 1,672 Borrowings ...... 13 21,776 Provisions for other liabilities and charges ...... 14 881 Deferred income from EU subsidies ...... 15 5,740 30,069 Total liabilities 53,545
EQUITY Capital and reserves attributable to equity holders of the Company Ordinary shares ...... 16 15,215 Other reserves ...... 17 178,423 Retained earnings ...... (9,176) 184,462 Minority interest in equity...... 420 Total equity...... 184,882 Total equity and liabilities ...... 238,427
F-9 CONSOLIDATED FINANCIAL STATEMENTS OF AS TRIGON FARMING FOR THE YEAR ENDED 31 DECEMBER 2006
Consolidated income statement – by nature of expense
Year ended 31 (in thousands of Estonian kroons) Note December
Revenue...... 18 13,723 Other income...... 19 4,111 Gain arising from changes in fair value less estimated point-of-sale costs of 8 4,477 biological assets ...... Changes in inventories of agricultural produce...... (932) Changes in inventories of finished goods and work in progress ...... 6,887 Raw materials and consumables used ...... 20 (15,969) Employee benefits expense ...... 21 (5,684) Depreciation, amortisation ...... 11 (1,544) Other expenses ...... 23 (12,459) Other (losses)/gains ? net...... 24 (980) Operating profit ...... (8,371)
Finance costs...... 25 (560)
Profit before income tax...... (8,931) Profit for the year ...... (8,931)
Attributable to: Equity holders of the Company ...... (9,176) Minority interest ...... 245 (8,931)
F-10 CONSOLIDATED FINANCIAL STATEMENTS OF AS TRIGON FARMING FOR THE YEAR ENDED 31 DECEMBER 2006
Consolidated statement of changes in equity
Note Attributable to equity holders of the Company Other Retained Minority Share capital reserves earnings Total interest Total equity Balance at 4 May 2006...... 400 – – 400 – 400 Issue of share capital ...... 16 14,815 – – 14,815 – 14,815 Issue of subordinated loan-notes...... 17 – 178,357 – 178,357 – 178,357 Total contributions by owners...... 15,215 178,357 – 193,572 – 193,572 Minority interest arising on business combinations (Note 29) – – – – – 175 175
Net income recognised directly in equity Currency translation differences ...... – 66 – 66 – 66 Total net income recognised directly in equity ...... – 66 – 66 – 66
Recognised income and expense for the year Loss for the year...... – – (9,176) (9,176) 245 (8,931) Total recognised income and expense for the year ...... – 66 (9,176) (8,934) 245 (8,865) Balance at 31 December 2006 ...... 15,215 178,423 (9,176) 184,462 420 184,882
F-11 CONSOLIDATED FINANCIAL STATEMENTS OF AS TRIGON FARMING FOR THE YEAR ENDED 31 DECEMBER 2006
Consolidated cash flow statement
Year ended 31 (in thousands of Estonian kroons) Notes December 2006
Cash flows from operating activities
Cash generated from operations ...... 26 (78,274) Interest paid ...... (570) Net cash generated from operating activities ...... (78,844)
Cash flows from investing activities Acquisition of subsidiary, net of cash acquired ...... 29 (38,585) Purchases of property, plant and equipment (PPE) ...... 11 (36,728) Net cash used in investing activities ...... (75,313)
Cash flows from financing activities Proceeds from issuance of ordinary shares...... 16 15,215 Increase in other reserves ...... 17 178,357 Repayments of borrowings...... (4,793) EU subsidies received ...... 2,270 Net cash used in financing activities ...... 191,049
Net (decrease)/increase in cash, cash equivalents and bank overdrafts ...... 36,892 Cash, cash equivalents and bank overdrafts at beginning of year...... - Cash, cash equivalents and bank overdrafts at end of year ...... 36,892
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1 GENERAL INFORMATION
AS Trigon Farming (‘the Company’) and its subsidiaries (together ‘the Group’) operate in agricultural production. The Company started its activities in 2006 and the current set of financial statements is the first for the Company and the Group. The Group has subsidiaries in Estonia, Russia and Ukraine and sells its production in the same countries.
The Company is a limited liability company incorporated and domiciled in Estonia. The address of its registered office is Pärnu road 15, Tallinn.
The current set of financial statements is prepared in English for presenting to readers outside Estonia. The Company also prepares statutory set of financial statements in accordance with IFRS, which will be in Estonian and will be available to public in the Estonian Commercial Register.
These group consolidated financial statements were authorised for issue by the Board of Directors on 5 March 2007. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
2 ACCOUNTING PRINCIPLES
2.1 Basis of preparation
The consolidated financial statements of AS Trigon Farming have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of biological ass ets and available-for-sale financial assets.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 4.
Standards early adopted by the Group
IFRS 7, Financial Instruments: Disclosures, and the complementary Amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures, were early adopted in 2006. IFRS 7 introduces new disclosures relating to financial instruments. This standard does not have any impact on the classification and valuation of the Group’s financial instruments.
Standards, amendments and interpretations effective in 2007 or late, but not relevant
The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2007 but are not relevant to the Group’s operations:
– IFRIC 8, Scope of IFRS 2 effective for annual periods beginning on or after 1 June 2006. – IFRIC 9, Reassessment of embedded derivatives effective for annual periods beginning on or after 1 November 2006. – IFRIC 10, Interim Financial Reporting and Impairment, effective for annual periods beginning on or after 1 January 2007. – IFRIC 11, IFRS 2—Group and Treasury Share Transactions, effective for annual periods beginning on or after 1 March 2007. – IFRS 8 Operating Segments, effective for annual periods beginning on or after 1 January 2009.
2.2 Consolidation
(a) Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de -consolidated from the date that control ceases.
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The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.
Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
(b) Transactions with minority interests
The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.
2.3 Foreign currency translation
(a) Functional and presentation Currency
Items included in the financial statements of each of the Group’s entities are measured using the Currency of the primary economic environment in which the entity operates (‘the functional Currency’). The consolidated financial statements are presented in Estonian kroon, which is the Company’s functional and presentation Currency.
(b) Transactions and balances
Foreign Currency transactions are translated into the functional Currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.
Changes in the fair value of monetary securities denominated in foreign Currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying am ount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in the carrying amount are recognised in equity.
Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation differences on non -monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non -monetary financial assets such as equities classified as available for sale are included in the available-for-sale reserve in equity.
(c) Group companies
The results and financial position of all the group entities (none of which has the Currency of a hyperinflationary economy) that have a functional Currency different from the presentation Currency are translated into the presentation Currency as follows:
· assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; · income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and
· all resulting exchange differences are recognised as a separate component of equity.
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On consolidation, exchange differences arising from the translation of the net investment in foreign operations and of borrowings are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
2.4 Property, plant and equipment
All property, plant and equipment is stated at historical cost less depreciation and impairment provision, where required. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
– Buildings 25-40 years – Machinery 7-20 years – Vehicles 3-5 years – Furniture, fittings and equipment 3-8 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.5).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within other (losses)/gains – net, in the income statement.
Borrowing costs are not included in the cost of property, plant and equipment (or other qualifying assets) but expensed as incurred.
2.5 Impairment of non-financial assets
Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financia l assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
2.6 Financial assets
The Group classifies its financial assets in the following categories: loans and receivables and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
Regular purchases and sales of financial assets are recognised on the trade-date – the date on which the Group commits to purchase or sell the asset.
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet
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date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet (Note 6).
(b) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.
Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value. Loans and receiva bles are carried at amortised cost using the effective interest method.
When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities.
Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as part of other income. Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Group’s right to receive payments is established.
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in Note 2.9.
2.7 Agriculture
Agricultural activity is defined by the management as an enterprise of the biological transformation of biological assets for sale into agricultural produce or into additional biological assets. Agricultural produce is defined as the harvested product of the Company’s biological assets and a biological asset is defined as a living animal or plant.
Biological assets are measured on initial recognition and at each balance sheet date at its fair value less estimated point-of- sale cost, expect for the case where the fair value cannot be measured reliably on initial recognition. Agricultural produce harvested from the Company’s biological assets is measured at its fair value less estimated point -of-sale costs at the point of harvest and subsequently recorded as inventories (Note 2.8 (a)).
If an active market exists for a biological asset or agricultural produce, the quoted price in that market is the appropriate basis for determining the fair value of that asset. If an active market does not exist the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the balance sheet date, is used in determining fair value. Cost is used as an approximation of fair value when little biological transformation has taken place since initial cost incurrence, e.g. within short time after seeding the crop.
A gain or loss arising on initial recognition of a biological asset at fair value less estimated point-of-sale costs and from a change in fair value less estimated point -of-sale costs of a biological asset shall be included in profit or loss for the period in which it arises.
The Company has determined the groups of its biological assets to be livestock and crops.
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(a) Livestock and dairy herd
Livestock are measured at their fair value less estimated point-of-sale costs. The fair value of livestock is determined based on market prices of livestock of similar age, breed and genetic merit. The fair value of dairy herd takes into account the milk quota attached to the herd.
Estonia is a member of EU and the milk can be sold based on milk quotas allocated by the State for each producer. The milk quota itself can not be separated from the herd and the agricultural business as it is not possible to trade with the quota without selling it together with the herd and the agricultural business. Also, there is no active market available for the herd without the milk quota. As the fair value of the herd can be determined reliably only together with the attached milk quota, the Group considers the milk quota to be an integral part of the fair value of the dairy herd.
(b) Crops – grain and grassland
Crops are measured at their fair value less estimated point-of-sale costs. At initial recognition (after seeding) the crops are measured at the cost as the market-determined values are not available for such biological assets (note 2.8 (b)). The crops are measured at fair value once the fair value becomes reliably measurable. Usually the fair value of a crop can be measured only immediately before harvest.
(c) Government grants
(i) Government grants related to income and costs
An unconditional government grant related to a biological asset measured at its fair value less estimated point-of-sale costs are recognised as income when the government grant becomes receivable (government grants for dairy herd, general area- aid subsidies). If a government grant is conditional, including where a government grant requires a Group Company not to engage in specified agricultural activity, the Group recognises the government grant as income when the conditions attaching to the government grant are met (investment subsidies, area-aid environmental subsidies).
(ii) Government grants related to purchase of property, plant and equipment
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the income statement on a straight-line basis over the expected lives of the related assets.
2.8 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
(a) Agricultural produce
Agricultural produce is initially measured at its fair value less estimated point -of-sale costs and subsequently recorded in inventories until sold to third parties or used internally for feeding animals. Cost of the agricultural produce is determined using FIFO method.
(i) Milk
Milk is initially measured at its fair value less estimated point-of-sale costs at the time of milking and subsequently recorded as inventories (Note 2.8 (a)). The fair value of milk is determined based on market prices in the local area.
The Company is exposed to financial risks arising from changes in milk prices. The Company does not anticipate that milk prices will decline significantly in the foreseeable future, and therefore, has not entered into derivative or other contracts to manage the risk of a decline in milk prices. The Company reviews its outlook for milk prices regularly in considering the need for active financial risk management.
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(ii) Grain and feeds
Grain and feeds produced by the Group are initially measured at its fair value less estimated point -of-sale costs at the time of harvest and subsequently recorded as inventories (Note 2.8 (a)). The fair value of feed is determined based on market prices in the local area. The fair value of grain is determined based on quoted prices on the nearest market or if multiple markets are available, of the market what the group company expects to use.
(b) Work-in-progress related to field preparation
Cost of agricultural preparation on fields before seeding is recorded as work-in-progress. After seeding the cost of field preparation is transferred to the fair value of biological assets (note 2.7 (c)).
2.9 Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The delinquency of payment is estimated separately on each market where the Group operates. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within selling and marketing costs. When a trade receivable is uncollectible, it is written off against the allowance accou nt for trade receivables. Subsequent recoveries of amounts previously written off are credited against selling and marketing costs in the income statement.
2.10 Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short -term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
2.11 Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
2.12 Trade payables
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.13 Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
2.14 Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet
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date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
2.15 Employee benefits
(a) Pension obligations
The Group does not operate pension schemes. Pension obligations may arise due to a legal obligation to pay for the incapability to work because of an accident.
The Group has legal obligation to pay contributions to the state pension funds according to the local regulations of each country of location. The contributions to the local pension funds are treated as social security tax payments.
(b) Termination benefits
Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to present value.
2.16 Provisions
Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
2.17 Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group.
The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considere d to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
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(a) Sales of goods – agricultural produce
The Group’s main revenue arises from the sales of agricultural produce – grain and milk. The agricultural produce is subject to quality control at the point of sale. Revenue from sales of agricultural produce is recognised after the results of quality control are available.
(b) Sales of biological assets
The Group sells living animals for slaughtering. The revenue from sales of living animals is recognised after the animals have been delivered to the slaughterhouse.
(c) Sales of services
The Group occasionally sells transportation services to other agricultural producers. Revenue from transportation services is recognised when the service has been provided.
(d) Interest income
Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.
(e) Dividend income
Dividend income is recognised when the right to receive payment is established.
2.18 Leases
The Group as a lessee
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight -line basis over the period of the lease.
Leases in which the risks and rewards incidental to the ownership of an asset are transferred substantially to the lessee are classified as finance leases. At the commencement of the lease term, the Group recognises the asset purchased on finance lease term on its balance sheet at the amount lower of the present value of future rent payments of fair value of the leased asset.
Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are included in borrowings. The interest cost is charged to the income statement over the lease period using the effective interest method. The assets acquired under finance leases are depreciated over their useful life or the shorter lease term if the Group is not reasonably certain that it will obtain ownership by the end of the lease term.
2.19 Dividend distribution
Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders.
3 FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (including Currency risk, commodity price risk, cash flow interest rate risk, fair value interest rate risk), credit risk, liquidity risk and capital repatriation risk. Having started its operations in May 2006, the Group’s focus during its first financial year was to acquire its first investments in the target countries of operation (Estonia, Ukraine and Russia) through committing the equity capital
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invested into the Group by its shareholders. The acquisitions concluded in the first financial year established the initial size of the Group’s business operations in the three target countries and the initial division between dairy and cereals production businesses. This created a base for putting in place the initial financial risk management policies.
On the basis of the current business operations of the Group, the management is working out financial risk management policies, which will seek to minimise potential adverse effects on the Group’s financial performance from unpredictable fluctuations in the financial markets. Once drawn up, these financial risk management policies will be presented to the Supervisory Board of the Group for approval prior to being carried out by the management. Since the Group is looking to actively expand its operations in the three target countries in the next few years, the management will seek to adjust the financial risk management policies on a continuous basis in order to correspond to the ongoing development of the Group’s business operations.
(a) Market risk
(i) Foreign exchange risk
The Group operates in Estonia, Ukraine and Russia and is exposed to foreign exchange risk arising primarily from exposures with respect to the Estonian kroon (EEK), the Euro, the US dollar, Russian Rouble and Ukrainian Hryvnia. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations.
The investment capital contributed to the Group by its shareholders during 2006 was paid in both the Estonian kroon and the Euro. Since it was difficult to predict the result of the acquisitions during the first year of operations and the resulting division of the actual operations in the three target countries of operation, the Group did not implement any currency risk management policies in its first financial year of operation, other than aiming to negotiate all major investments and payments to be made either in Estonian kroons or in Euros. The Estonian kroon’s exchange rate is fixed against the Euro at 1 EUR = 15.6466 EEK. The exchange rate is equivalent to the former exchange rate against the German mark (1 DEM = 8 EEK), introduced by the Estonian monetary reform of 1992. With the monetary reform, the currency board system was established, the principles of which have been maintained until today. Estonian kroon is freely convertible, i.e., there are no restrictions on the free movement of capital between Estonia and foreign countries. As a member state of the European Union, Estonia has an obligation to adopt the Euro. Both the Estonian government and the central bank have set the objective to join the Euro zone as soon as possible, i.e., as soon as Estonia meets all the necessary conditions. Currently, Estonia complies with all the criteria with the exception of the inflation rate.
(ii) Price risk
The Group is exposed to commodities price risk because of the significant size of its business operations in the production of cereals. Cereals to be produced by the Group in Russia and Ukraine will primarily be exported, which will expose a significant share of the Group’s revenues to global fluctuations in agricultural commodity prices. The milk production operations of the Group are to a much lesser extent affected by global commodity prices since the raw milk is sold regionally and cannot be exported over long distances. This is further supported by the fact that milk powder, a milk product commodity which can be transported over long distances, does not directly compete with raw milk due to the inferiority of milk powder based end-product quality. Such lower quality makes milk powder a secondary raw material to the milk processing companies operating in the target countries of the Group and allows the Group to negotiate fresh high quality raw milk price relatively independently of global milk powder price levels.
In 2006 the Group had only limited revenues based almost entirely on milk production in Estonia. Therefore, in 2006, the Group did not ca rry out any commodity price risk management policies.
(iii) Cash flow and fair value interest rate risk
As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates.
The Group’s interest rate risk arises from long -term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. During its first financial year of operations, the Group’s investment strategy was to commit the equity capital contributed by its shareholders to finance the Group’s investment activities. This implied that the Group did not incur significant bank borrowings as part of its investment financing strategy. Currently the only long- term borrowings that exist are bank loan and leasing facilities acquired by the Group in the acquisition of shares of the
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two Estonian operating farms. During 2006, the Group’s borrowings at variable rate were denominated in Euros. Break- down between floating and fixed interest rates for the existing long-term borrowings of the Group is shown below:
(in thousands of Estonian kroons) 31 December 2006 Long -term borrowings Outstanding amount Fixed rate ...... 738 Floating rate ...... 22,913 23,651
At 31 December 2006, the Group had a total of 23,651 thousand kroons in long-term borrowings, out of which 17,055 thousand kroons was Euro denominated borrowings and 6,597 thousand kroons was borrowings denominated in the Currency. In terms of beak-down between fixed and floating interest rate borrowings 768 thousand kroons were fixed interest rate borrowings and 22,884 thousand kroons floating interest rate borrowings. Base interest rate in all floating interest rate borrowings (both the Currency and Euro denominated) is 6-month EURIBOR or 5 year EURIBOR.
(in thousands of Estonian
kroons)
2006 Interest rate years months Maturity Balance at over 5 years no later than 12 between 1 and 5 31.December 2006 AS Hansapank * 17,055 407 4,331 12,317 2007 5 year EURIBOR + 1,5% AS Hansa Liising Eesti 48 29 20 - 2008 6 month EURIBOR + 3,0% AS Hansa Liising Eesti 124 37 86 - 2010 6 month EURIBOR + 1,5% AS Hansa Liising Eesti 4,228 653 2,870 705 2012 6 month EURIBOR + 1,5% AS Hansa Liising Eesti 99 38 60 - 2009 6 month EURIBOR + 1,9% AS Hansa Liising Eesti 96 26 70 - 2010 6 month EURIBOR + 1,9% AS Hansa Liising Eesti 620 169 451 - 2010 6 month EURIBOR + 1,45% AS Hansa Liising Eesti 592 166 426 - 2010 6 month EURIBOR + 1,35% AS Hansa Liising Eesti 52 14 38 - 2010 6 month EURIBOR + 3,0% Total borrowings 22,913 1,540 8,351 13,022
* loan facility, other liabilities in the table are financial lease liabilities
At 31 December 2006, if interest rates on floating interest rate borrowings at that date had been 10 basis points higher/lower with all other variables held constant, net profit for the year would have been 23 thousand kroons lower/higher, as a result of higher/lower interest expense on floating rate borrowings; other components of equity would have been 23 thousand kroons lower/higher as a result of a decrease/increase in the net profit for the year.
The facilities expiring within one year are annual facilities subject to review at various dates during 2007. The other facilities are in the process of arrangement to help finance the proposed expansion of the Group’s activities in Ukraine and Russia.
(b) Credit risk
Credit risk for the Group arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to suppliers (in the form of pre -payments) and customers, including outstanding receivables and committed transactions. For banks and financial institutions, the Group’s policy is to work only with institutions, which have an internationally reputable strategic shareholder as the majority investor. With customers, the Group did not have any significant outstanding receivables during the first financial year of business operations. With suppliers, the main credit risk in 2006 arose from operations in Ukraine where the Group made pre-payments for fixed assets and fertilisers to be used in production in the next year of operations. The pre -payments are required due to the nature of business operations in Ukraine.
The table below shows the outstanding balance of pre-payments by four major counterparties at the balance sheet date:
(in thousands of Estonian kroons) 31 December 2006 Counterparty Nature of prepayment Outstanding amount
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Ukrainian private companies Acquisition of fixed assets 29,517 Ukrainian private companies Acquisition of fertilizers 23,060 52,577
In the assessment of the management, no losses are expected from non-performance of the counterparties of the pre - payments.
(c) Liquidity risk
The Group’s main liquidity risks derive from the cyclical nature of agricultural production. Field-works in spring and harvest in autumn entails concentration of costs and working capital need in the spring season and concentration of revenues in the autumn season. The cyclicality is stronger in cereals production and much lower in dairy production, as dairy production revenues accrue evenly throughout the whole operating year. The Group is seeking to lower the cyclicality also in cereals production by acquiring its own warehousing infrastructure to store grain for longer time periods and to be able to sell cereal products more evenly throughout the year.
In 2006 all working capital and investment needs of the Group were financed through share holder investments. The Group is seeking to continue financing its existing operations and planned expansion through additional shareholder investments also in 2007. If this will not be possible, however, the management will hold back new acquisitions and seek to finance the required investment and working capital need of the existing operations from bank borrowings. In the assessment of the management, this is feasible as the Group currently carries only limited borrowings.
(d) Capital repatriation risk
The capital repatriation risk derives from the Group’s investments into Ukrainian and Russian subsidiaries. Potential changes in the political environment in Ukraine or Russia, may impose restrictions on repatriating capital invested into these countries. The Group’s policy is to make investments into Ukraine and Russia only via Cypriot holding companies. The advantageous double taxations treaties with Ukraine and Russia make Cyprus a favoured location of inward investments to these regions by several internationally recognised investors as well as for Ukrainian and Russian own capital, which seeks to have foreign domiciliation. In the assessment of the Group’s management, carrying out investments into Ukraine and Russia via Cypriot holding companies is the best possible hedge for minimizing capital repatriation risks.
3.2 Capital risk management
The Group’s objective in the 2006 financial year was to commit to actual investments the equity capital invested to the Group by its shareholders. For 2007, the Group is aiming to raise further equity capital in order to finance the expansion of its business operations. Once the newly raised equity capital has been committed, the Group will start to look to increase its bank borrowing for further financing the expansion and the ongoing business operations. All significant bank borrowings of the Group will be approved by the Supervisory Board of the Group prior to being drawn upon. The Supervisory Board will also approve the leveraging strategy to be worked out by the management, keeping in mind (i) safeguarding the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and (ii) development of an optimal capital structure so as to reduce the cost of capital.
3.3 Fair value estimation
The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price.
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments.
The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.
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4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
4.1 Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below.
(a) Fair value of biological assets
The Group’s biological assets are measured at fair value less point-of-sale costs at each balance sheet date. Due to the specifics of the agricultural production, fair value of some crops and animals can not be determined reliably in their present status. The biological assets in certain geographic areas where the Group operates are not traded on active markets which could enable use of market value. Therefore the fair value is sometimes determined using the alternative methods described in note 2.7. The use of alternative methods of fair value estimation requires the Group to refer to latest transactions and use price averages, or to use cost as an approximation of fair value. Were the actual prices for the biological assets higher by 10 per cent from management’s estimates, the net profit would increase by EEK 2,6 million, if the prices were lower by 10 per cent the net profit would decrease by EEK 2,4 million.
(b) Useful lives of property, plant and equipment
The depreciable groups of property, plant and equipment amounted to 50,183 thousand kroons as at
31 December 2006. The remaining balance includes land, which does not depreciate; and prepayments for property, plant and equipment. Management has estimated useful lifetimes for depreciable property, plant and equipment. However, the actual useful lifetimes can be different than those estimated by the management. If the average useful lifetime would be 10 per cent longer than estimated by the management, it would decrease the depreciation charge by 332 thousand kroons and would it be 10 per cent shorter than estimated by the management, the depreciation charge would increase by 425 thousand kroons in a year.
4.2 Critical judgments in applying the entity’s accounting policies
The Group management has decided to recognise available-for-sale financial instruments – shares of some companies, which were owned by the companies acquired during the year – at cost, because they believe that the fair value of these companies can not be measured reliably. All these companies are unlisted and small; therefore the valuation techniques would give a large variance in the estimated fair values. The management believes that the valuation of these companies would give little benefit to the readers of the financial statements.
The Group has not disclosed net profit for the year for the acquired subsidiaries as if the acquisition date had been the beginning of the period because it has been considered impracticable. The net profit can not be determined reliably because material part of the profit or loss relates to the change in fair values of the biological assets. It is impracticable to determine the fair values of biological assets retrospectively. In addition, none of the acquired entities prepared IFRS accounts prior to the acquisitions.
5 CASH AND CASH EQUIVALENTS
(in thousands of Estonian kroons) 2006 Cash at bank and on hand...... 35 Short-term bank deposits...... 36,855 36,892
Short term bank deposits bear interest of 3.8 per cent on annualized base.
6 TRADE RECEIVABLES AND PREPAYMENTS
(in thousands of Estonian kroons) 2006
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Receivables: Trade receivables...... 10,724 Less: provision for impairment of trade receivables ...... (18) Trade receivables – net ...... 10,706
(in thousands of Estonian kroons) 2006 Prepayments: Prepayments for rent...... 15,636 Prepayments for other indirect taxes ...... 4,587 Prepayments for other operating expenses ...... 3,085 23,308 Total receivables and prepayments...... 34,014 Less: non-current portion...... (15,011) Total current receivables and prepayments...... 19,003
The fair values of trade and other receivables are not materially different from the carrying values.
The ageing analysis of trade receivables and prepayments is as follows:
(in thousands of Estonian kroons) 2006 Up to 3 months ...... 10,724 10,724
The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:
(in thousands of Estonian kroons) 2006 Currency Ukrainian hryvna...... 3,690 Estonian kroon...... 7,024 10,724
The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security.
7 INVENTORIES
(in thousands of Estonian kroons) 2006 Prepayments for inventory ...... 24,443 Work in progress...... 7,905 Agricultural produce ...... 3,658 Raw materials ...... 2,342 38,347
Prepayments for inventory include prepayments for fertilizers and other inventories used for agricultural production.
No inventories have been written off.
8 BIOLOGICAL ASSETS
(in thousands of Estonian kroons) Dairy herd Pig-breeding Plant cultivation Total Acquisition of subsidiaries (Note 29)...... 20,170 279 300 20,749 Increases due to purchases...... 1,171 - - 1,171 Decreases due to sales ...... (1,814) - - (1,814) Gain arising from changes in fair value less estimated point-of-sale costs ...... 2,525 116 1,836 4,477 End of year...... 22,052 395 2,136 24,583
Total fair value of the biological assets as at 31 December 2006 amounted to 24,583 thousand kroons.
Average prices used in known sales transactions of the dairy herd with quota in Estonia during last two months of 2006 have been used to determine the fair value of dairy herd. During 2006 pig-breeding was secondary production in Ukraine and no pigs have been sold. The fair value of pigs has been determined based on fair value of meat after slaughtering in
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the Ukrainian region where the production is located. The cost of seeding of crops, which approximates the fair value of these crops, is used to determine the fair value of biological assets involved in plant cultivation.
Dairy herd, pcs Pig -breeding, pcs Plant cultivatio, ha Physical quantities as of end of the year...... 2,224 191 849
9 AVAILABLE-FOR-SALE FINANCIAL ASSET S
(in thousands of Estonian kroons) 2006 Unlisted securities: Shares of Nädaline OÜ...... 100 Shares of Raplamaa Tootjate OÜ...... 16 Membership in cooperatives ...... 82 197
The fair values of unlisted securities cannot be determined and thus are recognised at cost. At the time of preparing the financial statements available-for-sale financial investments are not impaired.
10 DEFERRED INCOME TAX
The Group does not have material deferred tax assets or liabilities. This is due to the following reasons:
1) The Group companies in Estonia are subject to income tax only when the profits are distributed. No corporate income tax is imposed on earnings; therefore there are no temporary differences between the tax and accounting bases of assets and liabilities.
2) The acquired subsidiary in Ukraine is not subject to income tax, but to the agricultural tax. The agricultural tax is based on hectares of arable land the company uses, not on its earnings and therefore no deferred tax arises.
3) The established subsidiaries in Russia and Ukraine did have losses in 2006. The losses in Russia have carry forward right in total amount less than 30 thousand kroons, which has been considered immaterial for more detailed disclosure.
Due to these reasons no deferred income tax assets or liabilities have been recognised in the Group’s balance sheet. The Group does not have current income tax liabilities for the same reasons.
11 PROPERTY, PLANT AND EQUIPMENT
-
ayments Land Buildings Vehicles & machinery Furniture, fittings & equipment Construction in process and pre p Total Year ended 31 December 2006 Balance at 4 May 2006 ------Acquisition of subsidiary (Note 29)..... 14,624 25,587 11,001 409 17,931 69,552 Additions ...... 1,531 9,083 6,325 1,024 12,112 36,728 Disposals ...... - (123) (182) (11) (39) (355) Depreciation charge ...... - (554) (963) (23) (4) (1,544) Unrealised exchange rate differences .... - 3 5 - 4 12 Closing net book amount ...... 22,808 33,996 16,187 1,398 30,005 104,394 Including assets under finance lease in - 4,023 4,972 - - 8,995 net book amount......
At 31 December 2006 Cost...... 22,808 34,281 16,988 1,417 30,005 105,500 Accumulated depreciation...... - (289) (807) (19) (4) (1,118) Unrealised exchange rate differences .... - 3 5 - 4 12
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Net book amount...... 22,808 33,996 16,187 1,398 30,005 104,394
As of 31 December 2006 the Group owned (or was in process of privatisation for) 2,206 hectares of land of which 1,341 hectares is in Estonia, and 841 in Russia.
Prepayments for property, plant and equipment include prepayments for harvesters in amount of 9,171 thousand kroons, prepayment for an apartment in amount of 1,863 thousand kroons and prepayment for elevator in amount of 18,483 thousand kroons. The rest of it are other prepayments and construction in process.
As of 31 December 2006, in total 828 hectares of land was encumbered with combined mortgage. The amount of the combined mortgage was 40,993 thousand kroons. In addition, some machinery and equipment were pledged with commercial pledge in amount of 3,500 thousand kroons. The object of the commercial pledge is unrestricted, i.e. all removable property up to an amount of 3,500 thousand kroons is pledged for the benefit of the bank.
Information on assets acquired under the terms of a finance lease is presented in Note 13.
12 TRADE AND OTHER PAYABLES
(in thousands of Estonian kroons) 2006 Trade payables ...... 13,945 Social security and other indirect taxes ...... 1,110 Accrued expenses ...... 1,16 Amounts due to related parties (Note 31)...... 748 Other payables...... 2,036 19,008 Less: non-current portion...... (1,672) 17,336
13 BORROWINGS
(in thousands of Estonian kroons) 2006 Non-current ...... Bank borrowings...... 16,648 Finance lease payables ...... 5,128 21,776 Current ...... Finance lease payables ...... 1,469 Bank borrowings...... 407 1,876 Total borrowings...... 23,652
(in thousands of Estonian kroons) Total future minimum payments Finance lease payables up to 12 months...... 1,542 1-5 years ...... 5,833 Over 5 years ...... 907 8,282 Future interests 1,685 Present value of the lease 6,597
The carrying amounts of the borrowings approximate their fair value.
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
(in thousands of Estonian kroons) Bank borrowings Finance lease payables Euro...... 17,055 - Estonian kroon...... - 6,597 17,055 6,597
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Estonian kroon is pegged to the euro at the rate of 15.6466 kroons per one euro. According to the currency board system no fluctuation in the peg is allowed, which will avoid any exchange rate differences.
Finance lease (in thousands of Estonian kroons) Bank borrowings payables Floating rate: – Expiring within one year ...... 407 1,132 – Expiring beyond one year...... 16,648 4,726 Fixed rate: – Expiring within one year ...... - 336 – Expiring beyond one year...... - 402 17,055 6,597
All the loan and lease arrangements have been concluded under regular terms. Lease agreements are related to the purchase of buildings and machinery in Estonia and are classified as finance lease because the ownership of leased assets passes to the Group at the end of lease term.
14 PROVISIONS FOR OTHER LIABILITIES
(in thousands of Estonian kroons) Movements in provisions: 2006 Recognising the provision for potential tax liability (Note 27 and 29)...... 1,657 Recognising the contingent consideration (Note 29)...... 1,522 Recognising provision for veterinary services ...... 1,300 Recognising potential claims of entitled subjects of the agricultural reform...... 667 Total provisions...... 5,145 Less: non-current portion...... (881) Current portion 4,264
Provision for potential tax liability is recorded due to the potential tax risk in one of the farms acquired (see Note 29).
Contingent consideration relates to the acquisition of the shares of Kärla farms (see Note 29) and consists of an obligation to pay on of the previous owners 322 thousand kroons in 2 years if the seller continues to be employed as a top manager of the Kärla farms and fulfils the targets set for the farms and of an amount of 1,200 thousand kroons, which is payable to another previous owners on the condition that EU investment subsidy, which was applied by the previous owner, will be received.
Provision for veterinary services in amount of 1,300 thousand kroons has been recognised in purchase price allocation and includes fair value of binding liability for veterinary care of dairy herd in one of the acquired farms in future periods.
Provisions in amount of 667 thousand kroons reflect the potential claims of entitled subjects of the agricultural reform in Ukraine and Estonia.
15 DEFERRED INCOME FROM EU SUBSIDIES Deferred income from EU subsidies is split as follows:
(in thousands of Estonian kroons) 2006 Environmental subsidy...... 3,686 Requirements set for dung pits subsidy...... 2,054 5,740
16 SHARE CAPITAL Number of shares Ordinary shares At 4 May 2006 ...... 4,000 400,000 Additional shares issued...... 14,815 14,815 At 31 December 2006...... 15,215 15,215
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The total authorised number of ordinary shares is 15,215,100 shares with a par value of 100 kroons per share. All issued shares are fully paid.
Share option to AS Trigon Capital:
In accordance with the Shareholders’ Agreement of the Group, AS Trigon Capital has been granted an option to call for a directed issue of new shares of the Group. As of the balance sheet date, AS Trigon Capital had option rights to a total of 38,038 new shares i.e. representing 20 per cent of the share capital of the Group on a fully diluted basis. The option may be exercised by AS Trigon Capital either wholly or partly, whereas upon partial exercise, the non-exercised portion may be exercised (also wholly or partly) later. The option subscription price per share has been defined as price per share paid by the shareholders of the Group, in each respective previous round of financing, plus a premium calculated at an annual hurdle rate of 6 per cent. As part of the option right, AS Trigon Capital, upon exercising the option, also has an obligation to simultaneously subscribe for new sub-ordinated shareholder loan-notes of the Group. The amount of loan- notes to be subscribed for by AS Trigon Capital at each such exercise of the option will be equal to the number of loan- notes outstanding per share for all other shareholders plus an additional number of loan-notes calculated using a 6 per cent annual hurdle rate.
17 OTHER RESERVES
The Group has issued subordinated loan-notes in 2006 totalling 178,357 thousand kroons. The loan-notes are classified as other reserves in the equity and are considered to be equity instruments of the Group.
The subordinated loan-notes of the Group have been issued only to the shareholders of the Group pro-rata to the shareholdings of each specific shareholder and can be sold only together with the shares. The subordinated loan-notes are unsecured and subordinated to the claims of all other creditors of the Group. No interest is paid on the loan-notes. The loan-notes are redeemed only in case the Group has funds in excess of what is required for financing its operational activities. The loan-notes repayment is subject to the proposal by the Management Board of the Group and has to be approved by the respective resolution of the Supervisory Board of the Group.
18 REVENUE
(in thousands of Estonian kroons) 2006 Revenue Sales of milk...... 9,364 Sales of other agricultural produce ...... 4,359 13,723
Revenue by geographical locations: 2006 Estonia...... 12,846 Ukraine...... 877 13,723
Estonian milk production is capped by EU milk quotas. As of 31 December 2006 the group owned 8,030 thousand kg of milk quota per year.
19 OTHER INCOME
(in thousands of Estonian kroons) 2006 Other income Government grants recognised as income...... 1,831 Other income...... 2,280 4,111
(in thousands of Estonian kroons) 2006 Other income by geographical locations: Estonia...... 3,711 Ukraine...... 400
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4,111
Government grants recognised as income include subsidies for agricultural production. Government grants have been received within the framework of the European Union projects and Ukrainian government and are divided as follows:
(in thousands of Estonian kroons) 2006 Area subsidy ...... 1,450 Subsidies for harvesting and interest expenses ...... 317 Unfavourable regions subsidy...... 32 Other subsidies...... 32 1,831
In Ukraine subsidies can be claimed for harvesting and interest expenses. Subsidies can be claimed every year, but every year Ukrainian government decides on the size and order of the payments.
The Group used the following subsidies during the year:
· The area subsidies. These are designated to support tillage of the agricultural land and cultivation of crops and certified seeds. · The environmental subsidy. It is designated to support environment -friendly agricultural techniques and methods. By applying for the subsidy, the producer undertakes a five year obligation to continue its activities or to return the grant received.
· Unfavourable regions subsidy. It is designated to support continuous use of agricultural land in unfavourable regions. By applying for the subsidy, the producer undertakes a five year obligation to continue its activities or to return the grant received. · Requirements set for dung pits subsidy. It is designated to reconstruct dung pits in a way that these will comply with the requirements of European Union norms on water and environmental protection.
· Milking cow subsidies. It is designated to support dairy farms. · Harvesting and interest expenses subsidies. These are designated to support harvesting and interest expenses in Ukraine.
20 RAW MATERIALS AND CONSUMABLES USED
(in thousands of Estonian kroons) 2006 Animal feed...... 5,792 Materials for agricultural production...... 4,662 Other services ...... 2,440 Fuel, gas, electricity...... 2,430 Transportation ...... 646 15,970
21 EMPLOYEE BENEFIT EXPENSE
(in thousands of Estonian kroons) 2006 Wages and salaries ...... 4,377 Social security costs ...... 1,307 5,684
Number of employees...... 188
22 OPERATING LEASE PAYMENTS
In 2006, operating lease payments amounted to 758 thousand kroons. Rent expense is included in other expenses in the income statement.
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The future aggregate minimum land rental and passenger car rental payments under non-cancellable rental agreements are as follows:
(in thousands of Estonian kroons) up to 12 months...... 3,949 1-5 years ...... 14,576 Over 5 years 61,905 90,430
Lease agreements have been concluded under regular terms.
23 OTHER EXPENSES
(in thousands of Estonian kroons) 2006 Legal and consulting fees ...... 7,146 Office and administration expenses ...... 1,876 Land tax and land rental ...... 559 Transportation ...... 484 Other expenses ...... 2,394 12,459
24 OTHER (LOSSES)/GAINS – NET
(in thousands of Estonian kroons) 2006 Net foreign exchange gains/(losses) (Note 29) ...... (980) (980)
25 FINANCE COSTS – NET
(in thousands of Estonian kroons) 2006 Interest expense: – Finance lease liabiliti es...... 90 – Bank borrowings ...... 480 Finance income – Interest income on short-term bank deposits...... (10) Net finance costs ...... 560
26 CASH GENERATED FROM OPERATIONS
(in thousands of Estonian kroons) 2006
Profit before income tax...... (8,931) Adjustments for: – Depreciation (Note 11)...... 1,544 – Loss on disposal of property, plant and equipment (Note 11)...... (355) – Gain arising from changes in fair value less estimated point-of-sale costs of biological assets ...... (15,486) – Finance costs – net ...... (10 – Foreign exchange losses/(gains) on operating activities ...... 980 Changes in working capital (excluding the effects of acquisition and exchange differences on consolidation): – Inventories ...... (31,797) – Trade and other receivables ...... (29,947) – Trade and other payables ...... 6,577 – Acquisition of biological assets...... (1,203) Cash generated from operations...... (78,274)
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27 CONTINGENCIES
The Group has recognised contingent liabilities related to the business combinations in amount of 1,657 thousand kroons (note 29). The fair value of the contingent liabilities has been determined in the course of purchase price allocation and further included in provisions.
Taxes
Estonia:
The tax authorities may at any time inspect the books and records within 3-6 years subsequent to the reported tax year, and may impose additional tax assessments and penalties in Estonian subsidiaries of the Group. Tax audits were not conducted in 2006 in Estonia. The Company's management is not aware of any circumstances which may give rise to a potential material liability in this respect.
Ukraine:
Tax audit was conducted in the Ukrainian subsidiary Rubeznoje and revealed no additional tax liability. Tax audits are conducted regularly within 2 to 3 years and the first tax audit in Trigon Farming Kharkov is expected in 2008. The Company's management is not aware of any circumstances which may give rise to a potential material liability in this respect.
Russia:
The tax authorities may at any time inspect the books and records within 6 years subsequent to the reported tax year, and may impose additional tax assessments and penalties in Russian subsidiaries of the Group. Tax audits were not conducted in 2006 in Russia. The Company's management is not aware of any circumstances which may give rise to a potential material liability in this respect.
28 COMMITMENTS
Operating lease commitments – group company as lessee
The Group leases land and passenger cars under non-cancellable operating lease agreements. Future rent payments from non-cancellable rent agreements are disclosed in note 22.
The Group has no other commitments.
29 BUSINESS COMBINATIONS
On July 30, 2006, the Group acquired 99,9 per cent of the share capital of Russian Agro Investors, a Russian holding company owning 100 per cent of the share capital of Dobruchi 2, operating in Russia. As the company acquired did not constitute a business it was treated as a purchase of assets. The purchase price of EEK 8,072 thousand was allocated to land (EEK 8,066 thousand) and cash (EEK 6 thousand).
On August 3, 2006, the Group acquired 100 per cent of the share capital of Kärla, an agricultural group of companies operating in Estonia. The acquired business consists of six legal entities. The acquired business contributed revenues of EEK 9,780 thousand kroons and net profit in the amount of 1,994 thousand kroons to the Group for the period from August 1, 2006 to December 31, 2006.
Details of net assets acquired are as follows:
(in thousands of Estonian kroons) – Cash paid 8,347 – Cash payable 1,429 – Cash payable for Contingent Considerations (Note 14) 1,522 – Direct costs relating to the acquisition 9 Total purchase consideration 11,307 Fair value of net assets acquired (11,307)
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The assets and liabilities as of 1 August 2006 arising from the acquisition are as follows:
Acquiree’s carrying (in thousands of Estonian kroons) Fair value amount Cash and cash equivalents 545 545 Property, plant and equipment 29,035 29,084 Land 5,767 865 Biological assets 9,374 7,141 Inventories 2,230 2,230 Trade and other receivables 1,496 1,496 Trade and other payables (5,648) (4,348) Borrowings (28,379) (28,379) Contingencies (1,657) - Prepaid future period revenues (1,280) (681) Net assets 11,482 9,115 Minority interests (175) Net assets acquired 11,307 Purchase consideration settled in cash 11,307 Cash and cash equivalents in subsidiary acquired (545) Cash outflow on acquisition 10,763
On August 9, 2006, the Group acquired 100 per cent of the share capital of Kaiu OÜ, an agricultural company operating in Estonia. The acquired business contributed revenues of 6,271 thousand kroons and net profit in the amount of 1,269 thousand kroons to the Group for the period from August 1, 2006 to December 31, 2006.
(in thousands of Estonian kroons) – Cash paid 29,763 – Direct costs relating to the acquisition 421 Total purchase consideration 30,184 Fair value of net assets acquired (30,184)
The assets and liabilities as of 1 August 2006 arising from the acquisition are as follows:
Acquiree’s carrying (in thousands of Estonian kroons) Fair value amount Cash and cash equivalents 2,386 2,386 Property, plant and equipment 6,376 6,475 Land 8,834 1,531 Biological assets 11,096 8,410 Available-for-sale financial assets 197 197 Inventories 2,252 2,252 Trade and other receivables 2,468 2,486 Trade and other payables (1,302) (1,302) Borrowings (647) (647) Deferred income (1,476) (1,353) Net assets 30,184 20,435 Net assets acquired 30,184 Purchase consideration settled in cash 30,184 Cash and cash equivalents in subsidiary acquired (2,386) Cash outflow on acquisition 27,797
On August 22, 2006, the Group acquired 100 per cent of the share capital of Rubezn oe OOO, an agricultural company operating in Ukraine. The acquired business contributed revenues of 1,191 thousand kroons and net profit in the amount of 1,325 thousand kroons to the Group for the period from September 1, 2006 to December 31, 2006.
Details of net assets acquired are as follows:
(in thousands of Estonian kroons) – Cash paid 61 Total purchase consideration 61 Fair value of net assets acquired (61)
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The assets and liabilities as of 1 August 2006 arising from the acquisition are as follows:
Acquiree’s carrying (in thousands of Estonian kroons) Fair value amount Cash and cash equivalents 36 36 Property, plant and equipment 1,752 3,163 Land 23 23 Biological assets 279 287 Available-for-sale financial assets - 13 In ventories 2,069 7,250 Trade and other receivables 102 102 Trade and other payables (4,200) (4,200) Net assets 61 6,674 Net assets acquired 61 Purchase consideration settled in cash 61 Cash and cash equivalents in subsidiary acquired (36) Cash outflow on acquisition 25
On November 1, 2006, the Group acquired 100 per cent of the share capital of Malopolovetskoje Agro OOO, a company registered in Ukraine which currently does not carry out any business. The company was acquired to start activities near Kiev, but because the original plan did not succeed the company has remained inactive.
As explained in Note 4.2, the Group has not disclosed revenue and net profit for the year for the acquired subsidiaries as if the acquisition date had been the beginning of the period because it has been considered impracticable.
See Note 31 for disclosures regarding the business combination that took place after the balance sheet but before the approval of these financial statements.
30 RELATED-PARTY TRANSACTIONS
The Group’s owners are legal and physical persons and no sole shareholder has control over the Group’s activities.
AS Trigon Capital, which owns 10.38 per cent of the total voting shares and holds the option described in note17, provides management services to the Group.
(in thousands of Estonian kroons) 2006 (a) Purchases of management services – AS Trigon Capital 3,373 3,373
Key management is not compensated by the Group. All key management receives its compensation from AS Trigon Capital and the compensation is included in the management fee.
(in thousands of Estonian kroons) 2006 (b)Year-end balances arising from sales/purchases of goods/services Payable to related parties (Note 13): – AS Trigon Capital management fee 748
The payables to related parties arise mainly from purchase transactions and are due two months after the date of purchase. The payables bear no interest.
31 EVENTS AFTER THE BALANCE SHEET DATE
(a) Further investment into the Group by existing shareholders
As of February 28, 2007 existing shareholders of the Group had invested additional capital into the group by subscribing to new subordinated loan notes (which are classified as other reserves) in a total amount of 110,730 thousand kroons. As a result the total investment of the shareholders into the Group had raised to 304,302 thousand kroons (consisting of 15,215 thousand kroons into share capital and 289,087 thosand kroons into subordinated shareholder loan-notes).
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(b) Preliminary agreement to acquire OOO Kovjagovskoje
During the first quarter of 2007, the Group concluded a preliminary agreement for the acquisition of 100 per cent of the shares of OOO Kovjagovskoje. OOO Kovjagovskoje is a company which holds only one main asset: a grain storage elevator with total capacity of 30,000 tonnes. The grain storage elevator is located in Kharkov Oblast, Ukraine, and is positioned right in the middle of the grain production areas of the Group. The transaction is expected to be finalised be the end of the first quarter of 2007.
(c) Further equity financing of the Group and potential restructuring
During the first quarter of 2007, the Group started the process of raising significant further equity funding to finance its operational activities and development plans. As part of concluding the agreements with investors for further equity funding, the management expects that the Group legal structure will be restructured. If the restructuring will take place, AS Trigon Farming will become the Estonian holding company of the Group instead of being a parent company.
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INDEPENDENT AUDITOR’S REPORT
To the Shareholders of AS Trigon Farming
We have audited the accompanying consolidated financial statements of AS Trigon Farming (the Company) which comprise the balance sheet as of 31 December 2006 and the income statement, statement of changes in equity and cash flow statement for the financial year (4 May 2006 to 31 December 2006) then ended and a summary of significant accounting policies and other explanatory notes.
Management Board’s Responsibility for the Financial Statements
Management Board is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Company as of 31 December 2006, and of its financial performance and its cash flows for the financial year then ended in accordance with International Financial Reporting Standards.
Urmas Kaarlep Margus Lutsoja AS PricewaterhouseCoopers Authorised Auditor
2 April 2007
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