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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Zirax | LSE:ZRX | London | Ordinary Share | GB00B0T9VS23 | ORD 1P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 1.125 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
TIDMZRX RNS Number : 7313U Zirax PLC 30 June 2009 Zirax plc ("Zirax" or the "Company") Preliminary Results for the year ended 31 December 2008 Zirax, the AIM quoted speciality chemical company focused on the development, production and sale of oilfield process chemicals and de-icing solutions, today announces its preliminary results for the year ended 31 December 2008. Highlights Financial performance * Total revenues up 11% to $33.9m (2007: $30.7m) * Substantial increases in our cost base lead to gross margin reducing to 45% (2007: 52%) * Pre-tax profit before exceptionals $0.7m (2007 profit: $5.3m) * Exceptional provision of $3.0m against deposits at financial institutions to which access has been restricted (2007: nil) * Pre-tax loss after exceptionals $2.3m (2007 profit: $5.3m) Operating highlights * Since the year end, as part of negotiations to agree a new supply and licensing agreement with Solvay, owners of the Rosignano plant, Solvay repaid to Zirax the original advance payment of EUR2.2m (including interest of EUR0.2m) * Remains the second largest supplier of calcium chloride pellets globally and the leading supplier in the Eastern Hemisphere * Major contract win to supply 14,000 MT pa to an oil producing company in the Middle East * Sixth consecutive award of Moscow de-icing contract * Acquisition of Solith in January 2008 Enquiries: +-----------------------------+-----------------------------+-----------------------------+ | Zirax | Fenlon Dunphy, CEO | T: +44 (0)20 7868 1694 | +-----------------------------+-----------------------------+-----------------------------+ | | | | +-----------------------------+-----------------------------+-----------------------------+ | Hanson Westhouse Limited | Tim Metcalfe | T: +44 (0)20 7601 6100 | +-----------------------------+-----------------------------+-----------------------------+ | | Richard Baty | | +-----------------------------+-----------------------------+-----------------------------+ | | | | +-----------------------------+-----------------------------+-----------------------------+ | Cardew Group | Tim Robertson | T: +44 (0)20 7930 0777 | +-----------------------------+-----------------------------+-----------------------------+ | | David Roach | | +-----------------------------+-----------------------------+-----------------------------+ | | Daniela Cormano | | +-----------------------------+-----------------------------+-----------------------------+ Chairman's Statement 2008 has been a difficult year for the business as a whole and the wider world economy. Our cost base for existing product has increased in these harder times and our margins have tightened. From the business development perspective, the delay in full supply of product from Rosignano is very disappointing and has created issues for the business both in the reduction of anticipated revenues and the increased cost pressure resulting from longer supply chains. This has delayed our strategy of further expansion into international markets. The renegotiations with Solvay and action plans to resolve the production problems are progressing well. We remain committed to geographic expansion and are focused on increasing the Group's capacity. It was important to us, as part of our renegotiation with Solvay that the EUR2.2m advance was returned to us, which has happened. However, it is more important that the capacity increase is restored and we currently anticipate this will happen in 2010. Whilst these renegotiations take place we continue to source product from Rosignano. We also see our future growth coming from supplying higher margin complimentary products; to this end we have already introduced two new products in 2009, Acid ExtrOil and Acid Blend, both of which are targeted at the enhanced oil recovery market, and there are further product launches planned for later in the year. In January 2008, we made our first strategic acquisition, buying 100% of the share capital of Solith Anlagenbau und Service GmbH ('Solith'). Solith, located in Austria, provides us with a platform to expand our footprint to the de-icing markets of Central and Western Europe. It provides an additional route to other industrial markets in Europe and we are pleased that it has been successful in securing non-seasonal business which means the Group is better utilising it's plant facility, a key aim at the time of acquisition. Importantly, we sold all available product during the year as demand continues to exceed supply, however, we are frustrated that we are not able to take full advantage due to supply issues at the Rosignano plant. Overall revenues increased by 11% to $33.9m (2007: $30.7m) and the seasonal effect of the de-icing segment of the business has been further reduced with Oilfield Process Chemical revenues now accounting for 75% of Group turnover compared to 52% in 2007. We also increased the proportion of International revenues from 19% in 2007 to 29% in 2008. However, as a result of the various difficulties outlined we are reporting an operating loss before an exceptional item of $0.8m for 2008 as against an operating profit in 2007 of $4.7m. For the financial reporting year the Board has decided to take a prudent stance and make an exceptional provision of $3.0m against cash deposits at a financial institution in Russia where we believe there to be a greatly increased credit risk and access to the cash deposits has been restricted. The Board are currently negotiating to reach a solution with the financial institution. The Company's auditors have been unable to obtain appropriate audit evidence regarding the recoverability of this balance and $3.5m held at a local Russian bank, a related party, which the Directors are confident of recovering in full. As a result they have issued a disclaimer of opinion on their audit of the Group's consolidated financial statements. The above positions together with the general uncertainty in the Russian banking sector represent a possible material change in the financial condition of Zirax LLC and the Zirax Group. While the Board are confident of the Group's ability to continue to operate, the business is dependent on the continued support of its lenders, as technically some or all of the borrowings and facilities could become immediately repayable due to the possible material changes that have taken place. The majority of the Group's current facilities expire during 2009 and some may need to be replaced to maintain an appropriate level of working capital. Therefore a key priority for the management team is to begin discussions with the individual lenders to ensure their continued support. Basic EPS shows a loss of 1.98 cents for 2008 from a profit of 2.17 cents in 2007. No dividend is being declared for the period under review. However, the Board is committed to generating value for our shareholders, and keeps dividend payment under careful consideration. I would like to take this opportunity to thank all the employees of Zirax for their dedication and continued efforts to grow and develop the business. The directors believe that Zirax remains well positioned to grow the business based on the continuing strong growth in demand for its products. Our focus remains on delivering significant shareholder value. Sir Michael Oliver Chairman Operating and Financial Review Zirax is primarily focused on the Oilfield Process Chemicals and high performance De-icing Solutions sectors, and to an increasing extent, the wider industrial market. In 2008 we continued our strategy of growing the Oilfield Process Chemicals segment of our business, taking it to 75% of our overall revenues. This has had the effect of further reducing the seasonality of our business. As a direct consequence, De-icing Solutions revenues now represent 16% of our revenue total. The remainder of Group revenue is derived from the Industrial Chemicals segment. However, 2008 was a difficult year at the margin and profit level with particularly significant increases in our distribution costs and our general and administrative expenses. The slower than anticipated product supply from Rosignano meant, not only reduced supply to generate additional revenue, but also that where we were developing business outside of Russia we still needed to source product from our Volgograd plant with the consequent additional distribution cost and reduced potential supply within Russia. Clearly 2008 and moving in to 2009 has signalled a revision of global economic fortunes. There will undoubtedly be difficult times ahead and it is hard for anyone to predict the immediate economic future. Zirax predominantly operates and sells in the Russian economic environment where the official inflation forecast for 2009 is a minimum of 13%, but unofficially is probably higher. The Russian Rouble has come under significant pressure, losing almost 50% of it's value against the US Dollar since 1 January 2008, although this has partially come back in recent months. The deterioration of the global economic environment during 2008 and its impact on the interbank market has resulted in restrictions on some of the Group's cash deposits in Russia which has lead the Group to provide for them and has reduced the headroom between debt and cash resources as at the year end. We remain committed to growing our business internationally. In 2008 revenues in international sales grew 70%, whilst Russian sales stayed almost constant compared to 2007. Overall, Russian sales represented 71% of revenues in 2008 compared to 81% in 2007, and international sales were 29% of revenues compared to 19% in 2007. In November 2007 we announced the opening of Solvay's plant at Rosignano, Italy which should have provided us with an increase in annual capacity of approximately 55,000 MT. In May 2009 we announced that we had suspended our agreements with Solvay due to inconsistent quantities of calcium chloride production at the plant and had entered into renegotiations with them. We are re-evaluating with Solvay the timeline for achieving full capacity at the plant and currently anticipate that substantial progress will have been made towards reaching this target in 2010. This capacity will still be principally targeted at the growing demand from the oilfield process chemicals markets in nearby Africa and the Middle East, plus potential de-icing and industrial markets in Europe. Capacity out of Volgograd is 110,000 MT and Ebensee, Austria is 10,000 MT. We will continue to meet our aims of growing market share and the changing needs of our customers, who demand new, more efficient and environmentally friendly ways of delivering their end requirements. We are also actively investigating, through our own research and development, commercial collaborations and acquisitions, other potential applications and revenue streams. Our markets and strategy Oilfield Process Chemicals Our revenues within this sector grew 58% from $16.0m in 2007 to $25.3m in 2008, but our operating profit decreased by 80% from $2.2m to $0.4m in 2008. This revenue growth continues to come from the expanding Russian market along with our increased movement into international markets, particularly in the Middle East. With such a sizeable Russian market to target we see a good future for our existing products and for the development of new ones. When we have resolved the additional capacity availability from Italy, we will be well positioned, through existing and new contacts, to strengthen our international market share in the future. The exploration and development of new oil and natural gas wells may have slowed as a result of the economic downturn, but the need for more efficient production in the existing ones still results in a global increase in demand for oilfield process chemicals. Customers in the oilfield service sector impose strict quality requirements on any supplier of speciality chemicals, particularly when used in the drilling and commissioning of oil wells. We have developed our own brand of calcium chloride pellets, PelletOil(TM), with a smaller particle size and calcium chloride content of 94-98%, for use in this market. Products with such a high calcium chloride concentration are considered premium products in the oilfield service sector. Calcium Chloride is used as a component element in many applications within this market, including: * Completion Fluids to flush the drilling hole clean of solids prior to the casings being cemented in place, * Drilling Muds to cool and lubricate the drill bit allowing longer bit life and reducing drilling times by up to 25%, and * Enhanced Oil Recovery to improve the oil extraction percentages through chemical flooding technologies. We have developed strong relationships with a number of the leading oilfield service companies, providing product for use in Africa, the Middle East, Russia, CIS and the North Sea. De-icing Solutions Despite a harder winter season just gone for 2008/09, in Europe and particularly our primary market of Russia, this followed a very mild winter season in 2007/08. This meant that demand was low in 2008, as our customers entered the 2008/09 winter season with high levels of stock left over from the previous season. Overall revenues from De-icing Solutions were 55% lower, down from $12.4m in 2007 to $5.5m in 2008. In addition, tighter margins meant that our operating profit decreased 89% from $3.7m in 2007 to $0.4m in 2008. We won the auction for a sixth consecutive year to provide de-icing products to Moscow City Council in the 2008/09 winter season. Revenues from this contract were lower this year due to the sequence of milder winters in Moscow over the previous two seasons which underlines our decision to further diversify our customer base. However, we still anticipate significant growth potential in this segment; in the short term, as the harder 2008/09 season has depleted stocks and, in the medium to longer term, through expanding into new markets. In January 2008 we acquired Solith, a young Austrian company focused on a very similar market place, as it provides higher performance de-icing product to the highways agencies of Austria. The prolonged use of salt can be harmful to vegetation and corrosive to metal, resulting in an increasing amount of environmental legislation being introduced worldwide to restrict the use of lower performance de-icing products. Naturally, this creates a gap in the market, which Zirax is able to fill. Our products are more efficient, as they penetrate the ice quicker than medium strength flakes, and better meet environmental concerns because of the significantly smaller quantities required to achieve the same result. Our de-icing products, IceMelt(TM) and calcium chloride pellets, give off heat as they dissolve, melting more ice faster at lower temperatures. IceMelt(TM) is our specially designed and patented high performance de-icing agent which also contains a corrosion inhibitor, making it particularly suited to use in municipal, commercial and retail applications. Industrial Chemicals Our revenues from other industrial opportunities grew 39% from $2.3m in 2007 to $3.1m in 2008, but our operating profit decreased by 60% from $0.5m to $0.2m in 2008. We are developing some interesting new applications for our products within the paper and water treatment areas, and we look forward to building on these. Solith, in Austria, was purely a de-icing business when we acquired it. We are pleased to say that they have won on-going industrial contracts to provide them with all year round income. This will be a continuing strategy within this business as well. Business environment and competition Zirax remains the second largest supplier of calcium chloride pellets globally and the leading supplier in the Eastern Hemisphere. Although calcium chloride is widely supplied in medium strength flake and liquid format, we are one of very few manufacturers of high purity calcium chloride pellets. Our proprietary technological process is the result of a number of years of operations and an accumulation of technical knowledge. Without such technology and process knowledge, we believe it would require significant capital investment for a competitor to start similar production of calcium chloride pellets with comparable concentration levels. We firmly believe, and are actively engaged, in developing and producing complimentary products to offer alongside our higher specification calcium chloride. Such products will be well focused and targeted to offer a solution package. Results Total revenue for 2008 increased 11% from the previous year to $33.9m. Within our segments, sales of Oilfield Process Chemicals have grown to $25.3m, which is a 58% increase over 2007, whilst reducing our dependence on high performance De-icing products. Sales in this segment were $5.5m in 2008 from $12.4m in 2007. We have coupled this with an increase in the Industrial sector to $3.1m from $2.3m, further spreading our segment range and exploring new applications. Cost of sales showed a 28% increase from $14.6m in 2007 to $18.8m in 2008 as costs of raw materials and energy increased at a higher rate than our revenue. Distribution expenses grew 45% to $9.8m compared to $6.8m in 2007 reflecting the cost of supplying Europe and Middle East customers from Russia together with increased distribution costs within Russia. General and administrative expenses for 2008 include an exceptional impairment provision against cash and cash equivalents of $3.0m. Excluding this exceptional item, general and administrative expenses increased 36% to $6.1m in 2008 compared to $4.5m in 2007 reflecting in part the increase in employee numbers from 211 at the end of 2007 to 239 at the close of 2008, as we acquired the staff of Solith and expanded some administrative functions. Operating profit before exceptional item became negative at $(0.8)m in 2008 from $4.7m in 2007. An exceptional provision of $3.0m has been taken against cash deposits at a financial institution in Russia, where we believe there to be a greatly increased credit risk and access to the deposits has been restricted, resulting in an operating loss after exceptional item of $3.8m compared to a profit of $4.7m in 2007. Foreign exchange gains of $1.6m in 2008 resulted from significant movements in foreign currency exchange rates compared to a foreign exchange gain of $0.2m in 2007. This follows through to a loss before taxation of $2.3m in 2008 compared to a profit before taxation of $5.3m in 2007. Loss for the year after tax was $3.4m compared to a profit of $3.7m in 2007. Basic EPS was a loss of 1.98 cents for 2008 compared to a profit of 2.17 cents in 2007. The basic EPS in 2008 before the exceptional item was a loss of 0.27 cents. In line with the Board's stated strategy no dividend will be payable for the current period (nil: 2007). Capital expenditure Investment in property, plant and equipment and intangible assets of $1.9m in 2008, primarily results from the continued expansion of our Volgograd plant and facility and the acquisition of patent rights. Additionally through the acquisition of Solith a further $0.9m of property, plant and equipment was brought in to the group along with $1.0m of goodwill. Cash flow In 2008 net cash generated from operations before exceptional items amounted to $4.6m compared to net cash used in operations of $3.4m in 2007. This net cash flow from operations was significantly increased in 2008 as a result of the reversal of the timing of the Moscow City council contract for the winter season 2007/08, which was finalised late in the 2007 financial year resulting in a significantly higher closing receivable position at December 2007. 2008 was then significantly impacted by an exceptional provision of $3.0m against cash held at a financial institution resulting in net cash generated from operations of $1.7m. Cash capital expenditure was $1.9m as we continue the expansion of the Volgograd plant capacity and further secured our intellectual property. $0.5m was spent in cash on the acquisition of Solith. We were also able to reduce borrowings by a net $2.1m. Liquidity and financial risk Due to the exceptional provision against cash and cash equivalents it is possible some or all of the borrowings and facilities may become immediately repayable as a result of a possible material adverse change in the financial condition of Zirax LLC and the Zirax Group. In addition the possibility exists that the existing borrowings and facilities that expire during the next year will need to be replaced to maintain appropriate levels of working capital and that they may not be renewed on existing terms or at all by the Group's lenders. As a result the management team will immediately begin discussions with all the Group's lenders to seek their ongoing support for the business. The Group is trading profitably with a positive trading outlook underpinned by the continued strong demand for its products. The management are therefore reasonably confident of securing the ongoing support from the banks. Further details of the Group's liquidity position and going concern review are provided in note 2 and note 25. Future outlook The extraordinary economic events during 2008 made it a difficult year for Zirax. We are frustrated by the delay of product supply from Rosignano although we have recovered our initial advance payment of EUR2.2m (including interest) and we are confident that we can, with Solvay, resolve the technical issues at the plant. Our cost base was directly affected by the economic crisis during the year and as a consequence increased substantially in Russia and in the wider distribution market with freight and haulage rates particularly high through most of 2008 although these have eased in 2009. The volatility in distribution rates is a particular challenge for our business as they make up approximately 25% of our overall cost base. Looking ahead, we expect costs associated with manufacturing and distribution to remain high; as we cannot simply pass on these increased costs in our selling price, we are focused on adapting our business model to operate in this environment. We have established a good base in terms of our customers and increasingly our geographic reach; we have also gained a reputation for quality. Volume and value of revenues have continued to increase year on year. We are now seeking to build on these positive aspects by searching out higher margin products to offer our customers a wider solution to meet their needs. We have already introduced two new products to the market in 2009, Acid ExtrOil and Acid Blend, both of which are specifically targeted at the enhanced oil recovery market. We are looking to align ourselves with innovative product and solution providers; this harder economic environment also opens up opportunities to such providers that can display solutions that are genuinely cost effective and increasingly environmentally beneficial. We are optimistic about future product developments. We continue to diversify our target markets in a controlled and focused fashion along with broadening the geography of our customer base that we target. In doing so, we are also mindful of the need to limit our distribution exposure, so we will seek to source product as close to our end target market as possible. In May 2009 Zirax made a supplier advance of 30m Russian Roubles ($893,000) to one of the Group's key suppliers, Kaustik, a related party, in respect of purchases of hydrochloric acid with repayment in the three months to September 2009, in return for a price discount (see notes 24 and 27). Despite the difficulties of the last year, we have strengthened our reputation in the marketplace for quality and service. Not only do our customers demand more of our products, but they also seek and actively encourage us to source additional product for them. We are therefore confident that the Company will recover from this very challenging period, and be able to deliver significant shareholder value. Fenlon Dunphy Chief Executive Officer Consolidated Income Statement for the Year Ended 31 December 2008 +-----------------------------------------------------+----------+----------+----------+ | | Notes | 2008 | 2007 | | | | $'000 | $'000 | +-----------------------------------------------------+----------+----------+----------+ | Revenue | 3 | 33,923 | 30,665 | +-----------------------------------------------------+----------+----------+----------+ | Cost of sales | | (18,796) | (14,628) | +-----------------------------------------------------+----------+----------+----------+ | Gross profit | | 15,127 | 16,037 | | | | | | +-----------------------------------------------------+----------+----------+----------+ | | | | | +-----------------------------------------------------+----------+----------+----------+ | Distribution expenses | | (9,815) | (6,777) | +-----------------------------------------------------+----------+----------+----------+ | General and administrative expenses | | (9,093) | (4,521) | +-----------------------------------------------------+----------+----------+----------+ | Operating (loss)/profit | 3, 4 | (3,781) | 4,739 | +-----------------------------------------------------+----------+----------+----------+ | Operating (loss)/profit before exceptional item | | (820) | 4,739 | +-----------------------------------------------------+----------+----------+----------+ | Exceptional impairment of cash and cash equivalents | 13 | (2,961) | - | +-----------------------------------------------------+----------+----------+----------+ | Operating (loss)/profit | 3, 4 | (3,781) | 4,739 | +-----------------------------------------------------+----------+----------+----------+ | | | | | +-----------------------------------------------------+----------+----------+----------+ | Interest receivable | 25 | 471 | 495 | +-----------------------------------------------------+----------+----------+----------+ | Interest payable and similar charges | 25 | (586) | (177) | +-----------------------------------------------------+----------+----------+----------+ | Net foreign exchange gain | | 1,618 | 240 | +-----------------------------------------------------+----------+----------+----------+ | Net finance income | | 1,503 | 558 | +-----------------------------------------------------+----------+----------+----------+ | (Loss)/profit before taxation | | (2,278) | 5,297 | +-----------------------------------------------------+----------+----------+----------+ | | | | | +-----------------------------------------------------+----------+----------+----------+ | Taxation | 7 | (1,140) | (1,559) | +-----------------------------------------------------+----------+----------+----------+ | (Loss)/profit for the year | | (3,418) | 3,738 | +-----------------------------------------------------+----------+----------+----------+ | | | | | +-----------------------------------------------------+----------+----------+----------+ | (Loss)/earnings per share expressed in US cents per | | | | | share: | | | | +-----------------------------------------------------+----------+----------+----------+ | Basic | 8 | (1.98) | 2.17 | +-----------------------------------------------------+----------+----------+----------+ | Diluted | 8 | (1.98) | 2.17 | +-----------------------------------------------------+----------+----------+----------+ Balance Sheets at 31 December 2008 +--------------------------------+---------+----------+----------+----------+----------+ | | | Group | Company | +--------------------------------+---------+---------------------+---------------------+ | | Notes | 2008 | 2007 | 2008 | 2007 | | | | $'000 | $'000 | $'000 | $'000 | +--------------------------------+---------+----------+----------+----------+----------+ | Non-current assets | | | | | | +--------------------------------+---------+----------+----------+----------+----------+ | Property, plant and equipment | 9 | 10,440 | 10,907 | 1 | 2 | +--------------------------------+---------+----------+----------+----------+----------+ | Intangible assets | 10 | 1,327 | 225 | - | - | +--------------------------------+---------+----------+----------+----------+----------+ | Investment in subsidiaries | 26 | - | - | 6,581 | 8,463 | +--------------------------------+---------+----------+----------+----------+----------+ | Trade and other receivables | 12, 27 | 3,117 | 6,104 | 3,117 | 3,161 | +--------------------------------+---------+----------+----------+----------+----------+ | Deferred income tax assets | 7 | 46 | 202 | - | - | +--------------------------------+---------+----------+----------+----------+----------+ | Total non-current assets | | 14,930 | 17,438 | 9,699 | 11,626 | +--------------------------------+---------+----------+----------+----------+----------+ | Current assets | | | | | | +--------------------------------+---------+----------+----------+----------+----------+ | Inventories | 11 | 4,141 | 3,199 | - | - | +--------------------------------+---------+----------+----------+----------+----------+ | Trade and other receivables | 12 | 5,632 | 11,524 | 5,179 | 8,979 | +--------------------------------+---------+----------+----------+----------+----------+ | Cash and cash equivalents | 13 | 4,367 | 8,156 | 250 | 13 | +--------------------------------+---------+----------+----------+----------+----------+ | Total current assets | | 14,140 | 22,879 | 5,429 | 8,992 | +--------------------------------+---------+----------+----------+----------+----------+ | Current liabilities | | | | | | +--------------------------------+---------+----------+----------+----------+----------+ | Short-term borrowings | 14 | 3,562 | 4,153 | - | - | +--------------------------------+---------+----------+----------+----------+----------+ | Trade and other payables | 15 | 4,125 | 5,633 | 500 | 373 | +--------------------------------+---------+----------+----------+----------+----------+ | Current tax liabilities | 16 | 222 | 891 | 30 | 17 | +--------------------------------+---------+----------+----------+----------+----------+ | Total current liabilities | | 7,909 | 10,677 | 530 | 390 | +--------------------------------+---------+----------+----------+----------+----------+ | Net current assets | | 6,231 | 12,202 | 4,899 | 8,602 | +--------------------------------+---------+----------+----------+----------+----------+ | Long-term borrowings | 14 | 692 | - | - | - | +--------------------------------+---------+----------+----------+----------+----------+ | Net assets | | 20,469 | 29,640 | 14,598 | 20,228 | +--------------------------------+---------+----------+----------+----------+----------+ | Shareholders' equity | | | | | | +--------------------------------+---------+----------+----------+----------+----------+ | Share capital | 17 | 2,965 | 2,965 | 2,965 | 2,965 | +--------------------------------+---------+----------+----------+----------+----------+ | Share premium | 19 | 11,194 | 11,194 | 11,194 | 11,194 | +--------------------------------+---------+----------+----------+----------+----------+ | Other reserves | 20 | 465 | 6,218 | 3,518 | 8,967 | +--------------------------------+---------+----------+----------+----------+----------+ | Profit and loss account | 21 | 5,845 | 9,263 | (3,079) | (2,898) | +--------------------------------+---------+----------+----------+----------+----------+ | Total shareholders' equity | | 20,469 | 29,640 | 14,598 | 20,228 | +--------------------------------+---------+----------+----------+----------+----------+ Cash Flow Statement for the Year Ended 31 December 2008 +---------------------------------------------+-----+--------+----------+---------+---------+---------+ | | | Group | Company | +---------------------------------------------------+--------+--------------------+-------------------+ | | Notes | 2008 | 2007 | 2008 | 2007 | | | | $'000 | $'000 | $'000 | $'000 | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Cash flows from operating activities | | | | | | +---------------------------------------------------+--------+----------+---------+---------+---------+ | (Loss)/profit before taxation | | (2,278) | 5,297 | (181) | (616) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Adjustments for: | | | | | | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Depreciation of property, plant and equipment | | 1,211 | 714 | 1 | 1 | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Amortisation of intangible assets | | 27 | 7 | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Loss on disposal of property, plant and equipment | | - | 15 | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Share options expense | | 97 | 122 | 97 | 122 | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Interest receivable | | (471) | (495) | (543) | (804) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Interest payable and similar charges | | 586 | 177 | 2 | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Profit and loss before working capital changes | | (828) | 5,837 | (624) | (1,297) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Increase in inventories | | (1,380) | (940) | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Decrease/(increase) in trade and other | | 4,070 | (7,396) | (1,205) | 668 | | receivables | | | | | | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Increase/(decrease) in trade and other payables | | 1,484 | 131 | 172 | (8) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Increase/(decrease) in taxes payable | | 36 | 42 | - | (16) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Cash from/(used in) operations | | 3,382 | (2,326) | (1,657) | (653) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Taxes paid | | (1,726) | (1,055) | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Net cash from/(used in) operating activities | | 1,656 | (3,381) | (1,657) | (653) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Net cash from/(used in) operating activities | | 4,617 | (3,381) | (1,657) | (653) | | before exceptional item | | | | | | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Exceptional impairment of cash and cash | 13 | (2,961) | - | - | - | | equivalents | | | | | | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Net cash from/(used in) operating activities | | 1,656 | (3,381) | (1,657) | (653) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Cash flows from investing activities: | | | | | | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Interest received | | 355 | 347 | 747 | 478 | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Purchase of property, plant and equipment | | (1,736) | (2,708) | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Purchase of intangible assets | | (179) | (184) | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Acquisition of subsidiary (note 22) | | (464) | - | (464) | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Loans granted to subsidiaries | | - | - | (1,138) | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Repayment of loans to subsidiaries | | - | - | 2,787 | 200 | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Net cash (used in)/from investing activities | | (2,024) | (2,545) | 1,932 | 678 | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Cash flows from financing activities: | | | | | | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Proceeds from borrowings | | 16,082 | 6,190 | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Repayment of borrowings | | (18,165) | (2,202) | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Interest paid | | (543) | (150) | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Net cash (used in)/from financing activities | | (2,626) | 3,838 | - | - | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Net increase/(decrease) in cash and cash | | (2,994) | (2,088) | 275 | 25 | | equivalents | | | | | | +---------------------------------------------+--------------+----------+---------+---------+---------+ | Cash and cash equivalents at beginning of | | 8,154 | 9,448 | 13 | 242 | | the year | | | | | | +---------------------------------------------+--------------+----------+---------+---------+---------+ | Effects of exchange rate changes | | (1,457) | 794 | (38) | (254) | +---------------------------------------------------+--------+----------+---------+---------+---------+ | Cash and cash equivalents at end of the year | 13 | 3,703 | 8,154 | 250 | 13 | +---------------------------------------------+-----+--------+----------+---------+---------+---------+ Consolidated Statement of Changes in Shareholders' Equity for the Year Ended 31 December 2008 +-------------------------------------+---------+---------+----------+---------+---------+ | | Share | Share | Other | Profit | Total | | | | | | and | | | | capital | premium | reserves | loss | equity | | | $'000 | $'000 | $'000 | account | $'000 | | | | | | $'000 | | +-------------------------------------+---------+---------+----------+---------+---------+ | Balance at 1 January 2007 | 2,965 | 11,194 | 4,357 | 5,525 | 24,041 | +-------------------------------------+---------+---------+----------+---------+---------+ | Profit for the year | - | - | - | 3,738 | 3,738 | +-------------------------------------+---------+---------+----------+---------+---------+ | Effect of exchange rates | - | - | 1,739 | - | 1,739 | +-------------------------------------+---------+---------+----------+---------+---------+ | Share options credit | - | - | 122 | - | 122 | +-------------------------------------+---------+---------+----------+---------+---------+ | Balance at 31 December 2007 | 2,965 | 11,194 | 6,218 | 9,263 | 29,640 | +-------------------------------------+---------+---------+----------+---------+---------+ | Loss for the year | - | - | - | (3,418) | (3,418) | +-------------------------------------+---------+---------+----------+---------+---------+ | Effect of exchange rates | - | - | (5,850) | - | (5,850) | +-------------------------------------+---------+---------+----------+---------+---------+ | Share options credit | - | - | 97 | - | 97 | +-------------------------------------+---------+---------+----------+---------+---------+ | Balance at 31 December 2008 | 2,965 | 11,194 | 465 | 5,845 | 20,469 | +-------------------------------------+---------+---------+----------+---------+---------+ Other reserves comprise the Merger, Translation and Other Reserves - see note 20. 1. General information The preliminary results announcement is for the year ended 31 December 2008. The financial information set out in this announcement does not constitute the statutory accounts of the Group or the parent company for the years ended 31 December 2007 or 2008, but is extracted from those accounts. The Group and parent company statutory accounts for 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered following the company's annual general meeting. The auditors have reported on the Group and parent company statutory accounts for both 2007 and 2008. The auditors' report in respect of the Group financial statements for the year ended 31 December 2008 contained a disclaimer on the view given by the financial statements, due to the possible effect on the Group financial statements of a limitation in evidence in respect of: * a provision having been made against an amount receivable from a financial institution in Russia of RR87m ($2,961,000) held with them on demand (as disclosed in note 13) where the auditors have been unable to obtain sufficient appropriate evidence regarding the recoverability of this amount and the need for the provision; and * an amount of RR104m ($3,540,000) held with a related party bank (as disclosed in note 23) where the auditors have been unable to obtain sufficient appropriate evidence as to the recoverability of this amount. Their report for 2008 contained a statement under both s237(2) and s237(3) of the Companies Act 1985 as due to the limitation in evidence described above, the auditors had not obtained all the information and explanations that they considered necessary for the purposes of their audit and they were unable to determine whether proper accounting records had been maintained in respect of Zirax LLC, an overseas subsidiary company. In addition, their report in respect of the Group financial statements for the year ended 31 December 2008 contained an emphasis of matter regarding the existence of a material uncertainty which may cast doubt about the Group's ability to continue as a going concern (as disclosed in note 2). The auditors' report in respect of the parent company financial statements for the year ended 31 December 2008, which was unqualified, contained an emphasis of matter regarding the existence of a material uncertainty which may cast doubt about the parent company's ability to continue as a going concern (as disclosed in note 2). Their report in respect of the parent company financial statements for 2008 did not contain a statement under s237(2) or s237(3) of the Companies Act 1985 The auditors' report in respect of the Group and parent company financial statements for the year ended 31 December 2007 was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s237(2) or s237(3) of the Companies Act 1985. The financial information contained in this preliminary announcement has been prepared in accordance with the accounting policies disclosed in the Group's annual financial statements for the year ended 31 December 2007, with the exception of the following new policies which are applicable for the year ended 31 December 2008: Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) up to 31 December each year. Except for Zirax LLC, which was accounted for using merger accounting, the net assets and results of acquired businesses are included in the consolidated accounts from their respective dates of acquisition, being the date on which the Group obtains control. Apart from Zirax LLC, which was accounted for using merger accounting, the acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the fair value of assets given, including cash paid, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, Business Combinations are recognised at their fair value at the acquisition date. All intra-group transactions, balances, income and expenses are eliminated on consolidation. All intra-group transactions, balances, income and expense are eliminated on consolidation. Exceptional items Exceptional items are those significant items which are separately disclosed by virtue of their size or incidence to enable a full understanding of the Group's financial performance. Transactions which may give rise to exceptional items are principally gains or losses on disposal of investments, subsidiaries and impairment of assets. Goodwill Goodwill represents the difference between the fair value of consideration paid for new interests in group companies and the fair value of the Group's share of their net identifiable assets at the date of acquisition. Goodwill is capitalised and not amortised, but is subject to an annual review for impairment. Any impairment is charged to the income statement as it arises and impairment losses are not reversed. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Group's cash generating units, or groups of cash generating units, that are expected to benefit from the combination. Impairment of non-financial assets Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets subject to amortisation are reviewed for impairment, whenever there is an indication that the asset may not be recoverable. When an asset is tested for impairment the recoverable amount of the asset is estimated in order to determine the extent of any impairment loss. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset concerned. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately as an expense. An impairment loss is reversed only if there has been a change in the estimate used to determine the asset's recoverable amount since the last impairment loss was recognised. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. 2. Going concern basis of preparation The directors have prepared forecasts for the business for the period to June 2010 on the basis that the cash and cash equivalents held at a bank in Russia, a related party referred to in note 23, are available to the Group under the terms of the deposit, and have excluded the cash at a financial institution in Russia which has been provided against. These forecasts reflect the best estimate the directors can make concerning the performance of the underlying business which remains cash generative over the year as a whole. In preparing these forecasts, the directors have identified and considered the following uncertainties: * As a result of the provision of $2,961,000 against cash and cash equivalents referred to in note 13, it is possible some or all of the borrowings and facilities may become immediately repayable as a result of a possible material adverse change in the financial condition of Zirax LLC and the Zirax group. * It is possible the Group may need to renew or replace existing borrowings after they expire, and the possibility exists that they will not be renewed by the Group's lenders nor that alternative lenders can be found. Both of the above factors give rise to a material uncertainty which may cast significant doubt upon the ability of the Group to continue as a going concern. Having carefully considered these uncertainties, the directors believe that: * There is a reasonable prospect that the Group's lenders will not seek the immediate repayment of the Group's borrowings and facilities although no formal confirmation has been received to this effect. * Based on the Group's underlying financial performance to date and financial performance shown by the Group's forecasts, there is a reasonable expectation that the Group will be able to agree new borrowings and banking facilities when the existing facilities expire. As a result of these considerations, the directors have a reasonable expectation that the Group can meet it's liabilities as they fall due for the foreseeable future. On this basis they believe that it is appropriate to prepare this financial information on a going concern basis. This financial information does not include any adjustment to the balance sheet intangible or tangible assets, the reclassification of long-term liabilities or provision for further liabilities that may be required should the going concern basis of accounting not be appropriate. 3. Segment information Primary reporting format - business segments At 31 December 2008, the Group is organised into three main business segments: (i) manufacture and sale of Oilfield Process Chemicals, (ii) manufacture and sale of De-icing Solutions and (iii) manufacture and sale of Industrial Chemicals. The Industrial Chemicals segment comprises sales principally to the paper and water treatment industries. These do not constitute separately reportable segments. The segment results for the period ended 31 December 2008 are as follows: +-------------------------------------+-----------+-----------+------------+---------+ | | Oilfield | De-icing | Industrial | Total | | | | Solutions | Chemicals | $'000 | | | Process | | $'000 | | | | Chemicals | $'000 | | | | | | | | | | | $'000 | | | | +-------------------------------------+-----------+-----------+------------+---------+ | Revenue | 25, 263 | 5,533 | 3,127 | 33,923 | +-------------------------------------+-----------+-----------+------------+---------+ | Segment operating profit | 448 | 420 | 194 | 1,062 | +-------------------------------------+-----------+-----------+------------+---------+ | Central costs | | | | (1,882) | +-------------------------------------+-----------+-----------+------------+---------+ | Exceptional impairment of cash and | | | | (2,961) | | cash equivalents | | | | | +-------------------------------------+-----------+-----------+------------+---------+ | Operating loss | | | | (3,781) | +-------------------------------------+-----------+-----------+------------+---------+ | Finance costs and net foreign | | | | 1,503 | | exchange | | | | | +-------------------------------------+-----------+-----------+------------+---------+ | Loss before taxation | | | | (2,278) | +-------------------------------------+-----------+-----------+------------+---------+ | Taxation | | | | (1,140) | +-------------------------------------+-----------+-----------+------------+---------+ | Loss for the year | | | | (3,418) | +-------------------------------------+-----------+-----------+------------+---------+ The segment results for the year ended 31 December 2007 are as follows: +-------------------------------------+-----------+-----------+------------+---------+ | | Oilfield | De-icing | Industrial | Total | | | | Solutions | Chemicals | $'000 | | | Process | | $'000 | | | | Chemicals | $'000 | | | | | | | | | | | $'000 | | | | +-------------------------------------+-----------+-----------+------------+---------+ | Revenue | 16,040 | 12,374 | 2,251 | 30,665 | +-------------------------------------+-----------+-----------+------------+---------+ | Segment operating profit | 2,208 | 3,719 | 475 | 6,402 | +-------------------------------------+-----------+-----------+------------+---------+ | Central costs | | | | (1,663) | +-------------------------------------+-----------+-----------+------------+---------+ | Operating profit | | | | 4,739 | +-------------------------------------+-----------+-----------+------------+---------+ | Finance costs and net foreign | | | | 558 | | exchange | | | | | +-------------------------------------+-----------+-----------+------------+---------+ | Profit before taxation | | | | 5,297 | +-------------------------------------+-----------+-----------+------------+---------+ | Taxation | | | | (1,559) | +-------------------------------------+-----------+-----------+------------+---------+ | Profit for the year | | | | 3,738 | +-------------------------------------+-----------+-----------+------------+---------+ The total depreciation and amortisation cost included in the income statements for the year ended 31 December 2008 and the year ended 31 December 2007 is as follows (note 9 and 10): +-------------------------------------+-----------+-----------+------------+-------+ | | Oilfield | De-icing | Industrial | Total | | | | Solutions | Chemicals | $'000 | | | Process | | $'000 | | | | Chemicals | $'000 | | | | | | | | | | | $'000 | | | | +-------------------------------------+-----------+-----------+------------+-------+ | Year ended 31 December 2008 | 857 | 232 | 149 | 1,238 | +-------------------------------------+-----------+-----------+------------+-------+ | Year ended 31 December 2007 | 360 | 305 | 56 | 721 | +-------------------------------------+-----------+-----------+------------+-------+ The segment assets and liabilities as at 31 December 2008 and capital expenditure for the period then ended are as follows: +-------------------------------------+-----------+-----------+------------+--------+ | | Oilfield | De-icing | Industrial | Total | | | | Solutions | Chemicals | $'000 | | | Process | | $'000 | | | | Chemicals | $'000 | | | | | | | | | | | $'000 | | | | +-------------------------------------+-----------+-----------+------------+--------+ | Assets | 21,076 | 4,978 | 3,016 | 29,070 | +-------------------------------------+-----------+-----------+------------+--------+ | Liabilities | 5,447 | 1,897 | 1,257 | 8,601 | +-------------------------------------+-----------+-----------+------------+--------+ | Capital expenditure (note 9) | 1,236 | 320 | 188 | 1,744 | +-------------------------------------+-----------+-----------+------------+--------+ | Expenditure on intangible assets | 137 | 622 | 474 | 1,233 | | (note 10) | | | | | +-------------------------------------+-----------+-----------+------------+--------+ The segment assets and liabilities as at 31 December 2007 are as follows: +-------------------------------------+-----------+-----------+------------+--------+ | | Oilfield | De-icing | Industrial | Total | | | | Solutions | Chemicals | $'000 | | | Process | | $'000 | | | | Chemicals | $'000 | | | | | | | | | | | $'000 | | | | +-------------------------------------+-----------+-----------+------------+--------+ | Assets | 20,406 | 14,386 | 5,525 | 40,317 | +-------------------------------------+-----------+-----------+------------+--------+ | Liabilities | 6,692 | 3,042 | 943 | 10,677 | +-------------------------------------+-----------+-----------+------------+--------+ | Capital expenditure (note 9) | 1,509 | 1,284 | - | 2,793 | +-------------------------------------+-----------+-----------+------------+--------+ | Expenditure on intangible assets | - | - | 232 | 232 | | (note 10) | | | | | +-------------------------------------+-----------+-----------+------------+--------+ Segment assets consist primarily of property, plant and equipment, inventories, receivables and cash. Segment liabilities comprise operating liabilities. Secondary reporting format - geographical segments The Group sells its products to customers located in two main geographical segments: Russian sales and International sales. They are summarised in the table below. Sales in the Russian market are to customers located in the Russian Federation, where International sales are to the customers located mainly in Africa, Europe and CIS countries. The risks and rewards of selling to Africa, Europe and the CIS countries are deemed to be similar and so have been included as a single geographical segment. +------------------------------------------------+---------+---------------+--------+ | | Russian | International | Total | | | $'000 | $'000 | $'000 | +------------------------------------------------+---------+---------------+--------+ | Year ended 31 December 2008 | 24,115 | 9,808 | 33,923 | +------------------------------------------------+---------+---------------+--------+ | Year ended 31 December 2007 | 24,887 | 5,778 | 30,665 | +------------------------------------------------+---------+---------------+--------+ Revenues are allocated based on the country in which the customer is located. Assets and capital expenditure are primarily located or incurred in the Russian Federation. 4. Operating Loss/profit +----------------------------------------------------------+-------+-------+ | | 2008 | 2007 | | | $'000 | $'000 | +----------------------------------------------------------+-------+-------+ | Operating loss/profit is stated after charging: | | | +----------------------------------------------------------+-------+-------+ | Depreciation and amortisation | 1,238 | 721 | +----------------------------------------------------------+-------+-------+ | Disclosure of Auditors' remuneration | | | +----------------------------------------------------------+-------+-------+ | Fees payable to the Company's auditors for the audit of | 160 | 144 | | parent company and consolidated financial statements | | | +----------------------------------------------------------+-------+-------+ | Fees payable to the Company's auditors and its | | | | associates for other services: | | | +----------------------------------------------------------+-------+-------+ | Audit of the Company's subsidiaries pursuant to | 74 | 55 | | legislation | | | +----------------------------------------------------------+-------+-------+ | Other services pursuant to legislation (i) | 116 | 103 | +----------------------------------------------------------+-------+-------+ | Tax services (ii) | 156 | 64 | +----------------------------------------------------------+-------+-------+ | Other services (iii) | 80 | 13 | +----------------------------------------------------------+-------+-------+ | Total audit and non-audit fees | 586 | 379 | +----------------------------------------------------------+-------+-------+ (i) Other services pursuant to legislation include fees in respect of the interim review. (ii) Tax services include fees in respect of tax compliance and tax advice. (iii) Other services include legal advisory services and due diligence services. 5. Staff information (including directors) +---------------------------------------------------------+-------+-------+-------+-------+ | | Group | Company | +---------------------------------------------------------+---------------+---------------+ | | 2008 | 2007 | 2008 | 2007 | | | $'000 | $'000 | $'000 | $'000 | +---------------------------------------------------------+-------+-------+-------+-------+ | Employee costs were: | | | | | +---------------------------------------------------------+-------+-------+-------+-------+ | Wages and salaries | 4,893 | 3,696 | 701 | 560 | +---------------------------------------------------------+-------+-------+-------+-------+ | Social security costs | 781 | 586 | 64 | 50 | +---------------------------------------------------------+-------+-------+-------+-------+ | Pension costs | 45 | 41 | 45 | 41 | +---------------------------------------------------------+-------+-------+-------+-------+ | Share option costs | 97 | 122 | 97 | 122 | +---------------------------------------------------------+-------+-------+-------+-------+ | | 5,816 | 4,445 | 907 | 773 | +---------------------------------------------------------+-------+-------+-------+-------+ The Group does not operate any pension schemes. Pension costs represent contributions paid to directors' personal pension schemes. The average number of employees (including directors) is as follows: +---------------------------------------------------------+--------+--------+--------+--------+ | | Group | Company | +---------------------------------------------------------+-----------------+-----------------+ | | 2008 | 2007 | 2008 | 2007 | | | Number | Number | Number | Number | +---------------------------------------------------------+--------+--------+--------+--------+ | Production | 171 | 158 | - | - | +---------------------------------------------------------+--------+--------+--------+--------+ | Administrative | 64 | 50 | 6 | 6 | +---------------------------------------------------------+--------+--------+--------+--------+ | Total | 235 | 208 | 6 | 6 | +---------------------------------------------------------+--------+--------+--------+--------+ 6. Directors' remuneration +-----------------------------------------------------------------------+-------+-------+ | | 2008 | 2007 | | | $'000 | $'000 | +-----------------------------------------------------------------------+-------+-------+ | Salaries and benefits | 976 | 744 | +-----------------------------------------------------------------------+-------+-------+ | Pension costs | 45 | 41 | +-----------------------------------------------------------------------+-------+-------+ | Termination benefits | 177 | - | +-----------------------------------------------------------------------+-------+-------+ | Share option costs | 97 | 122 | +-----------------------------------------------------------------------+-------+-------+ | | 1,295 | 907 | +-----------------------------------------------------------------------+-------+-------+ The remuneration of the highest paid director was $411,773: (2007: $300,000). Remuneration paid to key management personnel for their services is made up of a contractual salary and a performance bonus depending on operating results. Discretionary bonuses may also be payable to directors, which are approved by the shareholders' meeting, provided the Group has statutory profit for the year. There is no long-term compensation plan. Key management personnel includes only the directors. Termination benefits of $177,000 (2007: nil) were paid to Valery Andosov who resigned as a director on 29 September 2008. The following tables show the beneficial interests of the directors who held office at the end of the year in the ordinary shares of the Company and the interests of directors in share options: +------------------------------------------+--------------+--------------+--------------+ | | Shares held | Additions | Shares held | | | at | | at | | | 1 January | | 31 December | | | 2008 | | 2008 | +------------------------------------------+--------------+--------------+--------------+ | Directors - shares: | | | | +------------------------------------------+--------------+--------------+--------------+ | Sir Michael Oliver | - | - | - | +------------------------------------------+--------------+--------------+--------------+ | Mr. Mikhail Baranov (a) | 66,979,166 | - | 66,979,166 | +------------------------------------------+--------------+--------------+--------------+ | Mr. Fenlon Dunphy | - | 50,000 | 50,000 | +------------------------------------------+--------------+--------------+--------------+ | Mr. Mikhail Petrushin (b) | 67,340 | - | 67,340 | +------------------------------------------+--------------+--------------+--------------+ | Mr. David Wood | - | - | - | +------------------------------------------+--------------+--------------+--------------+ * Mr. Baranov's shares are held indirectly through Erith Group Limited, in which he is a 50% shareholder and through 000 Yugo-Vostok Promkapital, in which he is a 33.3% shareholder. The number of shares shown in the table above represent the deemed interests of Mr Baranov. * Mr. Petrushin's shares are held indirectly through a close family member. +----------------------+----------+-----------+----------+-----------+----------------+ | | Exercise | Options | Options | Options | Nominal | | | | held at | granted | held at | exercise dates | | | Price | 1 | during | 31 | | | | (GBP) | January | the year | December | | | | | 2008 | | 2008 | | +----------------------+----------+-----------+----------+-----------+----------------+ | Directors - options: | | | | | | +----------------------+----------+-----------+----------+-----------+----------------+ | Mr. Mikhail | 0.15 | 861,607 | - | 861,607 | 05.06.07 - | | Petrushin | | | | | 12.12.10 | +----------------------+----------+-----------+----------+-----------+----------------+ | Sir Michael Oliver | 0.15 | 1,723,214 | - | 1,723,214 | 02.04.08 - | | | | | | | 02.10.11 | +----------------------+----------+-----------+----------+-----------+----------------+ | Mr. David Wood | 0.15 | 861,607 | - | 861,607 | 02.04.08 - | | | | | | | 02.10.11 | +----------------------+----------+-----------+----------+-----------+----------------+ | Mr. Fenlon Dunphy | 0.15 | 1,723,214 | - | 1,723,214 | 27.06.08 - | | | | | | | 27.12.11 | +----------------------+----------+-----------+----------+-----------+----------------+ Options were issued under an employee share scheme approved by the Board of the Company on 12 December 2005 and will not be exercisable until 18 months from the date of grant of the option. No directors exercised any share options during the year. 7. Taxation +-----------------------------------------------------------------------+---------+---------+ | | 2008 | 2007 | | | $'000 | $'000 | +-----------------------------------------------------------------------+---------+---------+ | Taxation expense for the year: | | | | | | | +-----------------------------------------------------------------------+---------+---------+ | Current income tax expense | (984) | (1,737) | +-----------------------------------------------------------------------+---------+---------+ | Deferred tax | (156) | 178 | +-----------------------------------------------------------------------+---------+---------+ | Taxation charge | (1,140) | (1,559) | +-----------------------------------------------------------------------+---------+---------+ The taxation charge for the year is higher (2007: higher) than the standard rate of corporation tax in the UK 28.5% (2007: 30%). The differences are explained below. +-----------------------------------------------------------------------+---------+---------+ | | 2008 | 2007 | | | $'000 | $'000 | +-----------------------------------------------------------------------+---------+---------+ | (Loss)/profit before taxation | (2,278) | 5,297 | +-----------------------------------------------------------------------+---------+---------+ | Profit on ordinary activities multiplied by standard rate of | 649 | (1,589) | | corporation tax of 28.5% (2007: 30%) | | | +-----------------------------------------------------------------------+---------+---------+ | Effects of: | | | +-----------------------------------------------------------------------+---------+---------+ | Deferred tax credit recognised on tax losses | - | (149) | +-----------------------------------------------------------------------+---------+---------+ | Adjustment in respect of foreign taxation rates | 167 | 434 | +-----------------------------------------------------------------------+---------+---------+ | Non-deductible expenses and non-taxable income | (1,098) | (248) | +-----------------------------------------------------------------------+---------+---------+ | Unrecognised deferred tax asset on unrelieved taxation losses carried | (674) | (148) | | forward | | | +-----------------------------------------------------------------------+---------+---------+ | Other differences | (28) | (37) | +-----------------------------------------------------------------------+---------+---------+ | Taxation | (984) | (1,737) | +-----------------------------------------------------------------------+---------+---------+ The standard rate of corporation tax in the UK was reduced to 28% with effect from April 2008. Deferred taxation In 2008, the Russian subsidiary's taxable profit was subject to taxation at 24%. Deferred taxation assets/liabilities of the Russian subsidiary are calculated at 20% as at 31 December 2008 (2007: 24%). The net effect of the change in deferred taxation balances at the balance sheet dates is reflected in the income statement for the periods then ended. Deferred taxation assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. Taxation effect of deductible and taxable temporary differences: +----------------------------------------------------------------+--------------+--------------+--------------+ | | 31 December | Differences | 31 December | | | 2007 | recognition | 2008 | | | $'000 | and | $'000 | | | | reversals | | | | | $'000 | | +----------------------------------------------------------------+--------------+--------------+--------------+ | Property, plant and equipment | (34) | (30) | (64) | +----------------------------------------------------------------+--------------+--------------+--------------+ | Inventory | (23) | 55 | 32 | +----------------------------------------------------------------+--------------+--------------+--------------+ | Accrued expenses | 79 | - | 79 | +----------------------------------------------------------------+--------------+--------------+--------------+ | Trade and other receivables | - | (1) | (1) | +----------------------------------------------------------------+--------------+--------------+--------------+ | Losses | 180 | (180) | - | +----------------------------------------------------------------+--------------+--------------+--------------+ | Total net deferred taxation | 202 | (156) | 46 | +----------------------------------------------------------------+--------------+--------------+--------------+ 8. Earnings per share (EPS) Basic earnings per share +----------------------------------------------------------+---------+---------+ | | 2008 | 2007 | +----------------------------------------------------------+---------+---------+ | (Loss)/profit for the year ($'000) | (3,418) | 3,738 | +----------------------------------------------------------+---------+---------+ | Weighted average number of shares in issue ('000) | 172,321 | 172,321 | +----------------------------------------------------------+---------+---------+ | Basic earnings per share (cents) | (1.98) | 2.17 | +----------------------------------------------------------+---------+---------+ Diluted earnings per share As at 31 December 2008 the Company had no potentially dilutive financial instruments, options or contingent share obligations. As a result, there is no difference between basic EPS and diluted EPS. Basic earnings per share before exceptional items +----------------------------------------------------------+---------+---------+ | | 2008 | 2007 | | | | | +----------------------------------------------------------+---------+---------+ | (Loss)/profit for the year ($'000) | (3,418) | 3,738 | +----------------------------------------------------------+---------+---------+ | Add back exceptional impairment of cash and cash | 2,961 | - | | equivalents ($'000) | | | +----------------------------------------------------------+---------+---------+ | (Loss)/profit for the year before exceptional items | (457) | 3,738 | | ($'000) | | | +----------------------------------------------------------+---------+---------+ | Weighted average number of shares in issue ('000) | 172,321 | 172,321 | +----------------------------------------------------------+---------+---------+ | Basic earnings per share before exceptional items | (0.27) | 2.17 | | (cents) | | | +----------------------------------------------------------+---------+---------+ 9. Property, plant and equipment Group +---------------------------+-----------+----------+-----------+--------------+----------+ | | Buildings | Vehicles | Plant | Assets | Total | | | | | and | under | $'000 | | | $'000 | $'000 | equipment | construction | | | | | | | | | | | | | $'000 | $'000 | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Cost: | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 1 January 2008 | 4,514 | 129 | 6,622 | 1,860 | 13,125 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Acquisitions (note 22) | - | 10 | 900 | 5 | 915 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Additions | - | 88 | 108 | 1,548 | 1,744 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Disposals | - | (8) | (30) | - | (38) | +---------------------------+-----------+----------+-----------+--------------+----------+ | Transfers | 155 | - | 1,519 | (1,674) | - | +---------------------------+-----------+----------+-----------+--------------+----------+ | Translation difference | (767) | (33) | (1,357) | (286) | (2,443) | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 31 December | 3,902 | 186 | 7,762 | 1,453 | 13,303 | | 2008 | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Accumulated depreciation: | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 1 January 2008 | 391 | 37 | 1,790 | - | 2,218 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Depreciation charge | 161 | 136 | 914 | - | 1,211 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Disposals | - | (8) | (21) | - | (29) | +---------------------------+-----------+----------+-----------+--------------+----------+ | Translation difference | (88) | (26) | (423) | - | (537) | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 31 December | 464 | 139 | 2,260 | - | 2,863 | | 2008 | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Net book value: | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 31 December | 3,438 | 47 | 5,502 | 1,453 | 10,440 | | 2008 | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 31 December | 4,123 | 92 | 4,832 | 1,860 | 10,907 | | 2007 | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ +---------------------------+-----------+----------+-----------+--------------+----------+ | | Buildings | Vehicles | Plant | Assets | Total | | | | | and | under | $'000 | | | $'000 | $'000 | equipment | construction | | | | | | | | | | | | | $'000 | $'000 | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Cost: | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 1 January 2007 | 4,148 | 98 | 3,485 | 1,924 | 9,655 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Additions | - | 49 | - | 2,744 | 2,793 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Disposals | - | (25) | - | - | (25) | +---------------------------+-----------+----------+-----------+--------------+----------+ | Transfers | 64 | - | 2,884 | (2,948) | - | +---------------------------+-----------+----------+-----------+--------------+----------+ | Translation difference | 302 | 7 | 253 | 140 | 702 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 31 December | 4,514 | 129 | 6,622 | 1,860 | 13,125 | | 2007 | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Accumulated depreciation: | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 1 January 2007 | 238 | 16 | 1,126 | - | 1,380 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Depreciation charge | 130 | 25 | 559 | - | 714 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Disposals | - | (6) | - | - | (6) | +---------------------------+-----------+----------+-----------+--------------+----------+ | Translation difference | 23 | 2 | 105 | - | 130 | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 31 December | 391 | 37 | 1,790 | - | 2,218 | | 2007 | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Net book value: | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 31 December | 4,123 | 92 | 4,832 | 1,860 | 10,907 | | 2007 | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ | Balance at 31 December | 3,910 | 82 | 2,359 | 1,924 | 8,275 | | 2006 | | | | | | +---------------------------+-----------+----------+-----------+--------------+----------+ Property, plant and equipment pledged as security for borrowings amounted to $2,583,000 (2007: nil). Company +----------------------------------------------------------+-----------+-------+ | | Plant | Total | | | and | $'000 | | | equipment | | | | $'000 | | +----------------------------------------------------------+-----------+-------+ | Cost: | | | +----------------------------------------------------------+-----------+-------+ | Balance at 1 January 2008 | 3 | 3 | +----------------------------------------------------------+-----------+-------+ | Additions | - | - | +----------------------------------------------------------+-----------+-------+ | Balance at 31 December 2008 | 3 | 3 | +----------------------------------------------------------+-----------+-------+ | Accumulated depreciation: | | | +----------------------------------------------------------+-----------+-------+ | Balance at 1 January 2008 | 1 | 1 | +----------------------------------------------------------+-----------+-------+ | Depreciation charge | 1 | 1 | +----------------------------------------------------------+-----------+-------+ | Balance at 31 December 2008 | 2 | 2 | +----------------------------------------------------------+-----------+-------+ | Net book value: | | | +----------------------------------------------------------+-----------+-------+ | Balance at 31 December 2008 | 1 | 1 | +----------------------------------------------------------+-----------+-------+ | Balance at 31 December 2007 | 2 | 2 | +----------------------------------------------------------+-----------+-------+ +----------------------------------------------------------+-----------+-------+ | | Plant | Total | | | and | $'000 | | | equipment | | | | $'000 | | +----------------------------------------------------------+-----------+-------+ | Cost: | | | +----------------------------------------------------------+-----------+-------+ | Balance at 1 January 2007 | 3 | 3 | +----------------------------------------------------------+-----------+-------+ | Additions | - | - | +----------------------------------------------------------+-----------+-------+ | Balance at 31 December 2007 | 3 | 3 | +----------------------------------------------------------+-----------+-------+ | Accumulated depreciation: | | | +----------------------------------------------------------+-----------+-------+ | Balance at 1 January 2007 | 1 | 1 | +----------------------------------------------------------+-----------+-------+ | Depreciation charge | - | - | +----------------------------------------------------------+-----------+-------+ | Balance at 31 December 2007 | 1 | 1 | +----------------------------------------------------------+-----------+-------+ | Net book value: | | | +----------------------------------------------------------+-----------+-------+ | Balance at 31 December 2007 | 2 | 2 | +----------------------------------------------------------+-----------+-------+ | Balance at 31 December 2006 | 2 | 2 | +----------------------------------------------------------+-----------+-------+ 10. Intangible assets Group +-------------------------------------+---------+------------+----------+-------+ | | Patents | Trademarks | Goodwill | Total | | | $'000 | $'000 | | $'000 | | | | | $'000 | | | | | | (note | | | | | | 22) | | +-------------------------------------+---------+------------+----------+-------+ | Cost: | | | | | +-------------------------------------+---------+------------+----------+-------+ | 1 January 2008 | 208 | 24 | - | 232 | +-------------------------------------+---------+------------+----------+-------+ | Additions | 180 | - | 1,053 | 1,233 | +-------------------------------------+---------+------------+----------+-------+ | Translation difference | (62) | (4) | (43) | (109) | +-------------------------------------+---------+------------+----------+-------+ | Balance at 31 December 2008 | 326 | 20 | 1,010 | 1,356 | +-------------------------------------+---------+------------+----------+-------+ | Accumulated amortisation: | | | | | +-------------------------------------+---------+------------+----------+-------+ | 1 January 2008 | 5 | 2 | - | 7 | +-------------------------------------+---------+------------+----------+-------+ | Amortisation charge | 24 | 3 | - | 27 | +-------------------------------------+---------+------------+----------+-------+ | Translation difference | (4) | (1) | - | (5) | +-------------------------------------+---------+------------+----------+-------+ | Balance at 31 December 2008 | 25 | 4 | - | 29 | +-------------------------------------+---------+------------+----------+-------+ | Net book value: | | | | | +-------------------------------------+---------+------------+----------+-------+ | At 31 December 2008 | 301 | 16 | 1,010 | 1,327 | +-------------------------------------+---------+------------+----------+-------+ | At 31 December 2007 | 203 | 22 | - | 225 | +-------------------------------------+---------+------------+----------+-------+ +------------------------------------------------+---------+------------+----------+---------+ | | Patents | Trademarks | Goodwill | Total | | | $'000 | $'000 | | $'000 | | | | | $'000 | | +------------------------------------------------+---------+------------+----------+---------+ | Cost: | | | | | +------------------------------------------------+---------+------------+----------+---------+ | 1 January 2007 | - | - | - | - | +------------------------------------------------+---------+------------+----------+---------+ | Additions | 208 | 24 | - | 232 | +------------------------------------------------+---------+------------+----------+---------+ | Balance at 31 December 2007 | 208 | 24 | - | 232 | +------------------------------------------------+---------+------------+----------+---------+ | Accumulated amortisation: | | | | | +------------------------------------------------+---------+------------+----------+---------+ | 1 January 2007 | - | - | - | - | +------------------------------------------------+---------+------------+----------+---------+ | Amortisation charge | 5 | 2 | - | 7 | +------------------------------------------------+---------+------------+----------+---------+ | Balance at 31 December 2007 | 5 | 2 | - | 7 | +------------------------------------------------+---------+------------+----------+---------+ | Net book value: | | | - | | +------------------------------------------------+---------+------------+----------+---------+ | At 31 December 2007 | 203 | 22 | - | 225 | +------------------------------------------------+---------+------------+----------+---------+ | At 31 December 2006 | - | - | - | - | +------------------------------------------------+---------+------------+----------+---------+ Impairment testing of goodwill Goodwill acquired through business combinations has to be allocated for impairment testing purposes to individual cash-generating units ('CGU's') each representing the lowest level within the Group at which the goodwill is monitored for internal management purposes. CGUs in the Group correspond to operations in a particular country and the Goodwill has been allocated to the Austrian CGU. The impairment test involves determining the recoverable amount of the CGU and value in use calculations have been used to do this. Value in use is the present value of the future cash flows which are expected to be generated by the CGU. Future cash flows are based on business plans for a period of 5 years which reflect management's expectation based on past experience, adjusted to reflect market trends, economic conditions and key risks as appropriate. Cash flows beyond 5 years are extrapolated using an estimated terminal growth rate of 1% which does not exceed the average long term growth rate of the market in which the CGU operates. A pre-tax discount rate of 10.7% has been applied to cash flow projections, based on market data and reflecting the risk profile of the CGU. No impairment loss was recognised during the year and reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the CGU to fall below the carrying amount. 11. Inventories +--------------------------------------------------------------------+-------+-------+ | | Group | +--------------------------------------------------------------------+---------------+ | | 2008 | 2007 | | | $'000 | $'000 | +--------------------------------------------------------------------+-------+-------+ | Materials and consumables | 1,923 | 1,750 | +--------------------------------------------------------------------+-------+-------+ | Work in progress | 168 | 253 | +--------------------------------------------------------------------+-------+-------+ | Finished products | 2,050 | 1,196 | +--------------------------------------------------------------------+-------+-------+ | | 4,141 | 3,199 | +--------------------------------------------------------------------+-------+-------+ The cost of inventories recognised as an expense in the year and included in costs of sales in the income statement amounted to $18,668,000 (2007: $14,628,000). This includes $247,300 (2007: nil) for inventory written down to net realisable value, now carried at $316,000. 12. Trade and other receivables +------------------------------------------------+---------+---------+---------+---------+ | | Group | Company | +------------------------------------------------+-------------------+-------------------+ | | 2008 | 2007 | 2008 | 2007 | | | $'000 | $'000 | $'000 | $'000 | +------------------------------------------------+---------+---------+---------+---------+ | Trade receivables | 4,245 | 9,279 | - | - | +------------------------------------------------+---------+---------+---------+---------+ | Amounts owed by group undertakings | - | - | 5,042 | 8,896 | +------------------------------------------------+---------+---------+---------+---------+ | Receivables from related parties (note 23) | 31 | 449 | - | - | +------------------------------------------------+---------+---------+---------+---------+ | VAT recoverable | 629 | 1,107 | 30 | 41 | +------------------------------------------------+---------+---------+---------+---------+ | Other receivables | 727 | 689 | 107 | 42 | +------------------------------------------------+---------+---------+---------+---------+ | Advance payments (note 27) | 3,117 | 6,104 | 3,117 | 3,161 | +------------------------------------------------+---------+---------+---------+---------+ | | 8,749 | 17,628 | 8,296 | 12,140 | +------------------------------------------------+---------+---------+---------+---------+ | Less Non-current portion: | | | | | +------------------------------------------------+---------+---------+---------+---------+ | Advance payments (note 27) | (3,117) | (6,104) | (3,117) | (3,161) | +------------------------------------------------+---------+---------+---------+---------+ | Current portion | 5,632 | 11,524 | 5,179 | 8,979 | +------------------------------------------------+---------+---------+---------+---------+ Trade receivables are denominated in Russian Roubles, except for $411,325 and $463,449 denominated in USD and EURO, as at 31 December 2008 respectively and $161,000 denominated in USD as at 31 December 2007. As of 31 December 2008, trade receivables of $3,632,000 (2007: $9,086,000) were fully performing. Trade receivables of $613,000 (2007: $193,000) were outstanding for more than 60 days, but not impaired. None of the financial assets that were fully performing have been renegotiated in the year. Trade receivables are considered on a case by case basis for possible impairment with reference to historical information about default rates. Where there are particular concerns about certain customers the business seeks to obtain advance payment before product delivery. Trade receivables due for more than 360 days with no guarantee available from the client are impaired. As of 31 December 2008 trade receivables of $83,000 were impaired (2007: nil). 13. Cash and cash equivalents +--------------------------------------------------------+-------+-------+-------+-------+ | | Group | Company | +--------------------------------------------------------+---------------+---------------+ | | 2008 | 2007 | 2008 | 2007 | | | $'000 | $'000 | $'000 | $'000 | +--------------------------------------------------------+-------+-------+-------+-------+ | RR denominated cash and cash equivalents | 4,063 | 7,888 | - | - | +--------------------------------------------------------+-------+-------+-------+-------+ | Other currency balances with banks | 304 | 268 | 250 | 13 | +--------------------------------------------------------+-------+-------+-------+-------+ | | 4,367 | 8,156 | 250 | 13 | +--------------------------------------------------------+-------+-------+-------+-------+ +-----------------------------------------------------------------------+-------+-------+ | | Group | +-----------------------------------------------------------------------+---------------+ | | 2008 | 2007 | | | $'000 | $'000 | +-----------------------------------------------------------------------+-------+-------+ | Cash at bank and on hand | 827 | 3,919 | +-----------------------------------------------------------------------+-------+-------+ | Short-term bank deposits | 3,540 | 4,237 | +-----------------------------------------------------------------------+-------+-------+ | | 4,367 | 8,156 | +-----------------------------------------------------------------------+-------+-------+ A provision of $2,961,000 has been taken against cash balances held at a financial institution where access to the cash has been restricted. No formal reason has been given to the company as to why the amount is not being repaid, however management believe that it is due to the impact of the deteriorating economic situation in Russia and the liquidity problems facing the Russian banking system on the financial institution in which the cash balance is held. Cash and bank overdrafts include the following for the purposes of the cash flow statement: +------------------------------------------------------+-------+-------+-------+-------+ | | Group | Company | +------------------------------------------------------+---------------+---------------+ | | 2008 | 2007 | 2008 | 2007 | | | $'000 | $'000 | $'000 | $'000 | +------------------------------------------------------+-------+-------+-------+-------+ | Cash and cash equivalents | 4,367 | 8,156 | 250 | 13 | +------------------------------------------------------+-------+-------+-------+-------+ | Bank overdrafts (note 14) | (664) | (2) | - | - | +------------------------------------------------------+-------+-------+-------+-------+ | | 3,703 | 8,154 | 250 | 13 | +------------------------------------------------------+-------+-------+-------+-------+ 14. Borrowings +--------------------------------------------------------------------+-------+-------+ | | Group | +--------------------------------------------------------------------+---------------+ | | 2008 | 2007 | | | $'000 | $'000 | +--------------------------------------------------------------------+-------+-------+ | Short-term borrowings: | | | +--------------------------------------------------------------------+-------+-------+ | Bank overdrafts (note 13) | 664 | 2 | +--------------------------------------------------------------------+-------+-------+ | Bank borrowings | 2,898 | 4,151 | +--------------------------------------------------------------------+-------+-------+ | | 3,562 | 4,153 | +--------------------------------------------------------------------+-------+-------+ | Long-term borrowings: | | | +--------------------------------------------------------------------+-------+-------+ | Bank borrowings | 692 | - | +--------------------------------------------------------------------+-------+-------+ | | 692 | - | +--------------------------------------------------------------------+-------+-------+ The interest rates at the balance sheet date were as follows: +----------------------------+----------+--------------+----------+----------+--------------+----------+ | | 2008 | 2007 | +----------------------------+------------------------------------+------------------------------------+ | | Rate | Currency | Amount | Rate | Currency | Amount | | | | | $'000 | | | $'000 | +----------------------------+----------+--------------+----------+----------+--------------+----------+ | Bank overdrafts | 5.9% | Euros | 664 | 8.7% | Russian | 2 | | | | | | | Roubles | | +----------------------------+----------+--------------+----------+----------+--------------+----------+ | Short-term bank borrowings | 25.5% | Russian | 2,050 | 10.5% | Russian | 1,161 | | | | Roubles | | | Roubles | | +----------------------------+----------+--------------+----------+----------+--------------+----------+ | Short-term bank borrowings | 7.5% | Euros | 848 | 12.7% | Russian | 546 | | | | | | | Roubles | | +----------------------------+----------+--------------+----------+----------+--------------+----------+ | Short-term bank borrowings | - | - | - | 15.0% | Russian | 2,444 | | | | | | | Roubles | | +----------------------------+----------+--------------+----------+----------+--------------+----------+ | Long-term bank borrowings | 5.6% | Euros | 241 | - | - | - | +----------------------------+----------+--------------+----------+----------+--------------+----------+ | Long-term bank borrowings | 4.9% | Euros | 451 | - | - | - | +----------------------------+----------+--------------+----------+----------+--------------+----------+ | | | | 4,254 | | | 4,153 | +----------------------------+----------+--------------+----------+----------+--------------+----------+ Borrowings are secured with fixed or floating charges over the Group's assets. In 2007 no borrowings were secured. The maturity profile of borrowings and their key terms are disclosed in note 25. 15. Trade and other payables +---------------------------------------------------------+-------+-------+-------+-------+ | | Group | Company | +---------------------------------------------------------+---------------+---------------+ | | 2008 | 2007 | 2008 | 2007 | | | $'000 | $'000 | $'000 | $'000 | +---------------------------------------------------------+-------+-------+-------+-------+ | Trade payables | 2,283 | 1,285 | 185 | 139 | +---------------------------------------------------------+-------+-------+-------+-------+ | Amounts due to related parties (note 23) | 788 | 673 | - | - | +---------------------------------------------------------+-------+-------+-------+-------+ | Other payables and accruals | 1,054 | 3,675 | 315 | 234 | +---------------------------------------------------------+-------+-------+-------+-------+ | | 4,125 | 5,633 | 500 | 373 | +---------------------------------------------------------+-------+-------+-------+-------+ 16. Current tax liabilities +---------------------------------------------------------+-------+-------+-------+-------+ | | Group | Company | +---------------------------------------------------------+---------------+---------------+ | | 2008 | 2007 | 2008 | 2007 | | | $'000 | $'000 | $'000 | $'000 | +---------------------------------------------------------+-------+-------+-------+-------+ | Income tax | - | 714 | - | - | +---------------------------------------------------------+-------+-------+-------+-------+ | VAT payable | 5 | 15 | - | - | +---------------------------------------------------------+-------+-------+-------+-------+ | Property and other taxes | 217 | 162 | 30 | 17 | +---------------------------------------------------------+-------+-------+-------+-------+ | | 222 | 891 | 30 | 17 | +---------------------------------------------------------+-------+-------+-------+-------+ Value added tax of $5,000 as at 31 December 2008 (2007: $15,000) is payable to tax authorities when payments are received from customers or if relevant receivable balances are written off. 17. Share capital Group and Company +-----------------------------------------------------------------------+-------+-------+ | | 2008 | 2007 | | | $'000 | $'000 | +-----------------------------------------------------------------------+-------+-------+ | Authorised: | | | +-----------------------------------------------------------------------+-------+-------+ | 500,000,000 ordinary shares of 1p each | 8,602 | 8,602 | +-----------------------------------------------------------------------+-------+-------+ | Issued and fully paid: | | | +-----------------------------------------------------------------------+-------+-------+ | 172,321,429 ordinary shares of 1p each | 2,965 | 2,965 | +-----------------------------------------------------------------------+-------+-------+ Potential issues of ordinary shares On 12 December 2005, Zirax plc entered into an option agreement with the directors and Hanson Westhouse LLP, the nominated adviser pursuant to which Zirax plc granted options to Hanson Westhouse LLP to subscribe for up to 1,723,214 ordinary shares at the placing price of 15 pence. The option may be exercised at any time during the period of 5 years from admission to AIM provided that they may not be exercised in more than 4 tranches. The cost of Hanson Westhouse's options have been treated as issue costs and deducted from share premium, with a corresponding credit to other reserves. Details of options held by directors are disclosed in note 6. 18. Share-based payments The Group has granted five tranches of equity settled options with a fixed exercise price equal to the placing price of the shares at the date of admission to AIM. The options were granted to certain directors and Hanson Westhouse LLP, as explained in notes 6 and 17. Options were valued using the Black-Scholes option pricing model and the charge for the year was $97,000 (2007: $122,000). No performance conditions were included in the fair value calculations. The share awards outstanding at 31 December 2008 and 31 December 2007 are as follows: +---------------------------------------------------------+--------------+--------------+--------------+--------------+ | Grant date | Number of | Share price | Fair value | Fair value | | | shares | on grant | (price) on | GBP | | | granted | date | grant date | | | | | (pence) | (pence) | | +---------------------------------------------------------+--------------+--------------+--------------+--------------+ | 12 December 2005 | 861,607 | 15p | 4.73p | 40,754 | +---------------------------------------------------------+--------------+--------------+--------------+--------------+ | 12 December 2005 | 1,723,214 | 15p | 4.73p | 81,508 | +---------------------------------------------------------+--------------+--------------+--------------+--------------+ | 2 October 2006 | 861,607 | 14.25p | 2.64p | 22,777 | +---------------------------------------------------------+--------------+--------------+--------------+--------------+ | 2 October 2006 | 1,723,214 | 14.25p | 2.64p | 45,554 | +---------------------------------------------------------+--------------+--------------+--------------+--------------+ | 27 December 2006 | 1,723,214 | 14p | 2.48p | 42,653 | +---------------------------------------------------------+--------------+--------------+--------------+--------------+ A reconciliation of option movements is as follows: +------------------------------------------------------------------+----------+----------+ | | Number | Weighted | | | ('000) | | | | | average | | | | exercise | | | | price | +------------------------------------------------------------------+----------+----------+ | Outstanding at 1 January 2008 | 6,893 | 15p | +------------------------------------------------------------------+----------+----------+ | Granted | - | - | +------------------------------------------------------------------+----------+----------+ | Exercised | - | - | +------------------------------------------------------------------+----------+----------+ | Outstanding at 31 December 2008 | 6,893 | 15p | +------------------------------------------------------------------+----------+----------+ | Exercisable at 31 December 2008 | 6,893 | 15p | +------------------------------------------------------------------+----------+----------+ There were no options granted or exercised during 2007. 19. Share premium +------------------------------------------------------------------+----------+----------+ | | Group | Company | | | $'000 | $'000 | +------------------------------------------------------------------+----------+----------+ | At 31 December 2007 and 31 December 2008 | 11,194 | 11,194 | +------------------------------------------------------------------+----------+----------+ 20. Other reserves Group +-----------------------------------------------+----------+-------------+----------+----------+ | | Merger | Translation | Other | Total | | | reserve | reserve | reserve | $'000 | | | $'000 | $'000 | $'000 | | +-----------------------------------------------+----------+-------------+----------+----------+ | At 1 January 2007 | 3,430 | 2,066 | (1,139) | 4,357 | +-----------------------------------------------+----------+-------------+----------+----------+ | Effect of exchange rates | - | 1,739 | - | 1,739 | +-----------------------------------------------+----------+-------------+----------+----------+ | Share options credit | - | - | 122 | 122 | +-----------------------------------------------+----------+-------------+----------+----------+ | At 31 December 2007 | 3,430 | 3,805 | (1,017) | 6,218 | +-----------------------------------------------+----------+-------------+----------+----------+ | Effect of exchange rates | - | (5,850) | - | (5,850) | +-----------------------------------------------+----------+-------------+----------+----------+ | Share options credit | - | - | 97 | 97 | +-----------------------------------------------+----------+-------------+----------+----------+ | At 31 December 2008 | 3,430 | (2,045) | (920) | 465 | +-----------------------------------------------+----------+-------------+----------+----------+ The other reserve principally relates to the difference upon consolidation resulting from merger accounting as discussed below, and share options issued. On 15 November 2005, the Company acquired the entire share capital of Zirax LLC and the Group accounted for the combination using merger accounting. The consideration was satisfied by the issue of 90,625,000 equity shares of $1,559,000. The premium of $3,430,000 on the issue of these shares was taken to the merger reserve. The difference of $1,177,000 arising on consolidation between the value of Zirax plc shares issued ($4,989,000) and the nominal value of Zirax LLC shares acquired ($3,812,000) was debited to other reserves. Company +-----------------------------------------------+----------+-------------+----------+----------+ | | Merger | Translation | Other | Total | | | reserve | reserve | reserve | $'000 | | | $'000 | $'000 | $'000 | | +-----------------------------------------------+----------+-------------+----------+----------+ | At 1 January 2007 | 5,730 | 1,518 | 186 | 7,434 | +-----------------------------------------------+----------+-------------+----------+----------+ | Effect of exchange rates | - | 1,411 | - | 1,411 | +-----------------------------------------------+----------+-------------+----------+----------+ | Share options credit | - | - | 122 | 122 | +-----------------------------------------------+----------+-------------+----------+----------+ | At 31 December 2007 | 5,730 | 2,929 | 308 | 8,967 | +-----------------------------------------------+----------+-------------+----------+----------+ | Effect of exchange rates | - | (5,546) | - | (5,546) | +-----------------------------------------------+----------+-------------+----------+----------+ | Share options credit | - | - | 97 | 97 | +-----------------------------------------------+----------+-------------+----------+----------+ | At 31 December 2008 | 5,730 | (2,617) | 405 | 3,518 | +-----------------------------------------------+----------+-------------+----------+----------+ 21. Profit and loss account +------------------------------------------------------------------+----------+----------+ | | Group | Company | | | $'000 | $'000 | +------------------------------------------------------------------+----------+----------+ | At 1 January 2007 | 5,525 | (2,283) | +------------------------------------------------------------------+----------+----------+ | Profit/(loss) for the year | 3,738 | (615) | +------------------------------------------------------------------+----------+----------+ | At 31 December 2007 | 9,263 | (2,898) | +------------------------------------------------------------------+----------+----------+ | Loss for the year | (3,418) | (181) | +------------------------------------------------------------------+----------+----------+ | At 31 December 2008 | 5,845 | (3,079) | +------------------------------------------------------------------+----------+----------+ The directors have not presented an individual income statement for the Company, as permitted by s230 of the Companies Act 1985, although the Company's income statement has been approved by the Board. 22. Acquisition of subsidiary On 18 January 2008, the Group acquired 100% of the share capital of Solith Anlagenbau und Service GmbH ('Solith'). Solith, located in Austria, specialises in the production and distribution of value added de-icing products, including calcium chloride derivative "Brine C", used for motorway de-icing maintenance. The maximum consideration payable by Zirax is EUR3.8m, satisfied by a cash payment of EUR200,000 on completion, deferred payments of EUR100,000 in five equal instalments over 5 years and the balance of up to EUR3.5m, payable via a two-tier performance related earn out arrangement for the sale of product in Austria over a maximum period of six years. It is not currently considered probable that any significant consideration will arise on the earn-out. The assets and liabilities arising from the acquisition, are as follows: +------------------------------------------------+----------+------------+----------+ | | Carrying | Fair | Total | | | Value | Value | $'000 | | | $'000 | Adjustment | | | | | $'000 | | +------------------------------------------------+----------+------------+----------+ | Fixed Assets | 819 | 96 | 915 | +------------------------------------------------+----------+------------+----------+ | Inventories | 179 | 143 | 322 | +------------------------------------------------+----------+------------+----------+ | Other net current liabilities | (464) | - | (464) | +------------------------------------------------+----------+------------+----------+ | Borrowings | (1,244) | - | (1,244) | +------------------------------------------------+----------+------------+----------+ | Net liabilities | (710) | 239 | (471) | +------------------------------------------------+----------+------------+----------+ | Purchase consideration: | | | | +------------------------------------------------+----------+------------+----------+ | Cash paid | | | 323 | +------------------------------------------------+----------+------------+----------+ | Direct costs relating to acquisition | | | 141 | +------------------------------------------------+----------+------------+----------+ | Deferred consideration | | | 118 | +------------------------------------------------+----------+------------+----------+ | | | | 582 | +------------------------------------------------+----------+------------+----------+ | Fair value of net liabilities acquired | | | 471 | +------------------------------------------------+----------+------------+----------+ | Goodwill | | | 1,053 | +------------------------------------------------+----------+------------+----------+ The goodwill is attributable to Solith providing the Group a platform from which to expand throughout the de-icing markets of Central and Western Europe. Solith's loss for the period since acquisition was $0.7m. Because of the proximity of the acquisition to the start of the period, the revenue and loss of the Group, stated as if the acquisition had taken place at the start of the period, would not be significantly different to the revenue and loss disclosed in the income statement. 23. Balances and transactions with related parties Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 "Related Party Disclosures". In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding at 31 December 2008 and 31 December 2007 are detailed below. In accordance with IAS 24 disclosure is not required of transactions and balances between Group companies where such transactions are eliminated upon consolidation. All sales between the Group and its related parties are based on the market prices current at the time of sales. All inventory purchases made by the Group from its related parties are based on the market prices current at the time of purchase. (i) Balances with related parties: +----------------------------------------------------+-------------------+-------+-------+ | Balance sheet caption | Relationship | 2008 | 2007 | | | | $'000 | $'000 | +----------------------------------------------------+-------------------+-------+-------+ | Trade receivable from and prepayments to: | | | | +----------------------------------------------------+-------------------+-------+-------+ | OAO Kaustik | Under common | 31 | 61 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | | | 31 | 61 | +----------------------------------------------------+-------------------+-------+-------+ | Cash and cash equivalents with: | | | | +----------------------------------------------------+-------------------+-------+-------+ | Inkarobank | Under common | 3,540 | 4,237 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | | | 3,540 | 4,237 | +----------------------------------------------------+-------------------+-------+-------+ | Trade payables to: | | | | +----------------------------------------------------+-------------------+-------+-------+ | OAO Plastcard | Under common | 32 | 36 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | OAO Kaustik | Under common | 506 | 626 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | OOO European Chemical Company | Under common | 35 | 11 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | | | 573 | 673 | +----------------------------------------------------+-------------------+-------+-------+ | Short-term borrowings with: | | | | +----------------------------------------------------+-------------------+-------+-------+ | Inkarobank | Under common | - | 2,444 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | | | - | 2,444 | +----------------------------------------------------+-------------------+-------+-------+ (ii) Transactions with related parties: +----------------------------------------------------+-------------------+-------+-------+ | Income statement caption | Relationship | 2008 | 2007 | | | | $'000 | $'000 | +----------------------------------------------------+-------------------+-------+-------+ | Revenue from transactions with: | | | | +----------------------------------------------------+-------------------+-------+-------+ | OAO Kaustik | Under common | 193 | 289 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | | | 193 | 289 | +----------------------------------------------------+-------------------+-------+-------+ Revenue from transactions with OAO Kaustik is represented mainly by an operating lease of production equipment. +----------------------------------------------------+-------------------+-------+-------+ | Income statement caption | Relationship | 2008 | 2007 | | | | $'000 | $'000 | +----------------------------------------------------+-------------------+-------+-------+ | Inventory purchases: | | | | +----------------------------------------------------+-------------------+-------+-------+ | OAO Kaustik | Under common | 9,097 | 8,076 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | OAO Plastcard | Under common | 204 | 104 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | OOO European Chemical Company | Under common | 99 | 58 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ | | | 9,400 | 8,238 | +----------------------------------------------------+-------------------+-------+-------+ | Production services purchases: | | | | +----------------------------------------------------+-------------------+-------+-------+ | OAO Kaustik | Under common | 283 | 764 | | | control | | | +----------------------------------------------------+-------------------+-------+-------+ (iii) Other related party matters On 1 September 2005 Zirax LLC entered into a 20 year term framework agreement with OAO Kaustik for the supply of raw materials and the provision of utilities and services. This agreement has been entered into on an "arms' length basis". The prices for the supply of goods and services under the framework agreement and any other contract entered into between the parties pursuant thereto are determined for the first year of its term and subject to review thereafter in accordance with the formula set out therein. Pursuant to this framework agreement the parties executed several one-year agreements for the supply of hydrochloric acid, liquid calcium chloride, lime-milk, hot water, steam, natural gas, settled water, power, maintenance and repair, transport and telecommunications, waste purification and disposal services. (iv) Related party transactions of the Company The Company received interest on a loan to Zirax LLC of $426,000 (2007: $652,000). 24. Contingencies, commitments and operating risks (i) Contingent liabilities Following the acquisition of Solith, contingent consideration is payable as disclosed in note 22. At the date of acquisition, it was not considered probable that these monies would be payable and there is no change in this assessment at the year end. (ii) Lease commitments A 31 December, the total of future minimum lease payments under non-cancellable operating leases for each of the following periods were: +-----------------------------------------------------------------------+-------+-------+ | | 2008 | 2007 | | | $'000 | $'000 | +-----------------------------------------------------------------------+-------+-------+ | Within one year | 195 | 20 | +-----------------------------------------------------------------------+-------+-------+ | Between one and five years | 454 | 81 | +-----------------------------------------------------------------------+-------+-------+ | After five years | 956 | 838 | +-----------------------------------------------------------------------+-------+-------+ | | 1,605 | 939 | +-----------------------------------------------------------------------+-------+-------+ Lease and sub-lease payments recognised as an expense in the year were $430,000 (2007: $249,000). (iii) Operating environment The Russian Federation continues to display certain characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible in most countries outside of the Russian Federation, restrictive currency controls, and relatively high inflation. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations, and changes, which can occur frequently. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. The Russian banking and other financial systems are not well developed or regulated and the applicable legislation is subject to differing interpretations and inconsistent applications. The recent banking crisis that has affected financial institutions around the world has impacted the Russian banking system and Russian companies including Zirax LLC may be subject to further liquidity constraints which might have a material adverse effect on the Group's business. (iv) Concentration risk The Group relies significantly on relationships with other entities (including customers and suppliers) and also on good relationships with Russian regulatory and Government departments. The Group also relies upon third parties to provide essential Russian services on a contractual basis. With the growth of the Oil and Gas segment, the revenues from Rosneft, through a service company, have become significant. The proportion of Group sales to Rosneft in 2008 is 49% (2007: 30%). In addition, the Group's business has a dependency on the results of annual tenders conducted by the Government of Moscow city. The proportion of sales under such tenders in 2008 is 10% (2007: 39%). The Group aims to mitigate these risks by diversifying the customer base, particularly by growing the international business and also by developing the industrial chemicals segment. Zirax LLC has signed supply agreements with Kaustik for the provision of raw materials, the subcontracting of IceMeltTM production, support services and access to Zirax LLC's facility. Whilst Zirax LLC has a long-term supply contract with Kaustik which is mutually beneficial (in that it provides for a reliable off-take for Kaustik's hydrochloric acid produced as a by-product of its activities and a cost effective source of supply of hydrochloric acid for Zirax LLC), it cannot be excluded that the cost of supply of hydrochloric acid will be increased in due course. Furthermore, the contract may be terminated at a relatively short notice by either party. The ongoing relationship with Kaustik is therefore a material factor in the Group's ongoing success. With the current economic environment in Russia, there is a further risk that Kaustik could face liquidity difficulties and ultimately bankruptcy. However, Kaustik is owned by Nikochem which is considered by a Russian Government Commission to be one of Russia's economically strategic organisations and for which the Russian Government has prioritised economic assistance. Although Kaustik is not directly named as an economically strategic company, the Directors take comfort that it will receive support if necessary as part of the Nikochem Group but this is not guaranteed. As yet there have been no known instances of the Russian Government being asked to provide support so this mechanism is unproven. In May 2009, the Group was approached by Kaustik for assistance with short term liquidity issues. As a key supplier, the Group agreed to provide short term assistance in the form of advance payments against purchases of hydrochloric acid (see note 27) to help ease Kaustik's short term liquidity issues and ensure continued supplies. While the Directors have no reason to believe otherwise, there can be no assurance that the Group's existing relationships will continue or that new ones will be successfully formed and the Group could be adversely affected by changes to such relationships or difficulties in forming new ones. Any circumstance, which causes the early termination or non-renewal of one of these key business relationships, could adversely impact upon the Group, its business, operating results or prospects. (v) Taxation Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. As at 31 December 2008 management believes that its interpretation of the relevant legislation is appropriate and the Group's tax, currency and customs positions will be sustained. (vi) Environmental matters The enforcement of environmental regulation in Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations related to environmental pollution. As obligations are determined, they are provided immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate, under existing legislation, management believes that there are no significant liabilities for environmental damage. (vii) Insurance The Group holds insurance policies to cover risks related to its export shipments and transportation of goods to customers. Property, plant and equipment were brought into the insurance programme from 2007. (viii) Company guarantees The company has issued guarantees of $1.4m relating to the borrowings of subsidiary undertakings. 25. Financial Instruments Financial assets and liabilities Under IAS 39, the Group's trade receivables and other receivables and cash and cash equivalents are classified as 'Loans and receivables', and trade and other payables, short-term borrowings and long-term borrowings are classified as 'Financial liabilities measured at amortised cost'. The carrying values of the Group's loans and receivables and financial liabilities measured at amortised cost approximate their fair value. Interest receivable in the income statement relates wholly to financial instruments classified as loans and receivables and interest payable and similar charges relates wholly to financial liabilities measured at amortised cost. Financial Risk (i) Credit risk Financial assets, which potentially subject the Group to credit risk, consist principally of trade receivables and deposits with financial institutions. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history; in certain circumstances payment is required in advance of product delivery. The carrying amount of accounts receivable and deposits, net of provisions for impairment, represents the maximum amount exposed to credit risk. The Group has no significant concentrations of credit risk, apart from Rosneft and the Government of Moscow city, which are managed through regular customer communication. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the provision already recorded. Cash and cash equivalents includes $6,564,000 held in local Russian Banks against which an impairment of $2,961,000 has been taken (see note 13). The remaining cash is held in international western banks. (ii) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. The Group does not have formal arrangements to mitigate the foreign exchange risks of the Group's operations. At 31 December 2008, if RR had weakened/strengthened by 10% with all other variables held constant, post-tax profit for the year would have been $322,000 lower/higher (2007: $194,000 higher/lower), mainly as a result of foreign exchange gains/losses on translation of USD trade receivables and Euro denominated borrowings. At 31 December 2008, if Euro had weakened/strengthened by 10% with all other variables held constant, post-tax profit for the year would have been $365,000 lower/higher mainly as a result of foreign exchange gains/losses on transition of Euro denominated borrowings and Euro advance payments. (iii) Interest rate risk The Group's income and operating cash flows are substantially independent of changes in market interest rates. The Group is exposed to interest rate risk through market fluctuations of borrowings. At 31 December 2008, if interest rates had been 1% higher/lower with all other variables held constant, post-tax profit for the year would have been $30,000 (2007: $9,000) lower/higher. (iv) Liquidity risk The Group does not generally have significant liquidity risk as it seeks to maintain cash resources (including cash held in short term deposits) sufficient to cover its borrowings. However, the deterioration of the global economic environment during 2008 and its impact on the economy and financial institutions of Russia has resulted in restrictions on some of the Group's deposits which has lead the Group to provide for them and has reduced the headroom between debt and cash resources as at the year end. Subsequent to the year end the Group has had EUR2.2m returned from Solvay as part of the ongoing renegotiations of the supply and licencing agreements and has put in place $3.0m of new borrowings (see note 27) which has improved the Group's working capital position. On an ongoing basis, the Board monitors rolling forecasts of the Group's headroom on the basis of expected cash flow. This is generally carried out at local level in the operating companies of the Group in accordance with practice and limits set by the Group. Details of the maturities of the Group's financial liabilities based on the earliest contractual maturity date are given below. Details of commitments and contingencies are provided in note 24. +-------------------------------------+----------+----------+----------+----------+ | As at 31 December 2008 | Less | Between | Between | Over | | | than 1 | 1 and 2 | 2 and 5 | 5 years | | | year | years | years | $'000 | | | $'000 | $'000 | $'000 | | +-------------------------------------+----------+----------+----------+----------+ | Bank overdrafts | 664 | - | - | - | +-------------------------------------+----------+----------+----------+----------+ | Bank borrowings | 2,979 | 83 | 257 | 271 | +-------------------------------------+----------+----------+----------+----------+ | Trade and other payables | 4,125 | - | - | - | +-------------------------------------+----------+----------+----------+----------+ +-------------------------------------+----------+----------+----------+----------+ | As at 31 December 2007 | Less | Between | Between | Over | | | than 1 | 1 and 2 | 2 and 5 | 5 years | | | year | years | years | $'000 | | | $'000 | $'000 | $'000 | | +-------------------------------------+----------+----------+----------+----------+ | Bank overdrafts | 2 | - | - | - | +-------------------------------------+----------+----------+----------+----------+ | Bank borrowings | 4,153 | - | - | - | +-------------------------------------+----------+----------+----------+----------+ | Trade and other payables | 5,633 | - | - | - | +-------------------------------------+----------+----------+----------+----------+ No Group borrowings contain financial covenants, however they all contain the equivalent of material adverse change clauses. 26. investment in subsidiary undertakings +--------------------------------------------------------------------+----------+ | | Company | | | $'000 | +--------------------------------------------------------------------+----------+ | At 1 January 2008 | 8,463 | +--------------------------------------------------------------------+----------+ | Additions during the year (note 22) | 582 | +--------------------------------------------------------------------+----------+ | Translation difference | (2,464) | +--------------------------------------------------------------------+----------+ | At 31 December 2008 | 6,581 | +--------------------------------------------------------------------+----------+ The investment in the Russian subsidiary undertaking is stated at book value of net assets acquired in the subsidiary undertaking. The investment in the UK subsidiary undertaking which was incorporated during 2006 was a nominal amount of $3. Details of the subsidiary undertakings whose results are consolidated in this financial information are as follows: +------------------------------------------+---------------+--------------+---------------+ | Name and nature of business | Country | Type of | Group | | | of | share | effective | | | incorporation | | shareholding | | | and | | | | | registration | | | +------------------------------------------+---------------+--------------+---------------+ | Zirax LLC - producer and distributor of | Russia | Charter | 100% | | chemicals | | capital | | +------------------------------------------+---------------+--------------+---------------+ | Zirax (UK) Limited - distributor of | England | Ordinary | 100% | | chemicals | | | | +------------------------------------------+---------------+--------------+---------------+ | Solith Anlagenbau und Service GmbH - | Austria | Ordinary | 100% | | producer and distributor of chemicals | | | | +------------------------------------------+---------------+--------------+---------------+ 27. post balance sheet events The Company, together with Solvay S.A. ('Solvay') have initiated a process of renegotiation of the existing supply and licensing agreements at the Rosignano plant in Italy. The common aim of both parties is to revisit the provisions of those agreements, in particular with regard to the technical performance of the production unit. As part of this process, on 19 May 2009, the EUR2.0m ($2.7m) of advance payments that the Company had made pursuant to the supply agreement was received back by the Company, along with EUR0.2m ($0.3m) of interest. The Company continues to source product from the Rosignano plant while renegotiations take place. Since the year end the Group has put in place new borrowings in Russia of $3.0m which are secured over fixed assets and repayable within a year. Following discussions with one of the company's key suppliers, Kaustik (a related partly) a supplier advance of 30m Russian Roubles ($893,000) in respect of purchases of hydrochloric acid was made to them in May 2009. The repayment of the advance is scheduled to be made in three equal instalments due on the last day of July, August and September 2009. In addition Kaustik will provide a 5% discount from the commercial price for hydrochloric acid, on identified quantities which are supplied by Kaustik to Zirax through August 2009, representing an effective rate of return on the advance of 17%. This information is provided by RNS The company news service from the London Stock Exchange END FR CKCKPOBKDNAB
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