PROSPECTUS OF KSG Agro S.A.

Transcription

1 PROSPECTUS OF KSG Agro S.A. KSG Agro S.A. (incorporated as a public limited company (société anonyme), under the laws of Grand Duchy of Luxembourg, having its registered office at L-1855 Luxembourg, 46A Avenue J-F. Kennedy, and registered with the Trade and Companies Register (Registre de Commerce et des Sociétés) in Luxembourg under number B ) Offering of up to 4,925,500 Shares, with a nominal value of USD 0.01 each, and admission to trading on the main market of the Warsaw Stock Exchange of all the Shares issued in the share capital of KSG Agro S.A. This document (the Prospectus ) has been prepared for the purpose of (i) the offering (the Offering ) of up to 4,925,500 ordinary bearer shares in the share capital, each with a nominal value of USD 0.01 (the Offer Shares ), in KSGAgro S.A. (the Issuer or the Company ), and (ii) the admission of the entire issued share capital of the Issuer ( i.e., up to 14,925,500 Shares) to trading on the main market of Giełda Papierów Wartościowych w Warszawie S.A. (the Warsaw Stock Exchange, the WSE ). The Offering will consist solely of newly issued shares to be issued by the Issuer. The Issuer will receive all of the net proceeds from the sale of the Offer Shares. The Offer Shares offered in this Offering constitute a minority interest in the Issuer. The Offering consists solely of: (i) public offering to retail investors in Poland (the Retail Investors ), (ii) public offering to institutional investors in Poland (the Polish Institutional Investors ), and (iii) private placement to institutional investors in certain jurisdictions outside the United States and Poland in reliance on Regulation S under the U.S. Securities Act (the International Investors, and together with the Polish Institutional Investors, the Institutional Investors ), in each case in accordance with applicable securities laws. The Offer Shares have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the Securities Act ), or under any securities laws of any state or other jurisdiction of the United States. The Offer Shares may not be offered, sold or delivered within the United States to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Offer Shares will be offered and sold only outside the United States in reliance on Regulation S under the SecuritiesAct. See: Selling Restrictions. The Offer Shares are being offered, as specified in this Prospectus, subject to cancellation or modification of the Offering and subject to certain other conditions. The Prospectus constitutes a prospectus in the form of a single document within the meaning of Art. 5.3 of Directive 2003/71/EC of the European Parliament and of the Council of the European Union (the Prospectus Directive ) and the Luxembourg law dated July 10, 2005, relating to prospectuses for securities, implementing the Prospectus Directive into Luxembourg law (the Prospectus Act 2005 ), and has been prepared in accordance with the Prospectus Act 2005 and Commission Regulation (EC) 809/2004 of 29 April The Commission de Surveillance du Secteur Financier (the CSSF ) in its capacity as the competent authority in Luxembourg under the Prospectus Act 2005, has approved this document as a prospectus. The Issuer will be authorised to carry out the Offering to the public in Poland, once the CSSF has provided the Polish Financial Supervision Authority (the PFSA ), which is the competent authority in Poland, (in accordance with Art. 19 of the Prospectus Act 2005, Art. 18 of the Prospectus Directive and Art. 37 of the Polish Public Offerings Act) with a certificate of approval of this Prospectus and after the Prospectus has been made available to the public together with a translation of the summary into the Polish language. See Risk Factors for a discussion of certain considerations to be taken into account when deciding whether to invest in the Offer Shares. Prior to the Offering, there was no public market for the Shares. Based on this Prospectus, the Issuer intends to apply for the entire issued share capital as at the Settelement Date as defined below ( i.e., up to 14,925,500 Shares), including the Offer Shares, to be admitted to listing and trading on the main market of the WSE (the Admission ). The Issuer expects that trading in the Shares on the WSE will commence on or about May 5, 2011 (the Listing Date ). Settlement of the Offering is expected to occur on or about, April 28, 2011 (the Settlement Date ). Prospective retail and institutional investors in Poland (other than U.S. persons as defined in the Regulation S) may subscribe for the Offer Shares during a period which is expected to commence on or about April 15, 2011 and is expected to end on or about April 19, 2011 (the Subscription Period ). The final offer price per Offer Share (the Offer Price ) will not exceed PLN 26 (the Maximum Price ). The final Offer Price and the final number of the Ofer Shares will be determined by the Issuer upon recommendation of the manager named herein after completion of bookbuilding for institutional investors on or about April 15, 2011, based on interest from investors and will, in accordance withart. 10 of the ProspectusAct 2005 be filed with the CSSF and published in the same manner as this Prospectus and if required, otherwise in accordance with applicable Polish and Luxembourg regulations, including the website of the Luxembourg Stock Exchange ( All the Shares are ordinary bearer shares and will exist in the territory of Poland in book entry form once they have been registered with the Polish clearing and settlement institution the National Depository for Securities ( Krajowy Depozyt Papierów Wartościowych S.A., the NDS ). Shareholders in the Issuer may hold them through the NDS participants, such as investment firms and custodian banks operating in Poland. Offer Price: To be determined in PLN and announced on or about, April 15, 2011 Visum Capital Ltd. ( Lead Arranger and Financial Advisor ) and Bank Zachodni WBK S.A. ( Capital Advisor ) will act as advisors of the Issuer. Dom Maklerski BZWBK S.A. (the Lead Manager and Offering Broker ) will act as the manager and bookrunner for the Offering and the offering agent in Poland for the purposes of the public offering and admission of the Shares on the WSE. Capital Advisor Lead Arranger and Financial Advisor Lead Manager and Offering Broker Bank Zachodni WBK S.A. Visum Capital Dom Maklerski BZ WBK S.A. The date of this Prospectus is 4 April, 2011

2 TABLE OF CONTENTS SUMMARY... 2 SUMMARYFINANCIALANDOPERATINGDATA... 9 RISKFACTORS EXCHANGE RATES USEOFPROCEEDS DIVIDENDSANDDIVIDENDPOLICY CAPITALISATIONANDINDEBTEDNESS SELECTED HISTORICAL FINANCIAL INFORMATION OPERATING AND FINANCIAL REVIEW INDUSTRY OVERVIEW GENERALINFORMATIONONTHEISSUER GROUPSTRUCTURE KEY FORECASTS OF FINANCIAL DATA BUSINESS MATERIALCONTRACTS RELATEDPARTYTRANSACTIONS MANAGEMENT AND CORPORATE GOVERNANCE PRINCIPALSHAREHOLDER DESCRIPTIONOFTHESHARESANDCORPORATERIGHTSANDOBLIGATIONS CERTAIN LUXEMBOURG AND POLISH SECURITIES MARKET REGULATIONS ANDPROCEDURESANDTHEWARSAWSTOCKEXCHANGE THEOFFERINGANDPLANOFDISTRIBUTION PLACING SELLING RESTRICTIONS INDEPENDENT AUDITORS TAXATION ADDITIONAL INFORMATION INDEX TO FINANCIAL STATEMENTS... F-1 ANNEX I DEFINED TERMS... A-1 ANNEX II LIST OF PLACES ACCEPTING SUBSCRIPTIONS FOR OFFER SHARES FROMRETAILINVESTORS... A-5 1

3 SUMMARY KSG Agro S.A. SUMMARY The following constitutes the summary of the essential characteristics and risks associated with the Issuer, the Operating Companies, the Group and the Shares. This summary should be read only as an introduction to this Prospectus and contains information included elsewhere in this Prospectus. It is expressly pointed out that this summary is not exhaustive and does not contain all information which is of importance to prospective investors. Reading this summary should, in no way, be considered a substitute for reading this Prospectus in its entirety. Prospective investors should read this Prospectus thoroughly and completely, including the Risk Factors, any supplements to this Prospectus required under applicable laws and the Combined Financial Statements and other financial information and related notes, before making any decision with respect to investing in the Offer Shares. No civil liability will attach to the Issuer and other companies of KSG Group in respect of this summary (including the Summary Financial and Operating Information) or any translation thereof, unless it is misleading, inaccurate or inconsistent when read together with the other parts of this Prospectus. Where a claim relating to the information contained in this Prospectus is brought before a court in a Member State, the plaintiff may, under the national legislation of the Member State where the claim is brought, be required to bear the costs of translating this Prospectus before the legal proceedings are initiated. Summary of the Business The Issuer, KSG Agro S.A., incorporated in the Grand Duchy of Luxembourg, is a holding company for a group of twelve companies incorporated and operating in Ukraine in the farming industry and one Cypriot company incorporated for structuring reasons. The Issuer does not carry any business operations except for direct and indirect holding of shares in the Group Subsidiaries. The Group s operations are conducted through its Ukrainian subsidiaries. KSG Agro is an agricultural holding with total controlled land bank of approximately 33,700 hectares. The strategic focus of the Group s management is to strengthen its dominant position in its target region (Dnipropetrovsk, Kirovograd, and neighboring areas of Kherson, Mykolayiv, and Kharkiv regions, the Target Region ). The Target Region is rich in black soils and has favorable geographic location due to proximity to Dnipro River, main railways and Black Sea ports. The Group is primarily engaged in production of grains such as sunflower, wheat, barley, rapeseed and soybeans, vegetables production and also produces groceries for retail chains. The Group uses new agricultural machinery park comprised of more than 330 items. Grain production is executed in line with farming model based on modern agricultural technologies such as no-till, mini-till, and other, which were adopted by specialists of the Group. (For more details see Crop production process and farming management section ). The Group has 30,000 tones of own storage facilities. Total Group s sales amounted to USD 6.9 million, USD 13.8 million and USD 15.6 million in 2008, 2009 and 2010, respectively. Major local consumers of the Group s production are oil refineries, flour producers, and livestock feed producers. The Group also supplies vegetables, fruit, meat and groceries processed under feedstock production scheme to retail chains, such as Ukrainian franchisers of SPAR International. The Company believes it has strong base for further horizontal and vertical expansion within its Target Region focusing on grain and vegetable production, as well as on food production for retail chains. Business Strategy The Group s strategy is to strengthen its leading position in its Target Region and to develop into the largest vertically integrated agro holding in Central Ukraine. Group s vision: High marginal agricultural business resulting from long term cooperation with land owners, state and community. The key strategic goals of the Group are summarized below: Increase land bank to 150,000 hectares by 2016 Management plans to increase its land bank under control to 150,000 ha over the next five years with major focus on Dnipropetrovsk and Kirovograd regions. 2

4 KSG Agro S.A. Double operational efficiency of the land usage by the end of 2015 The Company sees efficient use of land as its core competitive advantage. The Group plans to increase net income per hectare substantially by the end of Key-strategic aspects facilitating such efficiency are summarized below: Further development of vegetables segment The Company plans to continue actively developing its vegetables segment. With only a few relatively large players and constantly growing demand for a qualitative large-scale supplies, Ukraine s vegetables segment currently represents a very promising and higher-marginal business niche. The vegetables share in the Company s revenues should increase from current 2 per cent. to 10 per cent. in Closer cooperation with retail chains The Group aims to achieve higher margins by gradually increasing proportion of revenue generated by sale of final product rather than agricultural commodities. Utilization of the irrigation potential in full The Group has control over approximately 2,000 hectares of land with irrigation infrastructure inherited from the soviet times and represented by pipe and channel networks. Use of artificial irrigation brings several benefits such as base for further vegetable sector expansion, ability to have higher grain yields and less exposure to weather risks. Competitive Strengths and Advantages The Group s management relies on the following competitive advantages for its further development: Location right in the center of Ukraine s sunflower industry The Company operates in regions where around 40 per cent. of Ukraine s total sunflower crushing capacities are installed. This allows the Company to enjoy almost guaranteed demand for its sunflower harvest, the Company s major crop. Central Ukraine favorable climate, less competition and closer to export routes Majority of the Group s land is located in step region which is characterized by softer winter, longer sunny days compared to northern regions and less risks of drought compared to southern. Company enjoys limited competition in the region with only one agroholding of comparable land bank size (approximately 37 thousand ha). The Company has been constantly approached by global grain traders due to its favorable geographical location (access to Dnieper river and close proximity to the Sea ports). Quality of black soil in the area of the Group s operations The land controlled by the Group lies in the region of high-quality black soils which are favorable for attaining high yields without excess fertilization. The average humus layer in the area is cm compared to average Ukrainian cm. Use of Proceeds The Group intends to use the net proceeds from the sales of Offer Shares to finance further land bank expansion, working capital needs, execution of capital investment program such as acquisition of modern elevator, investments into vegetables production segment, investments into land irrigation facilities and other value added projects. Summary of Risk Factors The investment in the Offer Shares involves risks that are listed below. Should any of these risks occur, the operations of the KSG Group and the financial results of the Issuer may be adversely affected. The risks listed below are discussed in details in the Risk Factors section of the Prospectus. Risks Relating to the Group s Operations and Industry Poor weather or other negative growing conditions may adversely affect the Group s crop production. Export restrictions on agricultural commodities imposed by regulatory authorities could adversely affect our business. 3

5 KSG Agro S.A. Outbreaks of crop diseases may adversely affect the Group s business. The Group currently benefits from tax exemptions, which may be discontinued in the future. State support currently enjoyed by the Company could be discontinued in the future. If the Group s products became contaminated, the Group may be subject to product recalls and liability claims. The Group s business and financial results are dependent on demand and price levels for the Group s produce. Price increase for fertilizers, pesticides and other related chemicals. The Group sells its bulk trading operations a substantial portion of its products to a limited number of customers. The Group must compete with agricultural companies, industrial companies and strategic land investors in order to lease land and not to weaken Group s market position. The Group is presently unable to obtain full ownership rights to land. The Group may be unable to implement its strategy, and the plan it executes may not produce the results intended. The Group may be unable to raise additional capital to fund growth of its operations. Covenants in the debt agreements of the Group Subsidiaries may restrict the ability to borrow and invest, which could affect the Group s flexibility to operate and ability to expand. The Group finances its operations with debt and any future increase of indebtedness could adversely affect its cash flow, prevent the Group from fulfilling its strategic expansion plans. Due to the seasonality of the Group s business and its related short-term financing requirements, it may experience liquidity problems. Additional need for investments in recently acquired companies could adversely affect our financial condition. The Group s operations are subject to risks associated with the engagement of third-party contractors. A shortage of adequate crop storage facilities may adversely affect the Group s ability to sell its produce to customers. Increase of transportation costs may decrease the Group s profitability. Increased costs for or disruptions in the supply of fuel could adversely affect the Group s business. Dependence on the key personnel and low labor costs. The Group may not have or may be unable to obtain sufficient insurance to protect itself from business risks and liabilities. The Group s current management information systems, in particular the accounting systems, may be insufficient for Group s operations or may not be as robust as those of companies organized in jurisdictions with a longer history of compliance with IFRS. The Group may be subject to claims and liabilities under and may incur costs to comply with health, safety and environmental laws and regulations, which could be significant. The Group depends on obtaining required permits and other administrative approvals from state, as well as rights to the land plots. Third parties could challenge the Group s title or other rights to farm land that it leases and the Group may not be able to renew its lease agreements. The Group is subject to currency-related and interest rate risks. The Issuer is a holding company with no operating activity and no assets other than shares of its subsidiary. If the AMC were to conclude that the Group or its shareholders were required to obtain approvals for certain transactions which lead to establishment of the Group but did not obtain such required approvals, the Group or its shareholders may be subject to fines or the relevant transactions may be invalidated. The Group could be subject to liabilities if it is determined that our past actions violated Ukrainian corporate laws or regulations. Certain of the Group s loan facilities are repayable on demand in case of breach of their terms. 4

6 KSG Agro S.A. Transfer pricing rules may potentially affect Group s results of operations. The validity of Group s suretyship agreements could be challenged. The Group s business could be adversely affected if it is unable to enter into leases with the holders of all of the land in a particular farm. The payments under the Group s leases increase automatically. Risks Related to Ukraine Emerging markets are subject to greater risks than more developed markets. Ukraine may continue to experience political instability or uncertainty. Ukraine may experience economic instability. Any unfavorable changes in Ukraine s regional relationships, especially with Russia, may adversely affect the Ukrainian economy and thus the Group s business. A failure to develop relations with the EU might have negative effects on the Ukrainian economy and the Group s business. Weaknesses relating to the legal system and legislation may create an uncertain environment for investment and business activity. The judiciary s lack of independence and overall experience, difficulty of enforcing court decisions and the discretion of governmental authorities to file and join claims and enforce court decisions could prevent the Group or investors from obtaining effected redress in court proceedings. There are deficiencies in corporate governance standards under Ukrainian law. Official economic data and third-party information in this Prospectus may not be reliable. Fluctuations in the global economy. Ukraine s physical infrastructure is in poor condition, which could disrupt normal business activity. Crime and corruption could disrupt the Group s ability to conduct its business and could materially adversely affect its financial condition and results of operations. Ukraine s tax system is undeveloped and subject to frequent change, which may create an uncertain environment for investment and business activity. The Group may face changes in respect of the double tax treaty regime between Ukraine and Cyprus. Economic instability in Ukraine could adversely affect the Group s business. The business environment in Ukraine could deteriorate. The potential for labour and social unrest in Ukraine could have a materially adverse effect on the Group s ability to conduct its business effectively and on the market price of the Shares. Risks Related to Shares, Listing and Trading on the WSE The Offering may be delayed, suspended or cancelled. The market value of Shares may be adversely affected by future sales or issues of substantial amounts of Shares. Holders of the Shares may not be able to exercise pre-emptive rights, and as a result may experience substantial dilution upon future issuances of shares. Existing shareholder will continue to exert significant influence on the management following the Offering. The Company is established and organized under Luxembourg law. Investors in the Offer Shares will be subject to obligations resulting from various national laws. Investors may have problems enforcing judgments against the Company. Tax treatment for non-luxembourg investors in a Luxembourg company may vary. There is no guarantee that the Issuer will pay dividends in the future. The price of the Issuer's Shares may fluctuate. 5

7 KSG Agro S.A. Securities or industry analysts may cease to publish research or reports about Issuer s business or may change their recommendations regarding the Issuer s Shares. The Issuer may be unable to list the Shares on the WSE or the Issuer may be delisted from the WSE. Trading in the Shares on the WSE may be suspended. The Issuer may have a limited free float, which may have a negative effect on the liquidity, marketability or value of its Shares. There can be no assurance regarding the future development of market for the Shares and its liquidity. The marketability of the Issuer s Shares may decline and the market price of the Issuer s Shares may fluctuate disproportionately in response to adverse developments that are unrelated to the Group s operating performance and decline below the Offer Price. The Company has no experience in complying with requirements for publicly-listed companies. Summary of the Offering The Issuer... KSG Agro S.A., a public limited company (société anonyme), incorporated under the laws of Grand Duchy of Luxembourg, having its registered office at L-1855 Luxembourg, 46A Avenue J-F. Kennedy, and registered with the Trade and Companies Register (Registre de Commerce et des Sociétés) in Luxembourg under number B The Principal Shareholder... ICD Investments S.A., incorporated under the laws of Switzerland, having its registered office at Via Luganetto 4, 6962 Lugano Viganello, Switzerland The Offering... The Offering consists of: (i) public offering to retail investors in Poland (the Retail Investors ), (ii) public offering to institutional investors in Poland (the Polish Institutional Investors ), and (iii) private placement to institutional investors in certain jurisdictions outside the United States and Poland in reliance on Regulation S under the U.S. Securities Act (the International Investors, and together with the Polish Institutional Investors, the Institutional Investors ), in each case in accordance with applicable securities laws. Offer Shares... Up to 4,925,500 ordinary bearer shares each with a nominal value of USD 0.01 to be issued by the Issuer. Bookbuilding... Before commencing of the Subscription Period for Retail and Institutional Investors, a book building process amongst the Institutional Investors invited by the Offering Broker will take place, during which such the Institutional Investors interested in subscribing for the Offer Shares will indicate the number of the Offer Shares they will be willing to acquire and the price, being not higher than the Maximum Price. Subscription Periods... The subscriptions by the Retail Investors and by the Institutional Investors will be accepted between April 15, 2011 and April 19,

8 KSG Agro S.A. Offer Price... The final Offer Price per Offer Shares will not exceed PLN 26 (the Maximum Price ). The Offer Price will be determined by the Issuer upon recommendation of the Offering Broker after completion of Bookbuilding for Institutional Investors on or about April 14 (till 2 pm), The final Offer Price will be based on the results of the Bookbuilding. Moreover, the following criteria will be taken into account while determining the Offer Price: (i) the size and price sensitivity of demand, as gauged during the Bookbuilding, (ii) the current and anticipated situation on the Polish and international capital markets, and (iii) the assessment of the growth prospects, risk factors and other information relating to Issuer s activities. The Offer Price will be expressed in PLN. The Issuer will announce the Offer Price on or around April 15, 2011 (not later than 9:00 am), prior to commencement of the subscription period in the retail and institutional tranche. The Offer Price will be filed with the CSSF, and published in the same manner as the Prospectus, including the website of the Luxembourg Stock Exchange ( Allotment... Allotment will take place on or about April 22, 2011, after closing of the Subscription Period. Settlement and Delivery of the Offer Shares... The settlement of the Offering is expected to be made on the Settlement Date, on or about April 28, 2011, after which the issue of the Offer Shares and payment of the total Offer Price will follow. The delivery of the Offer Shares will be effected through the book-entry facilities of the NDS, in accordance with the NDS s settlement procedures. Listing and Trading... The Issuer is planning to apply for admission to listing and trading on the main market of the WSE of all of the Shares issued in the Issuer s share capital, including the Offer Shares constituting up to 33 per cent. of all the Shares (assuming all the Offer Shares have been issued), immediately after the Settlement Date. The Issuer believes that trading on the WSE will commence on or about May 5, 2011, or as soon as possible thereafter, barring unforeseen circumstances. Form of Offer Shares... All the Shares are ordinary bearer shares and will exist in book entry form once they have been registered with the NDS. Investors may hold the Offer Shares through the NDS participants, including investment firms and custodian banks. The Issuer will apply for registration of all of the Shares issued in its share capital, including the Offer Shares, with the NDS. It is expected that on or soon after the Settlement Date, all of the issued Shares, including the Offer Shares, will be registered with NDS and will exist in book-entry form. 7

9 KSG Agro S.A. Shares outstanding before and after the completion of the Offering... As at the date of this Prospectus, the authorized share capital of the Issuer amounts to USD 200,000 divided into 20,000,000 Shares, with a nominal value of USD 0.01 each. The issued and paid-up share capital of the Issuer, as at the date of this Prospectus, amounts to USD 100,000 and is divided into 10,000,000 Shares with a nominal value of USD 0.01 each. All of the Shares are bearer or registered ordinary Shares, are fully paid up and rank pari passu with each other and there is no other class of shares authorised. Upon completion of the Offering no more than 14,925,500 Shares will be issued and outstanding which Shares will comprise the Group s share capital in the amount not exceeding USD 149,255. Securities code... ISIN code: LU Dividends... All Shares carry full dividend rights if and when the distribution of profit is declared. Voting Rights... Each Share entitles its holder to one vote at the General Meeting. Lock-up... Subject to certain exceptions, the Company and the Principal Shareholder have agreed that for the period of 12 months from the Settlement Date, they will not, without the prior written consent of the Offering Broker, propose or otherwise support an offering of any of the Company s shares, announce any intention to offer new shares and/or to issue any securities convertible into Company s shares or securities that in any other manner represent the right to acquire the Company s shares, or conclude any transaction (including any transaction involving derivatives) of which the economic effect would be similar to the effect of selling the Company s shares. Lead Manager and Offering Broker, Lead Manager, Offering Broker... Dom Maklerski BZWBK S.A. Lead Arranger and Financial Advisor, Lead Arranger... Visum Capital Ltd. Capital Advisor... Bank Zachodni WBK S.A. Selling Restrictions... The Offer Shares may not be offered outside Poland in any manner that would constitute public offering or would otherwise require authorization under applicable local regulations. The Offer Shares have not been and will not be registered under the US Securities Act or with any securities regulatory authority of any state or any jurisdiction in the United States and subject to certain exceptions, may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in the Regulation S) except in certain transactions exempt from the registration requirements of the US Securities Act. For information on further selling restrictions please see: Selling Restrictions. 8

10 SUMMARY FINANCIAL AND OPERATING DATA KSG Agro S.A. SUMMARY FINANCIAL AND OPERATING DATA The summary financial and operating data presented below refer to the financial years ended on December 31, 2008, 2009 and 2010 respectively. It has been extracted from the Combined Financial Statements, without material adjustment, and should be read in conjunction with, and is qualified in its entirety by reference to, the Combined Financial Statements and the notes thereto included in this Prospectus and the information in the section titled Operating and Financial Review. The Issuer is a holding company which does not have any operating assets, except for the equity interests in its subsidiaries. Income statement data December 31, 2008 audited thousand USD December 31, 2009 audited thousand USD December 31, 2010 audited thousand USD Revenue 6,863 13,785 15,628 Change in fair value of biological assets 5,204 4,251 16,919 Cost of sales (8,920) (12,102) (20,456) Gross profit 3,147 5,934 12,091 Other income (expenses) Administrative expenses (835) (1,158) (787) Losses from impairment of financial assets (565) Finance costs (3,740) (2,144) (1,558) Profit (loss) before tax (914) 2,531 10,049 Income tax expense (5) (2) Profit (loss) for the year/period (914) 2,526 10,047 Cash flows data December 31, 2008 audited thousand USD December 31, 2009 audited thousand USD December 31, 2010 audited thousand USD Net cash flows received from (used in) operating activities (2,473) 1,306 10,027 Net cash flow received from (used in) in investment activities (95) (654) (759) Net cash flow received from (used in) financing activities 5,580 (873) (11,802) Net cash flow for the period 2,742 (221) (2,534) Source: the Issuer based on the Combined Financial Statements and management figures Balance sheets data December 31, 2008 audited thousand USD December 31, 2009 audited thousand USD December 31, 2010 audited thousand USD Total non-current assets 10,679 10,605 10,846 Total current assets 12,083 15,528 15,484 Total Assets 22,762 26,133 26,330 Total equity 2,019 4,998 11,662 Total non-current liabilities 3,863 2,904 2,367 Total current liabilities 16,880 18,231 12,301 Total Equity and Liabilities 22,762 26,133 26,330 Source: the Issuer based on the Combined Financial Statements and management figures 9

11 ISK FACTORS KSG Agro S.A. RISK FACTORS Prospective investors in the Offer Shares should carefully consider the following risks and uncertainties, as well as other information contained in this Prospectus before deciding to invest in any of the Offer Shares. The Issuer s business, financial condition and results of operations have been, and could be, materially adversely affected by the following risks. If any of the following risks actually occurs, the value and trading price of the Shares could decline and investors could lose all or part of their investment. Described below are the risks and uncertainties the Issuer and the Group Subsidiaries believe are material, but these risks and uncertainties may not be the only ones faced by the Issuer and the Group Subsidiaries. Additional risks and uncertainties, including those that the Issuer and the Group Subsidiaries is not currently aware of or deems immaterial, may also result in decreased revenues, increased expenses or other events that could result in a decline in the value of the Shares. Risks Relating to the Group s Operations and Industry Poor weather or other negative growing conditions may adversely affect the Group s crop production. Weather conditions are a significant operating risk affecting the Group s crop growing operations. Weather not only directly impacts crop yields, but also the cost of, and the Group s ability to complete, harvests. Weather and other aspects of growing conditions may also lead to a greater use of fertilisers and other chemicals, which may also increase costs. Accordingly, the Group is highly susceptible to changes in the growing conditions of the regions in which it operates, as determined by the weather and otherwise, and the resulting impact on the production of crops. The Group irrigates not all land it farms and is therefore reliant on rainfall to water its crops. In the event of a shortage of rainfall the Group may lose some of its crops. Floods, heavy rainfall, snow and/or frost may also have an adverse effect on the Group s crops. The Group has no ability to control the effect of climate changes and poor weather conditions. Such factors may adversely affect the Group s business, results of operations and financial condition. Export restrictions on agricultural commodities imposed by regulatory authorities could adversely affect our business. The agriculture industry is generally subject to mounting governmental regulation and export restrictions in the form of quotas, tariffs, and other mechanisms to protect consumers. On October 4, 2010, the Ukrainian Government introduced export quotas for wheat, meslin, corn, barley, rye and buckwheat which were expected to last until 31 December However, on 8 December 2010, the Government extended the quotas until the end of March On 30 March 2011 the Government extended the quotas until 30 June 2011 within the same amounts for all crops, except for corn, quoted amount of which has been increased for 2 million tones. While the Group s revenues from sales of agricultural commodities were, in proncipal, derived from domestic sales in year 2010, the Group was prevented from exporting such commodities due to being unable to obtain quotas permitting to export crops. Accordingly, the Group had to reposition its strategy and focus on sales in domestic market. The Group was in the past and may be in the future subject to unofficial policies implemented by the Ukrainian Government that place restrictions on the agricultural commodities that we can export abroad. For example, the Ukrainian Government has recently increased inspections at ports, instituted additional requirements for obtaining export licences and implemented other measures to block ships from collecting grain at the ports from which we export our grain. In addition, Ukraine s state-owned railroad monopoly, the State Administration on Railway Transport ( Ukrzaliznytsya ), has placed unofficial bans on loading grain hoppers, which has slowed down or stopped the loading of export vessels from train carriages. If such restrictions are not removed, this could materially adversely affect our business, results of operations and financial condition. Furthermore, such export restrictions and limitations as well as unofficial policies implemented, can also affect agriculture volumes and prices in national, regional and world markets, which, in turn could adversely affect our business. Outbreaks of crop diseases may adversely affect the Group s business. The occurrence and effect of crop disease and pestilence can be unpredictable and devastating to crops, potentially destroying all or a substantial portion of the affected harvest. Outbreaks of crop diseases may restrict the Group s ability to conduct its operations. Even when only a portion of the crop is damaged, the Group s results of operations may be adversely affected because all or a substantial portion of the production costs for the entire crop have already been incurred. Although some crop diseases can be treated, the cost of treatment is high and may be economically unattractive. Any outbreak of a crop disease in Ukraine could result in export restrictions or quarantine being imposed by Ukrainian governmental authorities until the threat of disease spreading is eliminated. The Group does not maintain insurance to cover the consequences of crop disease, including those cited above. 10

12 KSG Agro S.A. The Group currently benefits from tax exemptions, which may be discontinued in the future. Under Ukrainian law, producers of agricultural products are permitted to choose between general and special regimes of taxation with respect to certain taxes. In particular, in accordance with the Tax Code, dated 2 December 2010, as amended, agricultural companies engaged in the production, processing and sale of agricultural products may apply to be registered as payers of fixed agricultural tax (the FAT ), provided that their agricultural production accounts for more than 75 per cent. of total production for the preceding tax (reporting) year. FAT is paid in lieu of corporate income tax, land tax, duties for geological survey works and duties for trade patents. The Group elected to pay FAT in lieu of other taxes in 2011, and currently eight out of twelve of the Group s Ukrainian Subsidiaries pay FAT. The remaining Ukrainian Group s Subsidiaries pay corporate income tax at the standart rate (23 per cent. as of 1 April 2011) as well as other taxes and duties. For the year ended December 31, 2010, the Group paid FAT in an aggregate amount equals USD 18,182 being equivalent to approximately 0.2 per cent. of its income before tax. If the FAT regime is repealed in future, the Group would be required to pay corporate income tax at the standard rate (23 per cent. as of 1 April 2011) for Ukrainian companies as well as other taxes and duties, which would have a material adverse effect on the Group s business, results of operations and financial condition. Separately, the Ukrainian legislation allows certain qualified agricultural producers to retain value added tax (the VAT ) collected on their taxable sales with view to recovering VAT paid on purchases of so-called production factors ; the excess of VAT collected over VAT paid is allowed to be used for other production needs. The VAT benefit will be cancelled as of 1 January The VAT benefits received by the Group amounted to USD 1.53 million in Any failure by the Group to retain the above mentioned benefits in the future could have a material adverse effect on the Group s business, results of operations and financial condition. State support currently enjoyed by the Company could be discontinued in the future. The Ukrainian Government provides various types of support to domestic agricultural producers by providing subsidies, including partially reimbursing interest paid on credit facilities with Ukrainian commercial banks and costs for electric power supply used for irrigation of lands, subsidies for producing seeds and planting new gardens. The aggregate amount of the above-mentioned compensations and subsidies is determined annually in the state budget. The right to reimburse interest rate paid is granted to agricultural companies based on a tender procedure, while other subsidies are paid upon application of the producer. During last three years the Group has received the state subsidies of USD million in 2008, USD million in 2009 and USD 1.53 million in A decision by the Ukrainian Government to unexpectedly discontinue subsidies for domestic agricultural producers in the future, or our failure to qualify for such subsidies, could have a material adverse effect on the Group s business, results of operations and financial condition. If the Group s products became contaminated, the Group may be subject to product recalls and liability claims. The Group s products may be subject to contamination by disease producing organisms, or pathogens. These pathogens are found generally in the environment and therefore there is a risk that they could be present in the Group s products. These risks may be controlled, but may not be fully eliminated, by adherence to good manufacturing practices and finished product testing. Even an inadvertent shipment of contaminated products is a violation of law and may lead to increased risk of exposure to product recalls, liability claims and increased scrutiny by governmental regulatory agencies and could have a material adverse effect on the Group s business, results of operations and financial condition. The Group s business and financial results are dependent on demand and price levels for the Group s produce. The selling prices and operating costs associated with producing our products are volatile and are determined by market conditions. Prices for agricultural commodities are the main determinants of our income and our decisions regarding total planting acreage. During the year ended 31 December 2010, agricultural commodity prices in Ukraine generally increased; however, in 2008, certain commodity prices, including corn, on which we are significantly dependent, decreased. Agricultural product prices therefore may adversely impact our operating activity. Selling prices for crop products and operating costs associated therewith are volatile and are determined by unpredictable factors, which are beyond our control. Price regulation by the Government of Ukraine and/or other types of Government intervention may negatively impact prices. Among the key factors affecting the market are the increased output by other agricultural businesses (both in Ukraine and internationally), crop or vegetables diseases or infestations, price controls or import or export regulation by the Government of Ukraine, the availability of subsidies to producers (both seasonal and long term) and the supply of, and the prices for, alternative produce. In addition, the Group has in the past experienced fluctuations in its earnings due to seasonality of demand for agricultural products. In a typical year, the prices for sunflower seeds and wheat, for example, generally peak in March and April, followed by a decrease in prices during the autumn months which correspond 11

13 KSG Agro S.A. with the harvesting period. Despite the Group s ability to manage this seasonality by storing its crops, the Group may be unable to effectively manage inventories to address seasonal changes in demand. If any or all of these factors depress prices or increase our operating costs, our business, results of operations and financial condition may be adversely affected. Price increases for fertilizers, pesticides and other related chemicals. Growing conditions can be impacted by the availability and cost of fertilisers. Fertiliser purchases accounted for approximately 19 per cent. of the Group s cost of agricultural produce for the year ended 31 December Prices for fertiliser in Ukraine are highly influenced by global fertiliser prices. In the event of a rise in fertiliser prices the Group may either reduce the amount of fertiliser it uses, thereby potentially reducing crop yields, continue to acquire similar quantities of fertiliser at a higher price, thereby incurring greater costs, or employ a combination of these approaches. In addition, the Group purchases substantial quantities of crop protection chemicals which could also experience increases in price. Such factors could materially and adversely affect the Group s costs and/or crop output and, as a result, the Group s business, financial condition and results of operations. The Group sells in its bulk trading operations a substantial portion of products to a limited number of customers. To minimise logistical and distribution costs the Group trades mainly on bulk wholesale terms. As a result, it has well-established ties with a relatively small number of selected large customers in bulk trading operations in particular relating to grain trading operations (see: Business ). There are a number of factors other than the Group s performance, including pricing and market demand for our products, that could cause the loss of a client and may not be predictable. One or more of the Group s clients could cease their operations or reduce their size. The default of one of the Group s large customers could have an adverse effect on the business, results of operations and financial condition. The Group must compete with agricultural companies, industrial companies and strategic land investors in order to lease land and not to weaken Group s market position. The Group is one of the largest companies engaged in the production and trading of crop products in Eastern Ukraine, successfully increasing its market share for the past three years. The appearance of new or aggressive activity by current market participants and/or their efforts for market consolidation may significantly increase competition. The Group may need to increase its budget for new acquisitions, increase marketing efforts or adjust pricing of its products. This could adversely affect the Group s business because of increased operating costs and reduced profitability. Increased competition could also cause the Company to lose its current market share or may force us to exit certain business lines, each of which can have an adverse effect in its sales revenues and profitability. The Group faces competition from other businesses seeking to expand their land portfolios in Ukraine. The Group faces increasing competition to lease land of sufficient quality and size in order to continue to expand its farming operations. As a result of this competition, the Group must expend increased time and cost to secure further land. The Group s average annual rent per hectare of land has increased from approximately UAH 267 (USD 50.7) (in the period ended 31 December 2008) to approximately UAH 355 (USD 44.7) (in the six months ended 30 March 2011). The Group may have to expend greater cost to lease land or may not be able to enter into leases of the desired term. In each case, the further leasing of land may not be economically attractive. If the Group is unable to continue to expand its leasehold portfolio, at the desired prices or at all, this may have a material adverse effect on the Group s business, financial condition and results of operations. The Group is presently unable to obtain full ownership rights to land. The Group s ability to obtain full ownership rights to agricultural land plots it currently leases is limited by a moratorium on sales of agricultural land currently in force in Ukraine. There can be no assurance that this moratorium will be lifted. However, in the event that it is lifted, the Group will consider the acquisition of full ownership rights to land. Although under the terms of the majority of the Group s leases, the relevant member of the Group has a pre-emptive right to acquire the freehold title to the underlying land, subject to such Group member s compliance with the terms of the original lease and the absence of any other potential purchasers offering better terms for the land, there can be no assurance that the relevant member of the Group will not encounter difficulties in enforcing such rights. There can be no assurance that owners of these land plots will agree to sell their land to the Group on commercially acceptable terms or at all, and they may instead sell the land to third parties. In the event that the Group is able to acquire freehold title to any land, it may encounter significant procedural difficulties in doing so effectively. There can be no assurance that the Ukrainian land registration system will be adequately developed or that Ukraine will have sufficient qualified practitioners or notaries in order to complete the procedures required to transfer freehold title to land in a timely or cost-efficient manner. Any such delays are likely to be especially severe in the event that large numbers of people seek to buy land at the same time, for example, upon any lifting of the moratorium on sales of agricultural land. In addition, any material changes to existing or future laws and regulations on land ownership 12

14 KSG Agro S.A. could further limit, or could again impose restrictions on, the Group s ability to obtain full ownership rights to relevant land plots. Obstacles to obtaining full ownership rights to relevant land plots may have a material adverse effect on the Group s business, financial condition and results of operations. Additionally the Group does not nave lease rights to the land underlying all of the buildings and facilities it owns. Some of the lease agreements underlying the buildings owned by the Group have not been duly registered. As such, the lease rights of the Group to such land may be challenged. However, in case of invalidation of the relevant lease agreements, due to the Groups ownership to the buildings, located on such land, the Group should be able to enter into the new land lease agreements without the land auction. Also, under Ukrainian law, the Group as the owner of the buildings is entitled to use the land necessary for access to and maintenance of such buildings. The Group may be unable to implement its strategy, and the plan it executes may not produce the results intended. The Group s strategy assumes i.a. the increase in the cultivated land, letting the Group to grow greater volumes of crops and vegetables. There are number of factors that may have an impact on the implementation of Group s strategy, including ability to gain capital and market demand for products. The Group s ability to obtain financing to accomplish its goals will depend upon the stability of current operations and the willingness of the market to make financing available to the Group. There can be no assurance that the Group will be able to fulfill its strategy in the period it has set for itself. The Group may be unable to raise additional capital to fund growth of its operations. The Group may need additional capital to maintain and expand our business. The Group s ability to raise additional funding to pursue the strategy depends on a number of factors, including an access to capital markets and the stability of its current operation. At the present time, the Group believes that its access to debt financing and cash flows from operations should be sufficient to finance its capital requirements for the foreseeable future. However, market conditions and other factors, especially large transactions and acquisitions to be effected by the Group or capital expenditures to be incurred by the Group, may cause us to seek additional financing sooner than we expected. As a result the Group cannot guarantee that with a view to finance the plans on the equity level, we will not issue additional Shares or debt instruments linked to the Company s share capital, which will lead to dilution of the Company s then shareholders, or that the Group will not issue Shares or debt instruments with rights superior to those of the then holders of the Shares. If the Group fails to generate sufficient funds from operating cash flow and debt or equity financing, we may have to delay or abandon its business plans or fall behind in our plant maintenance. Any of these events could adversely affect its business, results of operations and financial condition. Covenants in the debt agreements of the Group s Subsidiaries may restrict the ability to borrow and invest, which could affect Group s flexibility to operate and ability to expand. In order to finance the development of our business, we have needed and may need to attract debt financing. To obtain loans, we have been, and may be required to secure such loans by granting security over our significant assets such as future crops, property rights, significant inventories and production in progress. Such loan facilities provide restrictive covenants that may limit our flexibility to operate our business. In addition, any onerous collateral requirement may limit our ability to raise additional funds. Some of the current debt facilities of our Group contain covenants that impose on us operating and financial restrictions, including restrictions on our ability to incur loans, encumber assets, acquire shares in other entities, change our organizational form or ownership structure, effect merger or any other reorganisation, dispose, transfer or lease assets; receive credits from other banks, among others without prior consent of the bank. Events beyond our control could prevent us from complying with these covenants and result in a breach of any such obligation, thus triggering an event of default. This, in turn, may have an adverse effect on our business, financial condition, and results of operations or prospects. The Group finances its operations with debt and any future increase of indebtedness could adversely affect its cash flow, prevent from fulfilling the strategic expansion plans or from paying dividends. The Group leverage itself in order to finance its capital expenditure programs and part of our working capital needs associated with its development. Any need to obtain additional loans to finance its development, subject to compliance with covenants and other conditions, could increase the level of indebtedness and trigger several important consequences. For example, it could: limit our ability to obtain additional financing for working capital, capital expenditures or other purposes; require the Group to dedicate a substantial portion of the cash flow to pay interest expenses and repay principal debt, which would reduce funds that would otherwise be available for operations and future business opportunities; limit our flexibility in planning for, or reacting to, changes in business and the markets in which the Group operates; place the Group at a competitive disadvantage compared to its competitors that have less debt; 13

15 KSG Agro S.A. increase its vulnerability to general adverse economic and industry conditions; limit the ability to pay dividends. Due to the seasonality of the Group s business and its related short-term financing requirements, it may experience liquidity problems. The Group is required to perform various agricultural operations, such as fertilising, planting and harvesting, during specific seasons in the agricultural calendar. The time period for completing these key operations is very limited. The Group is exposed to the risk of equipment breakdown or failure or injury to, or death of, personnel at all times. If any of these risks or other risks that may interrupt operations, such as poor weather, were realised during a key period in the agricultural calendar, the Group may have to incur significant expense to remedy the situation, which could materially and adversely affect the Group s business, financial condition and results of operations. Due to the seasonal nature of the Group s business, the Group requires high levels of financing in the period immediately following the harvest to support the purchase of raw materials as they become available. The Group fulfils its seasonal financing requirements by obtaining credit lines from commercial banks, which are repaid in the course of the financial year or longer on the condition that its sales to customers are timely settled. If the majority of the Group s customers were unable or unwilling to fulfill their payment obligations in a timely manner, the Group would be forced to repay its credit lines from other resources, thus jeopardizing its liquidity. Additional need for investments in recently acquired companies could adversely affect our financial condition. The Group has recently acquired three new companies in line with its land bank expansion plans. The need for investments in such companies to bring their operations in line with the Group s strategy and policies could have an adverse effect on the Group s operating results and financial condition. The Group s operations are subject to risks associated with the engagement of third-party contractors. Some parts of the Group s operations, including tilling, spraying, harvesting, transportation and elevator storage, are outsourced to external contractors, in whole or in part. The Group has direct control over the day-to-day activities of such contractors and is reliant on such contractors performing their services in accordance with the relevant service contracts. However if any contractor fails to perform its respective obligations in a manner consistent with the relevant contracts, the related operations may not be performed adequately or at all, leading to unexpected costs and/or crop losses. The Group may not recover all or any losses it incurs as a result of legal action in respect of breaches by contractors of their respective obligations to the Group. If a contractor engaged in respect of certain operations becomes insolvent, it may prove impossible to recover compensation for defective work or services and the Group may incur losses as a result of such failure to perform its obligations. Such losses and disruptions due to actions on the part of external contractors may have an adverse effect on the Group s business, financial condition and results of operations. A shortage of adequate and vegetables crop storage facilities may adversely affect the Group s ability to sell its produce to customers. Available storage capacity at a local level may not be adequate to meet the storage requirements of farms within that area. As a result of a national shortage of crop and vegetables storage capacity, there is competition to secure crop and vegetables storage facilities in advance of harvests. In the event that the Group is unable to store the crops and vegetables it harvests at nearby grain elevators or vegetable warehouses, it may incur additional costs in transporting the crop to elevators or warehouses farther away. There can be no assurance that, in the event that the Group is unable to store its crop or vegetables locally, it will be able to procure storage facilities elsewhere. In the event that the Group is unable to procure storage facilities for crops or vegetables it has harvested within a short time after such crops or vegetables are harvested, it may have to sell them at a reduced price. Accordingly, any failure to secure crop or vegetables storage facilities may adversely affect the Group s business, financial condition and results of operations. Increases in transportation costs may decrease the Group s profitability. The Group s require significant quantities of raw materials to be delivered by truck or rail. Moreover, the Group also delivers its products to clients by truck or rail. Consequently, the operating profit may be adversely affected by increased transportation costs. If, under certain circumstances, a need arises to obtain larger than normal quantities of raw materials from farms located at a greater distance from the Group s plants, such a need will cause higher transportation costs, and as a result the operating profit could decrease. In addition, the Ukrainian Government sets rail tariffs and may further increase these tariffs, due among other factors to the cost of upgrading facilities and infrastructure. Any disruption in transportation or increase in tariffs for the Group s customers could have an adverse effect on the Group s business, results of operations and financial condition. 14

16 KSG Agro S.A. Increased costs for or disruptions in the supply of fuel could adversely affect the Group s business. The Group requires a substantial amount of fuel to produce and/or transport its crops and, as it expands its business, its needs will increase. The cost of fuel accounted for approximately 16 per cent. of the Group s cost of agricultural produce in the period ended 31 December 2010 and 13 per cent. in the year ended 31 December The prices of fuel fluctuate significantly over time and recently have risen significantly. The Group may not be able to pass on increased costs of production and distribution of its produce to its customers. Any such increases may therefore reduce the Group s gross margins, and could result in reduced profits. In addition, the Group is dependent on other parties for the supply of fuel and this supply could be disrupted. Any increases in the cost of fuel and any disruption in the supply of fuel to the Group, could have a material adverse effect on the Group s business, financial condition and results of operations. Dependence on the key personnel and low labor costs. The Group s success depends, to a certain degree, upon the efforts and abilities of certain key personnel, including our management team. In addition, the Group benefit from the extensive contacts and relationships of its key personnel. Since Ukraine is an emerging economy, with a rapidly developing labor market, it is difficult to employ and retain appropriate executives and specialists within a company for an extended period of time. Furthermore, because of the rapid growth, there is and most probably will be a relatively large staff turnover. Consequently, there may be cases when the hired personnel will not actually possess the required qualifications or experience, or will not have the capacity to excel as quickly as required. The loss of any of our key personnel or the inability to hire and retain qualified personnel could materially affect the business, results of operations, financial condition and prospects. In addition, the Group relies on large numbers of agricultural workers for its operations. Competition to engage agricultural workers in Ukraine, particularly during key periods in the agricultural year, such as harvest time, is intense. If the Group is unable to engage sufficient agricultural workers, or agricultural workers with the necessary experience, particularly at key periods in the agricultural year, the Group s operations could be disrupted in some regions adversely affecting the Group s business, financial condition and results of operations. With the exception of compensation for executives and specialists, labor cost in Ukraine has been historically lower than labor costs in more developed markets in Europe or North America. However, if wages and related costs were to increase in Ukraine, the Group s profitability could be reduced. KSG might need to increase the level of the employees compensation at a higher rate than it did in the past in order to stay competitive on the labor market. Unless the Group is able to continue increasing efficiency and productivity of its employees, each increase could have an adverse effect on its business activity and financial state. The Group may not have or may be unable to obtain sufficient insurance to protect itself from business risks and liabilities. While the Group tends to maintain the types of insurance customarily available to commercial businesses in Ukraine, its insurance policies do not cover, and insurance is not commercially available for all potential risks to which we are or may be exposed, such as insurance of damage caused to third parties due to use of pesticides and management liability insurance. The lack of insurance for all or certain business related risks may expose the Group to substantial losses, which could adversely affect its business, results of operations and financial condition. The Group s current management information systems, in particular accounting systems, may be insufficient for the Group s operations or may not be as robust as those of companies organised in jurisdictions with a longer history of compliance with IFRS. The Group existing management information systems are not as robust as those of companies organised in jurisdictions with a longer history of compliance with IFRS. Insufficient robustness of management information systems may limit the Group s growth potential, adversely affect the efficiency of internal control and procedures, and lead to incorrect presentation or interpretation of financial matters affecting the Group. The Group may be subject to claims and liabilities under and may incur costs to comply with health, safety and environmental laws and regulations, which could be significant. The Group operations are subject to various environmental, health and safety laws and regulations, including those governing solid waste and wastewater discharges and the use, storage, treatment and disposal of hazardous materials. Failure to implement measures to prevent flooding, bogging, salification of land, pollution of land, degradation of land, wind and water erosion, unauthorised agricultural run-off or the pollution of lakes or ponds may also subject the Group to liability. Furthermore, operations conducted by the Group at property leased or operated by the Group and the disposal of waste at other sites expose the Group to the risk of claims under environmental and health and safety laws and regulations. The Group s employees and external contractors frequently work under tight deadlines, sometimes at night and often with dangerous machinery. The Group s employees and contractors are exposed to the risk of injury or death in performing 15

17 KSG Agro S.A. their duties. The Group could incur material costs or liabilities in connection with claims related to any of the foregoing. The Ukrainian laws and regulations dealing with those matters are subject to frequent amendments, which forces us to respond quickly by adjusting to new and usually more stringent requirements and standards. In the ordinary course of business, the Group is subject to various state inspections. It makes all possible efforts to comply with such requirements and standards and believes that it meets most of them. However, the Group cannot entirely exclude the possibility that in the future it could incur substantial costs to comply with health, safety and environmental laws and regulations or that it will not manage to adjust to new requirements in a timely manner. For instance, the Group anticipates increased regulation by various governmental agencies concerning food safety, the use of medication in fodder formulations, the disposal of animal by-products and wastewater discharges. Furthermore, business operations currently conducted by the Group or previously conducted by others at property owned or operated on by the Group may expose the Group to claims under environmental, health and safety laws and regulations. The discovery of presently unknown environmental conditions, changes in environmental health, safety and other laws and regulations, enforcement of existing or new laws and regulations, a material breach of legislative requirements could result in fines being imposed on the Group by state inspections, damages and civil or criminal sanctions against the Group. The Group could also experience interruptions in its operations for actual or alleged violations of environmental, health and safety laws. Costs of compliance and potential liabilities due to environmental damage or harm to health could adversely affect the business, results of operations and financial condition. The Group depends on obtaining required permits and other administrative approvals from state, as well as rights to the land plots. The Group s operations in the agricultural business are subject to numerous governmental regulations. The requirements are sometimes contradictory to each other, they are changed without public notice and may occasionally be applied retrospectively. Regulatory authorities exercise considerable discretion in matters of enforcement and interpretation of law, regulations and standards, the issuance and renewal of permits and in monitoring compliance with the terms. The Group is actively monitoring its compliance with existing regulations and requirements. However, violations of any such regulations could result in various penalties or pecuniary fines that may have adverse effect on the business. Moreover, the Group s operations could be affected by governmental programs including sanitary inspection, environmental protection measures or tax and market reforms that, in turn, may negatively affect the business. Changes in regulatory regimes could be directly or indirectly related to production or sales of Group s products. Any material insufficiencies in the Group s compliance procedures could have a material adverse effect on the Group s business, results of operations and financial condition. Third parties could challenge Group s title to or other rights to farm land that it leases and the Group may not be able to renew its lease agreements. The Group leases all the land plots on which it grows grains and vegetables. The vast majority of its land plots under lease are leased from private individuals, whereas the remaining is leased from local authorities. As of the date of this Prospectus, the Group leases about 33,700 ha of land. The Group believes that the average size of a land plot leased by the Group from a private individual lessor is approximately 6,3 hectares. This gives rise to a significant administrative burden and a number of legal risks, including a risk of fragmentation of the Group s land bank, if it is unable to continue to lease land from individual lessors with adjoining plots of land or farm such land that it believes it has leased. Furthermore, some of the leases may not contain all of the provisions required under Ukrainian law or may not have been notarised as may be required under Ukrainian law. In particular, some land lease agreements lack certain annexes, land planning projects, proofs that the local authorities had necessary powers to lease out the land to the Group and to enter into relevant land lease agreements. Certain land lease agreements or annexes contain technical deficiencies or provide for the rent amount which is lower than the amount established by law. Some of the land lease agreements might have been required to be executed in the course of land auctions, but the Group failed to do so. The Group failed to register some of the land lease agreements within the period prescribed by such agreements. In addition, the Group does not pay rent on a timely manner to some individuals. Any such defects to the Group s leases may render them invalid or unenforceable. Any challenge to the validity or enforceability of its rights to the leased land may result in the loss of the respective lease rights. As of date of execution of the agreements, the average weighted initial term of the Group s leases was 10 years and the average weighted term remaining on the Group s leases is now 8 years. However, under Ukrainian law, as the lessee it has pre-emptive right to extend the term of the lease agreement upon its expiry, provided that it has complied with the terms of the lease and the lessor desires to continue leasing the land plot. The majority of the Group s leases provide that they will renew automatically at the end of their respective terms unless the relevant landowner gives one month s notice in writing to the relevant member of the Group that he does not wish the lease term to be renewed. Accordingly, there can be no assurance that all lease agreements will be renewed upon their expiration. Furthermore, the Group may not extend a particular lease because the relevant landowner may only be willing to extend the lease on terms, including as to price, which are unduly onerous or otherwise economically unattractive. In addition, Ukrainian legislation requires that the lease rights to any land plots held in state or municipal ownership granted on or after 1 January 16

18 KSG Agro S.A be allocated through an auction unless there are buildings owned by the lessee on the relevant land plot. Any relevant loss of land could materially affect the volume of cultivated and harvested raw materials and thus the Group s farming business. The Group is subject to currency-related and interest rate risks. Fluctuations in the value of USD, which is the Group s reporting currency, against other currencies, such as UAH, and EUR, have in the past had, and may have in the future, an adverse effect on the Group s results of operations. All domestic sales are in UAH, which is not a freely tradable currency. The results of domestic operations are reported in UAH and then converted into USD at applicable exchange rates for inclusion in our consolidated financial statements. Moreover, although most of Group s contacts (such as lease agreements and goods supply contracts) are denominated in UAH, payments under certain of such contracts are calculated and adjusted based on the applicable exchange rate of UAH to USD or EUR on the date of payment. A change in the value of these currencies compared to UAH would have a negative effect on the Group s results of the operations. The Group also encounters currency exchange risks to the extent that it incurs operating expenses in a currency other than that in which it has obtained financing or those in which it generates revenues. In the ordinary course of business, the Group enter into hedging transactions in order to manage the exposure to foreign exchange, currency and interest rate risks. The Group cannot assure prospective investors that any hedging transaction that it has entered into or may enter into in order to protect against such risks will be successful or that shifts in currency exchange rates generally will not have a material adverse effect on the financial condition or results of operations. The Issuer is a holding company with no operating activity and no assets other than shares of its subsidiary. The Issuer is a holding company with no business operations of its own. All business operations are carried out by the Operating Companies. The Issuer directly holds 100 per cent. of participatory interests and voting rights in KSG Agricultural and Industrial Holding Limited (Cyprus) which holds almost 100 per cent. of shares and voting rights in the Operating Companies. The Issuer could pay dividends only to the extent it is entitled to receive indirectly dividends from the Operating Company. It recognizes gains from the sale of its assets and proceeds from the issuance of the Shares only. Furthermore, the Issuer will depend upon external sources of financing, the earnings and cash flows from the Operating Company and dividends on shares indirectly held in the Group Subsidiaries to pay expenses and meet any future obligations. There is no guarantee that the earnings and cash flows from the Group Subsidiaries will be sufficient to meet future needs. If the AMC were to conclude that the Group or its shareholders were required to obtain approvals for certain transactions which lead to establishment of the Group but did not obtain such required approvals, the Group or its shareholders may be subject to fines or the relevant transactions may be invalidated. The Group s business has grown substantially over the recent years through the establishment and acquisition of companies in and outside of Ukraine. Certain of such transactions might have required prior approvals of the AMC. Similarly to many other businesses in Ukraine, members of the Group might not always be in the position to comply with all the applicable AMC approval requirements; in addition, the relevant legislation was not always certain or sufficiently developed and its implementation was often inconsistent. As a result, members of the Group might not have obtained AMC approvals, when required, for transactions pertaining to the establishment of the Group. Failure to obtain AMC approvals for such transactions may subject the Issuer and its controlling shareholder, and the entities related to them by control, to fines of up to five per cent of the Group s consolidated revenue for the financial year immediately preceding the year in which the fine is imposed, or in the worst case the relevant transactions may be invalidated through court procedures and the relevant companies may be dissolved (such invalidation and dissolution may only apply if the transactions are found to have led to the creation of a monopoly or substantially reduced competition in the relevant market or part thereof). The Group believes that none of the relevant transactions has led to the creation of a monopoly or substantially reduced competition in the relevant market in Ukraine, and any actions on the part of the AMC in relation to a number of such past transactions pertaining to the establishment of the Group would be barred under the applicable statute of limitations in Ukraine, and it therefore expects that any administrative fine in respect of failure to obtain AMC approvals for such past transactions is likely to be substantially less than the maximum amount specified above, or time-barred. However, there can be no assurance that this will be the case. The Group could be subject to liabilities if it is determined that our past actions violated Ukrainian corporate laws or regulations. Ukrainian corporate laws and regulations have developed considerably since Ukraine s transition to a market economy. Some of these laws and regulations contain ambiguities, imprecision and inconsistencies, which make compliance with these laws difficult. As a result, the Group s prior transactions may not have fully complied with all corporate formalities. 17

19 KSG Agro S.A. In particular, the Group may not have complied or may not have fully complied with all technical requirements of Ukrainian corporate law with respect to net assets sufficiency, certain transfers of interests in the Group s subsidiaries, or formation, or changes of charter capital. Depending on the nature of a violation, the above instances of non-compliance with applicable laws and regulations may result in, among other things, warnings or requests from governmental authorities for the corrective actions within a prescribed time period, requests for mandatory winding-up proceedings, or requests to unwind a previous transaction. To date, we have not received any notice of violation from any interested parties or from governmental authorities, and we do not expect that any party will seek to review or modify any such transaction or challenge the above-mentioned irregularities. However, there can be no assurance that we will not receive any such notices or claims in the future. Any such event could have an adverse effect on our business, results of operations, and financial condition. Certain of the Group s credit facilities are repayable on demand in case of breach of their terms. The Group s operations are partially financed through loans from several Ukrainian financial institutions (see Business Description Material Contracts Financing Agreements ) and financial leasing arrangements. To date, the Group has repaid the installments due on such borrowings in accordance with their respective repayment schedules. However, all of the Group s loan facilities may be repayable on demand in case of breach of contractual terms and there can be no guarantee that the Group will not be required to repay such facilities in the future with limited advance notice and when not provided for in the Group s budgets. Although the Management believes that it is unlikely all such lenders would simultaneously demand repayment of their respective facilities at the same time, the Group s ability to repay its debt as and when required will be dependent on is its ability to generate positive cash from operations or to refinance such indebtedness, neither of which can be assured. Transfer pricing rules may potentially affect Group s results of operations. Ukrainian transfer pricing rules apply to a wide range of situations involving cross-border and certain domestic transactions, most typically regulating pricing for goods and services sold or purchased to or from related parties. Under Ukrainian tax laws, the transactions between related parties must be carried out at arm s length. More specifically, a taxpayer must report the higher of the contractual prices and market prices, which are termed usual prices, in connection with the sale of goods or services to related parties. Similarly, a taxpayer s deductible expenses may not exceed the usual prices for goods and services. On 1 April 2011, a safe harbor rule will be introduced permitting the deviation of contractual prices from arm s length prices by no more than 20 per cent. Moreover, starting from 1 January 2013 the new tax rules relating to usual prices will become effective. Until that time, the old tax rules introduced by the Corporate Income Tax Law remain in force. It is not exactly clear how the old tax rules relating to usual prices will apply from 1 April 2011 (until 1 January 2013) when the relevant provisions of the Tax Code of Ukraine relating to CIT come into effect. Under Ukrainian tax laws, usual prices also apply to transactions with persons who either do not pay corporate income tax or pay it at a rate other than the standard rate of CIT. Because the Group s foreign counterparties, excluding those that have a permanent establishment in Ukraine, may not be payers of Ukrainian corporate income tax at the standard rate, the tax authorities may interpret this rule to apply to any transaction between the Group, as a resident entity, and its foreign counterparties, regardless of whether they are related parties. The Group s historical and current trading relationships could fall within these transfer pricing rules. Accordingly, the Group must report corporate income tax on export transactions at prices at which it makes purchases and prices used in transactions between its subsidiaries, as adjusted to the arm s length prices, that is, not lower than the usual prices for such products and supplies. With the safe harbor rule coming into force on 1 April 2011, however, the Group would be required to carry out such adjustments only if and when usual prices for such products and supplies would exceed the contractual prices by more then 20 per cent. Operating Companies must also report deductible expenses for the corporate income tax purposes at the level not greater than usual prices on import transactions and on transactions with other Ukrainian related parties and non-standard rate payers of corporate income tax. With the introduction of safe harbor rule, the obligation of Ukrainian subsidiaries to adjust their deductible expenses to the arm s length prices would arise only if the relevant contractual prices would be viewed to exceed the applicable usual prices by more then 20 per cent. Ukrainian tax laws offer a number of methods to establish the usual price. According to the commonly used comparable uncontrolled price method (the CUP ), the usual price is determined by reference to the sales price of identical (or similar) goods, works, or services between unrelated parties taking into account the commercial value of such agreements including the amount, volume of goods, contractual obligations, payment terms and other relevant terms. Other methods are largely based on national accounting standards and include the resale price method, the cost plus method and the balance sheet value method. However, there can be no guarantee that the transfer pricing method and underlying data used by the tax authorities to determine the usual price would correspond to the method and data used by management. Accordingly, any discrepancies between such tax assessments could lead to a dispute between the tax authorities and the Group which could have an adverse effect on the Group s business, results of operations and financial condition. 18

20 KSG Agro S.A. With respect to VAT, Ukrainian tax laws require that the relevant VAT liability must be reported with respect to the higher of the contractual price and usual price of the relevant goods or services irrespective of whether or not the transaction takes place between related parties. Similarly, input VAT must not exceed input VAT calculated by reference to usual prices. No safe harbor rule applies for the VAT reporting purposes. The Group has developed and follows an internal transfer pricing policy which its management believes is based on market practice and complies with tax and customs legislation in Ukraine. Management believes that the prices at which the Group purchases supplies and raw materials from, and the prices at which it sells products to, related parties, are the usual prices for such supplies and products. However, the relevant laws, rules and standards used for the purpose of determining usual prices in Ukraine are vaguely drafted and leave wide scope for interpretation by the Ukrainian tax authorities and administrative courts. In addition, to date, there has been only limited guidance as to how these laws, rules and standards are to be applied. As a result, there can be no assurance that the tax authorities in Ukraine will not challenge the Group s prices and propose adjustments for corporate income tax as well as VAT purposes. If such price adjustments are implemented, the Group s effective tax rate could increase and future financial results could be adversely affected. In addition, the Group could face significant losses associated with the assessed amount of prior tax underpaid and related tax interest and penalties, which may materially adversely affect the Group s business, results of operations and financial condition. The validity of Group s suretyship agreements could be challenged. The Group companies often enter into the suretyship agreements to secure obligations under the loan agreements of the other Group companies. The Law of Ukraine On Financial Services and the State Regulation of the Markets of Financial Services dated 12 July 2001 (the Financial Services Law ) views the issuance of suretyships as a type of financial services, which would normally be rendered by a bank or non-banking financial institution only, but, as an exception, can be rendered by another person when expressly permitted by a law of Ukraine or a regulation of the State Commission of Ukraine on the Regulation of the Markets of Financial Services (the Financial Services Commission ). Although the Financial Services Commission s regulation permits non-financial institutions to issue suretyships, such permission is subject to the issuer s compliance with the anti-money laundering requirements and procedures. The applicable regulation of the Financial Services Commission is uncertain as regards the exact scope and content of such compliance requirement. As a result, a risk exists that a particular Group company acting as surety may be seen as failing to ensure such compliance and, accordingly, as lacking capacity to enter into and/or to perform its obligations under the respective suretyship agreement, in which case the validity of suretyship agreement could be challenged. However, such legal uncertainty notwithstanding, Ukrainian companies such as the Group companies often conclude suretyship agreements, and the Financial Services Commission has not challenged such practice. In addition, we are not aware of any established practice of the Ukrainian courts whereby suretyship agreements would be declared invalid specifically for the reason of the surety failing to comply with any requirements or procedures of the anti-money laundering legislation. The Group s business could be adversely affected if it is unable to enter into leases with the holders of all of the land in a particular farm. The ownership of agricultural land in Ukraine is extremely fragmented. In order to lease a large area of land for the purpose of operating a large-scale farm, the Group must enter into a large number of leases in respect of each of the individual land plots that comprise such farm. Individual landowners may be unwilling to lease their land plots to the Group. A landowner may be particularly unwilling to lease his land if the Group has already agreed to lease a substantial area of land adjacent to such landowner s plot and such landowner believes that he may be able to lease his land to the Group on more favourable terms. The Group may only be able to lease the relevant land plot at a substantial cost, if at all. As a result of the process to privatise the ownership of agricultural land in Ukraine, title to agricultural land distributed to individuals is evidenced in a number of ways. As an initial stage of the privatisation process, landowners were granted a certificate evidencing the right to a share of land (a Land Certificate ), which described the amount of land by area within a given farm or other zone which the landowner would receive in due course. Specific plots of land within a farm or other zone were then allocated by agents of the local department of the State Agency for Land Resources (the Local Land Authorities ) to the individual landowners. Following the allocation of land within a farm or other zone, the landowner is required to register his title to the land that he has been allocated. Upon registration of his title to the land, the landowner is issued with a state act evidencing his ownership rights to the land (a State Act ). In certain areas landowners have not registered the titles to their land plots, but rely on their Land Certificates and the records of the land allocation process as evidence of their title to land. Approximately, 4 per cent of the land leased by the Group is leased from landowners who only hold Land Certificates. Under Ukrainian law, the parties to a lease of land whose title is evidenced by a Land Certificate are required to enter into a new lease agreement upon issue of the State Act in respect of the relevant land plot. If the parties fail to enter into such new lease, the Group s rights over the relevant land plot may be unenforceable. 19

21 KSG Agro S.A. The payments due under the Group s land leases increase automatically. Under the terms of the Group s leases, the annual rent is calculated as a percentage of the value attributed to the land plot under the state land cadastre maintained under the authority of the Ukrainian State Agency for Land Resources (the Land Cadastre and such value, the Cadastral Value ). Under the terms of such leases, the annual rent is automatically increased by the amount of the increase in Ukrainian land values as determined by the State Agency for Land Resources (the Indexation Index ) and published periodically. The Indexation Index was in 2008, in 2009 and one (1.00) in Furthermore, under Ukrainian law, the Cadastral Value of agricultural land must be reassessed every seven years by the State Agency for Land Resources thereby potentially impacting the rental expenses of the Group. Accordingly, the Group has no control over the annual increase in its rental costs under any of its existing or future leases. Any increase in land lease payments above the Group s current expectations could have a material adverse effect on the Group s business, financial condition and results of operations. RisksRelatingtoUkraine Historically, the Group s total sales revenues were generated from operations in Ukraine. The Company expects that such pattern will be repeated in the foreseeable future. As a consequence, risks and events that have a material adverse effect on the Group s operations in Ukraine could, in turn, have a material adverse effect on its overall business, financial condition, results of operations or prospects. Set forth below is a brief description of some of the risks incurred by investing in a company with substantial assets and operations in Ukraine. Emerging markets are subject to greater risks than more developed markets. Investors in emerging markets such as Ukraine should be aware that these markets are subject to greater risk than more developed markets, including in some cases significant political, economic and legal risks. Investors should also note that emerging economies such as Ukraine s are subject to rapid change and that the information set out in this Prospectus may become outdated relatively quickly. Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved, and investors are urged to consult with their own legal and financial advisors before making an investment in the Shares. Ukraine may continue to experience political instability or uncertainty. Since obtaining independence in 1991, Ukraine has undergone substantial political transformation from a constituent republic of the former Union of Soviet Socialist Republics to an independent sovereign state. In parallel with this transformation, Ukraine is transitioning from a centrally planned economy to a market economy However, this process of economic transition is not complete. Historically, a lack of political consensus in the Verkhovna Rada, or Parliament of Ukraine has made it difficult for the Government to sustain a stable coalition of parliamentarians to secure the necessary support to implement a variety of policies intended to foster economic reform and financial stability. The current Parliament was elected at the parliamentary elections held on September 30, In December 2007, the new Parliament appointed Yuliya Tymoshenko as the Prime Minister of Ukraine. On October 9, 2008, the President issued a decree dissolving the Parliament and designating December 7, 2008 as the date for new parliamentary elections. However, this decree was challenged in court and cancelled by a subsequent decree by the President. In December 2008, the Parliament elected its new Speaker, Volodymyr Lytvyn, and a new majority coalition was formed comprising three parliamentary factions: Our Ukraine People s Self Defense Bloc, Yuliya Tymoshenko s Bloc and the Volodymyr Lytvyn Bloc. The first round of the recent presidential elections was held on January 17, 2010; however, no candidate won 50 per cent. or more of the popular vote and the two highest polling candidates, Victor Yanukovych, a leader of Partiya Regioniv (the Party of Regions), and Yuliya Tymoshenko, leader of Yuliya Tymoshenko s Bloc, took part in the second round of elections. On February 7, 2010 Victor Yanukovych and Yuliya Tymoshenko won per cent. and per cent. of the popular vote, respectively. Although Yuliya Tymoshenko initially contested the results of the elections, she subsequently conceded and Viktor Yanukovych was inaugurated as President of Ukraine on February 25, On March 3, 2010, the incumbent Prime Minister Yuliya Tymoshenko was voted out of the Government following a vote of no confidence by the Parliament. On March 11, 2010, factions of Party of Regions, Volodymyr Lytvyn Bloc and the Communist Party of Ukraine and several other deputies formed a new parliamentary coalition consisting of 235 deputies. On the same day, the Parliament appointed Mykola Azarov, a member of the Party of Regions, as the new Prime Minister of Ukraine and endorsed the new members of the Government. Currently, the Government consists mainly of members of the President s Party of Regions with a few positions being occupied by representatives of other political forces. In 2010 a political reform introduced by the Law of Ukraine On Changes to the Constitution of Ukraine dated 8 December 2004 (the 2004 Reform Law ) was cancelled. The 2004 Reform Law provided for the shift of Ukraine from 20

22 KSG Agro S.A. the presidential to the parliamentary democracy and distributed a significant part of the President s powers to the Parliament and the Government. The 2004 Reform Law has been challenged at the Constitutional Court of Ukraine and announced unconstitutional on 30 September As a result, the Constitution of Ukraine was reversed back to its initial text adopted in 1996 and the President resumed his significant powers. An administrative reform in Ukraine has been introduced with issuance by the President of Ukraine of an Order On Improvement of the System of the Central Executive Authorities (the Order ) dated 9 December The Order introduced a major change to the system of central governing bodies separating them into the ministries and three categories of the central executive bodies and reduced the number of state bodies and administrative personnel. As of the date of this Prospectus, the balance of power between the President, the Government and Parliament has shifted, in favour of the President and the parliamentary coalition dominated by the Party of Regions. The opposition remains fractioned and does not have significant influence over the political process in the country. A number of criminal cases have been initiated against the members of the former Government (including Mrs. Tymoshenko) for various acts of alleged misconduct during their service in the Government. Recent political developments have also highlighted potential inconsistencies between the Constitution of Ukraine and various laws and presidential decrees. Furthermore, such developments have raised questions regarding the judicial system s independence from economic and political influences. A number of factors could adversely affect political stability in Ukraine. These could include: court action taken by opposition parliamentarians against decrees and other actions of the President or the Government; or court action by the President against parliamentary or governmental resolutions or actions. If political instability occurs, it may have negative consequences for the Ukrainian economy and, as a result, a material adverse effect on Group s business, prospects, results of operations, financial condition or the price of the Shares. Ukraine may experience economic instability. The negative impact of the global economic and financial downturn has been compounded by weaknesses in the Ukrainian economy, which is sensitive to external and internal events. In particular, although the Government has generally been committed to economic reform, the implementation of reforms has consistently faced the obstacles of a lack of political consensus, controversies over privatization (including privatization of land in the agricultural sector), the restructuring of the energy sector, the removal of exemptions and privileges for certain state-owned enterprises or for certain industry sectors, and the limited extent of cooperation with international financial institutions. The negative trends in the Ukrainian economy may continue while commodity prices on the external market remain low and access to foreign credit is limited, unless Ukraine undertakes certain important economic and financial structural reforms. The most critical structural reforms that need to be implemented or continued include: (i) comprehensive reforms of Ukrainian tax legislation with a view to broadening the tax base by bringing a substantial portion of the shadow economy into the reporting economy; (ii) reform of the energy sector through the introduction of uniform market-based energy prices and improvement in collection rates (and, consequently, the elimination of the persistent deficits in that sector); and (iii) reform of social benefits and pensions. According to the SSCU, consumer price inflation for 2010 was 9.1 per cent. as compared to the year end The rate of inflation in 2009 was 12.3 per cent., which is lower that the 16.6 per cent. and 22.3 per cent. recorded in 2007 and 2008, respectively, but higher than the 11.6 per cent. and 10.3 per cent. recorded in 2006 and 2005, respectively. In 2009, the Ukrainian Government incurred a budget deficit of UAH 19.9 billion (according to the Ministry of Finance of Ukraine). According to preliminary data from SSCU, GDP, as calculated in the national currency, increased by 4.9 per cent. in the first quarter of 2010as compared to a 20.3 per cent. decline for the first quarter of 2009, and in the second quarter of 2010 the real GDP increased by 5.9 per cent., as compared to 17.8 per cent. decline for the second quarter of In the third quarter of 2010, the real GDP increased by 3.4 per cent. as compared to a 15.9 per cent. decline for the third quarter of 2009 and in the forth quarter of 2010 GDP increased by 1 per cent. as compared to 7 per cent. decline for the forth quarter of However, it should be noted that the international investment markets generally evaluate Ukrainian GDP in U.S. dollar terms and that the recent U.S. dollar/hryvnia exchange rate volatility has further impacted the reported GDP. Accordingly, the IMF reported that Ukraine s GDP amounted to USD billion in 2008 and USD billion in 2009, a decrease of 35.6 per cent. year-on-year. Failure to achieve the political consensus necessary to support and implement such reforms and any resulting instability could adversely affect the country s macroeconomic indices and economic growth. Furthermore, future political instability in the executive or legislative branches could hamper efforts to implement necessary reforms. There can be no assurance that the political initiatives necessary to achieve these or any other reforms described elsewhere in this Prospectus will continue, will not be reversed or will achieve their intended aims. Rejection or reversal of reform policies favouring privatisation, industrial restructuring and administrative reform, may have negative impact on the Ukrainian economy and, as a result, on the Group s business, prospects, results of operations, financial condition or the price of the Shares. 21

23 KSG Agro S.A. In addition, the current global financial crisis has led to the collapse or bailout of some Ukrainian banks and to significant liquidity constraints for others. The crisis has prompted the Government to inject substantial funds into the banking system amid reports of difficulties among Ukrainian banks and other financial institutions. The continuation or worsening of the financial crisis, further insolvencies of Ukrainian banks, and the failure to adopt and implement a system of banking regulation that achieves an increased degree of soundness and stability in the nation s banks could have a material adverse effect on the Ukrainian economy and, as a result, on the Group s business, prospects, results of operations, financial condition or the price of the Shares. Any unfavourable changes in Ukraine s regional relationships, especially with Russia, may adversely affect the Ukrainian economy and thus the Group s business. Ukraine s economy depends heavily on its trade flows with Russia and the rest of the CIS countries largely because Ukraine imports a large proportion of its energy requirements, mainly from Russia (and from other countries that deliver energy to Ukraine through Russia). In addition, a large portion of Ukrainian service proceeds come from transit charges for oil, gas and ammonia from Russia. As a result, Ukraine considers its relations with Russia to be of strategic importance. Apart from Russia, Ukraine also developed significant relationships with certain countries of the European Union ( EU ) (including Germany, Poland, Hungary, Slovakia and Romania), as well as with Turkey. Relations between Ukraine and Russia cooled to a certain extent due to disagreements in late 2005 and early 2006 and 2009 over the prices and methods of payment for gas delivered by the Russian gas monopoly OJSC Gazprom; unresolved issues relating to the temporary stationing of the Russian Black Sea Fleet (Chornomorskyi Flot) in the territory of Ukraine; and a Russian ban on imports of meat and milk products from Ukraine, which was introduced in January 2006 and partially lifted in July If bilateral trade relations between Russia and Ukraine were to deteriorate, this may have negative impact on the Ukrainian economy as a whole and thus on the Group s business, results of operations, financial condition and prospects. On April 21, 2010, the Presidents of Ukraine and the Russian Federation agreed to amend existing gas supply agreements between Naftogaz of Ukraine and Gazprom to the effect that Gazprom will introduce a discount to the previously agreed price formula. According to media reports, the formulas in the 2009 agreements, which tie the price of imported gas to European benchmark prices, remain intact but Gazprom will offer a discount of: (i) a maximum USD 100 per cubic meter if the price for natural gas is USD 333 (or higher); or (ii) 30 per cent. if the price is below USD 333 per cubic meter. The discount was provided in exchange for certain concessions for stationing the Russian Black Sea Fleet on the territory of Ukraine, such as extending the lease terms for an additional 25 years from 2017 with further 5-year period extensions after the 25-year term. On April 27, 2010 the Ukrainian and Russian Parliaments ratified the agreement. More than 20 per cent. of Ukrainian goods are currently exported to Russia, while much of Russian exports of energy resources are delivered to the EU via Ukraine. Considerable dependence of the Ukrainian economy on Russian energy exports together with increase in natural gas price by Russia may adversely affect the pace of economic growth of Ukraine. Furthermore, gas price increases may force Ukraine to launch certain reforms in the energy sector and modernization of major energy-consuming industries through the implementation of efficient technologies and modernization of production facilities. However, there can be no assurance that this will take place. Any major adverse changes in Ukrainian relations with Russia, in particular any such changes adversely affecting supplies of energy resources from Russia to Ukraine or affecting Ukrainian revenues from transit charges for Russian oil and gas, would likely have negative effects on certain sectors of the Ukrainian economy and thus may materially adversely affect the Group s business, prospects, results of operations, financial condition or the price of the Shares. A failure to develop relations with the EU might have negative effects on the Ukrainian economy and the Group s business. Ukraine continues to develop its economic relationship with the EU. In 2008, the EU was the largest external trade partner of Ukraine importing goods and services from Ukraine amounting to U.S.$22.2 billion (28.2 per cent. of Ukraine s total exports of goods and services), and exporting goods and services to Ukraine amounting to U.S.$32.7 billion (35.5 per cent. of Ukraine s total imports of goods and services). In 2009, the EU remained the largest external trade partner of Ukraine with its share in the total foreign trade turnover of Ukraine amounting to about 31.0 per cent. (exports of goods and services from Ukraine to the EU amounted to approximately U.S.$12.5 billion, and imports of goods and services from the EU to Ukraine amounted to approximately U.S.$18.4 billion). In the nine months ended 30 September 2010, the EU s share in the total foreign trade turnover of Ukraine amounted to 28.4 per cent. Goods and services exported from Ukraine to the EU amounted to U.S.$9 billion, while goods and services imported to Ukraine from the EU amounted to U.S.$13.2 billion. European Union imports from Ukraine are to a large extent liberalised, apart from metal scrap, on which Ukraine levies export duties. 22

24 KSG Agro S.A. In return for effective implementation of political, economic and institutional reforms, Ukraine and other neighbouring countries should be offered the prospect of gradual integration with the EU s internal market, accompanied by further trade liberalisation. Ukraine s accession to the WTO created the necessary preconditions for the launch of formal negotiations for introduction of a free trade area ( FTA ) with the EU. In thirteen rounds of negotiations on the FTA held between Ukraine and the EU from 2008, the parties achieved progress in harmonisation of, among others, the following areas: trade in goods (including in relation to instruments of trade protection, tariffs, technical barriers in trade, sanitary and customs issues), intellectual property, rules relating to origin of goods, sustainable development and trade, trade in services, and public procurement. Should Ukraine fail to develop its relations with the European Union or should such developments be protracted, this may have negative effect on the Ukrainian economy. Weaknesses relating to the legal system and legislation may create an uncertain environment for investment and business activity. Since independence in 1991, as Ukraine has been developing from a planned to a market-based economy, the Ukrainian legal system has also been developing to support this market-based economy. Ukraine s legal system is, however, in transition and is, therefore, subject to greater risks and uncertainties than a more mature legal system. In particular, risks associated with the Ukrainian legal system include, but are not limited to: (i) inconsistencies between and among the Constitution of Ukraine and various laws, presidential decrees, governmental, ministerial and local orders, decisions, resolutions and other acts; (ii) provisions in the laws and regulations that are ambiguously worded or lack specificity and thereby raise difficulties when implemented or interpreted; (iii) difficulty in predicting the outcome of judicial application of Ukrainian legislation; and (iv) the fact that not all Ukrainian resolutions, orders and decrees and other similar acts are readily available to the public or available in understandably organized form. Furthermore, several fundamental Ukrainian laws either have only relatively recently become effective or are still pending in the Parliament. The recent origin of much of Ukrainian legislation, lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of the Ukrainian legal system in ways that may not always coincide with market developments, place the enforceability and underlying constitutionality of laws in doubt, and result in ambiguities, inconsistencies and anomalies. In addition, Ukrainian legislation often contemplates implementing regulations. Often such implementing regulations have either not yet been promulgated, leaving substantial gaps in the regulatory infrastructure, or have been promulgated with substantial deviation from the principal rules and conditions imposed by the respective legislation, which results in a lack of clarity and growing conflicts between companies and regulatory authorities. These and other factors that have an impact on Ukrainian legal system make the investment in the Shares subject to greater risks and uncertainties than an investment in a country with a more mature legal system. All of these factors make judicial decisions in Ukraine difficult to predict and effective redress uncertain. Additionally, court claims are often used to further political aims. The Group may be subject to these claims and may not be able to receive a fair hearing. Additionally, court judgments are not always enforced or followed by law enforcement agencies. All of these weaknesses could affect the Group s ability to enforce its rights or to defend itself against claims by others, which could have a material adverse effect on the Group s business, prospects, results of operations, financial condition or the price of the Shares The judiciary s lack of independence and overall experience, difficulty of enforcing court decisions and the discretion of governmental authorities to file and join claims and enforce court decisions could prevent the Group or investors from obtaining effected redress in court proceedings. The independence of the judicial system and its immunity from economic and political influences in Ukraine remains questionable. Although the Constitutional Court of Ukraine is the only body authorized to exercise constitutional jurisdiction and has been mostly impartial, the system of constitutional jurisdiction itself remains complicated and, accordingly, it is difficult to ensure smooth and effective removal of discrepancies between the Constitution and applicable Ukrainian legislation on the one hand and among various laws of Ukraine on the other hand. The court system lacks staffing and funding. Judicial decisions under Ukrainian law generally have no precedent effect, which results in the inconsistent application of Ukrainian legislation to resolve the same or similar disputes. The Ukrainian judicial system became more complicated and hierarchical as a result of recent judicial reforms. All of these factors make judicial decisions in Ukraine difficult to predict and effective redress uncertain. In addition, court claims are often used in furtherance of political aims. Finally, court orders are not always enforced or followed by law enforcement institutions. Courts in Ukraine will generally not recognise and/or enforce any judgment obtained in a court of a country other than Ukraine unless such enforcement is envisaged by an international treaty to which Ukraine is a party, and then only in accordance with the terms of such treaty. The uncertainties of the Ukrainian judicial system may have a negative impact on the Ukrainian economy as a whole, and thus may materially adversely affect the Group s business, financial condition, results of operations or prospects in Ukraine. 23

25 KSG Agro S.A. The independence of the judicial system and its immunity from economic and political influences in Ukraine is continuing to develop. Ukraine is a civil law jurisdiction and, as such, judicial precedents generally have no binding effect on subsequent decisions. Additionally, court claims can be used in furtherance of personal aims different from the formal substance of the claims. The Group may be subject to such claims, and courts may render decisions with respect to those claims that are adverse to the Group and its investors. State authorities have a high degree of discretion in Ukraine and at times they exercise their discretion arbitrarily, without due process or prior notice, and sometimes in a manner that is contrary to law. Unlawful or unilateral state actions could include the withdrawal of licences, sudden and unexpected tax audits, criminal prosecutions and civil actions. National and local Government entities could also use common defects in matters surrounding share issuances and registration as a basis for court claims and other demands to invalidate such issuances and registrations and/or to void transactions, often to further interests different from the formal substance of the claims. Such state action, if directed at the Group, could have a material adverse effect on the Group s business, prospects, financial condition and results of operations. There are deficiencies in corporate governance standards under Ukrainian law. Disclosure and reporting requirements have only recently been enacted in Ukraine and remain underdeveloped. Anti-fraud legislation has only recently been adapted to the requirements of a market economy and remains largely untested. Most Ukrainian companies do not have corporate governance procedures in line with the standards of European Union Member States or the United States. The concept of fiduciary duties owed by management or members of the board to their companies or shareholders remains undeveloped in Ukraine. Such deficiencies could significantly affect the communication of material information or result in inappropriate management decisions, which may have a material adverse effect on the Group s business, results of operations and financial condition. Official economic data and third-party information in this Prospectus may not be reliable. Although a range of governmental ministries, along with the NBU and the SSCU, produce statistics on Ukraine and its economy, there can be no assurance that these statistics are as accurate or as reliable as those compiled in more developed countries. Prospective investors should be aware that figures relating to Ukraine s GDP and many other aggregate figures cited in this Prospectus may be subject to some degree of uncertainty and may not have been calculated in accordance with international standards. Furthermore, standards of accuracy of statistical data may vary from ministry to ministry or from period to period due to the application of different methodologies. In this Prospectus data are presented as provided by the relevant ministry to which the data is attributed, and no attempt has been made to reconcile such data to the data compiled by other ministries or by other organisations, such as the IMF. Since the first quarter of 2003, Ukraine has produced data in accordance with the IMF s Special Data Dissemination Standard. There can be no assurance, however, that this IMF standard has been fully implemented or correctly applied. The existence of a sizeable unofficial or shadow economy may also affect the accuracy and reliability of statistical information. In addition, Ukraine has experienced variable rates of inflation, including periods of hyperinflation. Unless indicated, the information and figures presented in this Prospectus not been restated to reflect such inflation and, as a result, period to period comparisons may not be meaningful. Prospective investors should be aware that none of these statistics has been independently verified. The Group has also provided information on certain matters pertaining to documentation that belongs to independent third parties. In certain of these circumstances, the Group has relied on reported information in presenting such matters but is unable to independently verify such information. Fluctuations in the global economy. Ukrainian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. In addition, because Ukraine is a major producer and exporter of metal and agricultural products, the Ukrainian economy is especially vulnerable to world commodity prices and/or the imposition of import tariffs by the United States, the EU or by other major export markets. Any such developments may have negative effects on the Ukrainian economy as a whole and thus may materially adversely affect the Group s business, financial condition, results of operations or prospects in Ukraine. Ukraine s physical infrastructure is in poor condition, which could disrupt normal business activity. Ukraine s physical infrastructure largely dates back to the Soviet times and in certain respects has not been adequately funded and maintained. In some areas the rail and road networks, power generation and transmission, communication systems and building stock are particularly affected. Road conditions throughout areas of Ukraine are poor, with many roads not meeting minimum requirements for usability and safety. The Ukrainian Government has been implementing plans to develop the nation s rail, electricity and telephone systems, which may result in increased charges and tariffs whilst failing to generate the anticipated capital investment needed to repair, maintain and improve these systems. Breakdowns and failures of any part of Ukraine s physical infrastructure may disrupt the Group s normal business activity. Further deterioration of Ukraine s physical infrastructure may harm the national economy, disrupt the transportation of goods 24

26 KSG Agro S.A. and supplies, add costs to doing business in Ukraine and interrupt business operations, any or all of which could have a material adverse effect on the Group s business, prospects, financial condition and results of operations. Crime and corruption could disrupt the Group s ability to conduct its business and could materially adversely affect its financial condition and results of operations. The weakened economic conditions in Ukraine, caused by the recent global crisis, have resulted in higher unemployment and increased levels of social unrest. In addition, both the Ukrainian and international press continue to report high levels of official corruption in Ukraine. Press reports have described instances in which state officials have engaged in selective investigations and prosecutions to further interests of the state and individual officials. The Group s business, and the value of the Shares, could be adversely affected by white-collar crime, illegal activities, corruption or by claims implicating the Group in illegal activities. Independent analysts, including the Financial Action Task Force on Money Laundering ( FATF ) and Transparency International, an anti-corruption body based in the UK, have identified corruption and money laundering as problems in Ukraine. In accordance with Ukrainian anti-money laundering legislation which came into force in June 2003, the NBU and other state authorities, as well as various entities carrying out financial transactions, are required to monitor certain financial transactions more closely for evidence of money laundering. As a result of the implementation of this legislation, the FATF removed Ukraine from its list of Non-Cooperative Countries and Territories in February 2004 and discontinued the formal monitoring of Ukraine in January In February 2010 Ukraine was mentioned by FATF as having demonstrated progress in improving its AML/CFT regime despite still having certain strategic AML/CFT deficiencies. Ukraine has made a high-level political commitment to work with the FATF and MONEYVAL to address these deficiencies, including by: (i) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II), (ii) enhancing financial transparency (Recommendation 4); and (iii) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III). In early June 2009, the Parliament adopted several laws setting forth a general framework for the prevention and counteraction of corruption in Ukraine. However in December 2010 the Parliament abolished the adopted package of anti-corruption laws and the president submitted a new draft law On the basis of prevention and countering corruption in Ukraine for review of the Parliament. There can be no assurance that the new draft law will be approved an, if approved will be effectively applied and implemented by the relevant supervising authorities. Any future allegations of corruption in Ukraine or evidence of money laundering may have a negative effect on the ability of Ukraine to attract foreign investment and thereby on the Ukrainian economy as a whole and thus may materially adversely affect the Group s business, financial condition, results of operations or prospects in Ukraine. Ukraine s tax system is undeveloped and subject to frequent change, which may create an uncertain environment for investment and business activity. Ukrainian tax legislation is subject rto frequent changes and amendments, which can result in either a more favourable environment or unusual complexities for the Group and its business generally. For example, with effect from January 1, 2011 the Ukrainian tax system was significantly reformed by the adoption of a new Tax Code of Ukraine. Applicable taxes include FAT, VAT, corporate income tax, custom duties and other taxes. As a result, there may be significant uncertainity as to the implementation or interpretation of the new legislation and unclear or non-existent implementing regulations. Apart from the Tax Code of Ukraine, the issues of taxation are frequently governed by other statutory enactments. All the above impact negatively on the predictability of the country s taxation system, and, therefore, tell adversely on business activity, reducing the attractiveness of the national economy for foreign investors and restricting its opportunities for medium and long-term planning. As a result the ambiguity of interpretation of some tax regulations, and the discrepancies in the attitudes of taxpayers and government control agencies, there exists a large volume of explanations and clarifications for the application of such laws. For example, the difficulties in refunding VAT remain an obstacle for investing in the export-oriented sectors of economy. The complicated process of tax inspections and the contradictory rules on when they should be held create serious barriers during the administration of the taxes. Due to the budget deficit, even the taxpayers entitled to VAT refund, may not receive such refund in practice or may not be able to offset it against future tax liabilities. The inconsistencies in the provisions of Ukrainian tax legislation raise issues in relation to the tax treatment of foreign exchange losses, in particular during the financial crisis. The Group occasionally conducts intercompany transactions at terms that may be assessed by the Ukrainian tax authorities as non-market. Because of non-explicit requirements of the applicable tax legislation, such transactions have not been challenged in the past. However, it is possible with evolution of the interpretation of tax law in Ukraine and changes in the approach of tax authorities, that such transactions could be challenged in the future. 25

27 KSG Agro S.A. Differing opinions regarding legal interpretations often exist both among and within governmental ministries and organizations, including the tax authorities, creating uncertainties and areas of conflict. Recent events within Ukraine 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. Tax declarations/returns, together with other legal compliance areas (for example, customs and currency control matters), are subject to review and investigation by a number of authorities, which are authorized by law to impose substantial fines, penalties and interest charges. These circumstances generally create tax risks in Ukraine which are more significant than typically found in countries with more developed tax systems. Generally, tax returns in Ukraine remain open and subject to inspection for an indefinite period of time; however, the Ukrainian tax authorities may re-assess tax liabilities of taxpayers only within a period of three years after the filing of the relevant tax return. Nonetheless, this statutory limitation period may not be observed or may be extended in certain circumstances. Moreover, the fact that a period has been reviewed does not exempt this period, or any tax declaration or return applicable to that period, from further review. While the Group believe that it is currently in compliance in all material respects with the tax laws affecting its operations, it is possible that relevant authorities could, in the future, take differing positions with regard to interpretative issues, which may have a material adverse effect on the Group s business, prospect, results of operations, financial condition or the price of the Shares. The Group may face changes in respect of the double tax treaty regime between Ukraine and Cyprus. The Issuer is incorporated in Luxembourg and its subsidiary, which is a sub-holding company for the Group, is incorporated in Cyprus. A company which has its effective management and control exercised from Cyprus, thus having a tax resident status in Cyprus is subject to Cypriot taxation and qualifies for benefits available under the Cypriot tax treaty network, including the double tax treaty between the Government of the Union of Soviet Socialist Republics and the Government of Cyprus, dated October 29, 1982, to which Ukraine is successor and which is still applied in Ukraine (the Double Tax Treaty ). There can be no assurance that the Double Tax Treaty between Cyprus and Ukraine will not be replaced. Recent reports indicate that the terms of the Double Tax Treaty are being currently renegotiated but a final text for a proposed new Treaty has not as yet been agreed and/or ratified by the two countries. Adverse changes in the Double Tax Treaty may significantly increase the Group s tax burden and interest expenses and could materially adversely affect the Group s business, results of operations and financial condition. Economic instability in Ukraine could adversely affect the Group s business. Since the dissolution of the Soviet Union, the Ukrainian economy has experienced at various times: (i) significant declines in gross domestic product; (ii) hyperinflation; (iii) an unstable currency; (iv) high state debt relative to gross domestic product; (v) a weak banking system providing limited liquidity to Ukrainian enterprises; (vi) a large number of loss-making enterprises that continued to operate due to the lack of effective bankruptcy proceedings; (vii) significant use of barter transactions and illiquid promissory notes to settle commercial transactions; (viii) widespread tax evasion; (ix) the growth of black and grey market economies; (x) high levels of capital flight; (xi) high levels of corruption and the penetration of organised crime into the economy; (xii) significant increases in unemployment and underemployment; and (xiii) the impoverishment of a large portion of the Ukrainian population. The business environment in Ukraine could deteriorate. Ukrainian enterprises have a limited history of operating in free-market conditions and have had limited experience (compared with companies in more developed jurisdictions) of entering into and performing contractual obligations. Ukrainian enterprises, when compared to businesses operating in more developed jurisdictions, are often characterised by management that lacks experience in responding to changing market conditions and limited capital resources with which to develop their operations. In addition, Ukraine has a limited infrastructure to support a market system, and communications, banks and other financial infrastructure are less well developed and less well regulated than their counterparts in more developed jurisdictions. Ukrainian enterprises face significant liquidity problems due to a limited supply of domestic savings, few foreign sources of funds, high taxes and limited lending by the banking sector to the industrial sector, among other factors. Many Ukrainian enterprises cannot make timely payments for goods or services and owe large amounts in taxes, as well as wages to employees. The potential for labour and social unrest in Ukraine could have a materially adverse effect on the Group s ability to conduct its business effectively and on the market price of the Shares. The multiple factors and, primarily, as a result of the financial crisis in Ukraine, the failure of the Government and many private enterprises to pay full salaries on a regular basis and the failure of salaries and benefits generally to keep pace with the rapidly increasing cost of living have led in the past, and could lead in the future, to labour and social unrest. 26

28 KSG Agro S.A. Labour and social unrest may have political, social and economic consequences, such as increased support for a renewal of centralised authority, increased nationalism including calls for restrictions on foreign ownership of Ukrainian businesses, and violence. Although the Group has not experienced any such pressures in the past, no assurance can be given that the Group will not experience labor or social problems in the future. Any of these events could restrict the Group s operations and lead to the loss of revenue, thereby materially adversely affecting both the Group s ability to conduct its business effectively and the market price of the Shares. Risks Related to Shares, Listing and Trading on the WSE The Offering may be delayed, suspended or cancelled. Public offerings are subject to various circumstances independent from the Company and the Principal Shareholder. In particular, the demand for the Shares is shaped by, among others, investors sentiment toward sector, legal and financial conditions of the Offering. In case such circumstances would have adverse impact on the results of the Offering, the Principal Shareholder and the Company may decide to delay, suspend or cancel the Offering. Consequently, the investors may be unable to successfully subscribe for the Shares and payments made by investors during the Offering, if any, may be returned without any compensation. The market value of Shares may be adversely affected by future sales or issues of substantial amounts of Shares. In connection with the Offering certain lock-up arrangements will be made with respect to the issue of new Shares by the Issuer. For further details see Principal Shareholder Lock up Agreements. Once the lock-ups have expired or have been terminated, new Shares may be issued by the Issuer without any restrictions. There can be no assurance as to whether or not issues or sales of substantial amounts of Shares will take place on the market in the foreseeable future. The Issuer cannot predict what effect such future sales of existing Shares held by the Principal Shareholder or issues of new Shares by the Issuer, if any, may have on the market value of the Shares. However, there can be no assurance that sales of Shares by the Principal Shareholder or by other shareholders in the Issuer, or issue of new Shares by the Issuer or the perception that such sales or issues could occur, could adversely affect, even if temporarily, the market value of the Shares and could adversely affect the Issuer s ability to raise capital through future capital increases. Holders of the Shares may not be able to exercise pre-emptive rights, and as a result may experience substantial dilution upon future issuances of shares. Holders of the Shares generally will have a pre-emptive right with respect to any issue of shares or the granting of rights to subscribe for shares, unless explicitly provided otherwise in a resolution by the General Meeting or other corporate body having the right to exclude pre-emptive rights. The Board of Directors is authorized to issue up to 20,000,000 new shares in the Issuer during the period ending on five (5) years from the date of publication of the resolution to create the authorized capital and may limit or exclude pre-emptive rights of existing shareholders in connection with such issue of new shares. Of that number, up to 4,925,500 new shares will be issued in connection with the Offering. The authority of the Board of Directors to exclude pre-emptive rights may be extended by a majority vote of the shareholders for a further period. As a result of an issuance of additional Shares with exclusion of pre-emptive rights shareholding and voting rights in the Company and the earnings per Share may be diluted. Existing shareholder will continue to exert significant influence on the management following the Offering. Following completion of the Offering, the Principal Shareholder will continue to own an aggregate of not less than per cent. of the Company s outstanding shares (depending on the number of Offer Shares sold in the Offering). As a result, the Principal Shareholder will be in a position to exert significant influence over the outcome of matters submitted to a vote of the Company s shareholders, including matters such as approval of the annual financial statements, declarations of dividends, the election and removal of the members of the Board of Directors, capital increases and amendments to the Articles of Association. The Company is established and organized under Luxembourg law. The Company is a company organized and existing under the laws of the Grand Duchy of Luxembourg. Accordingly, the Company s corporate structure as well as rights and obligations of its shareholders may be different from the rights and obligations of shareholders in Polish companies listed on the WSE. The exercise of certain shareholders rights for Polish investors in a Luxembourg company may be more difficult and costly than the exercise of rights in a Polish company. Resolutions of the General Meeting may be taken with majorities different from the majorities required for adoption of equivalent resolutions in Polish companies. Action with a view to declaring a resolution invalid must be filed with, and will be reviewed by a Luxembourg court, in accordance with the law of the Grand Duchy of Luxembourg. 27

29 KSG Agro S.A. Investors in the Offer Shares will be subject to obligations resulting from various national laws. The Company is organized and existing under the laws of the Grand Duchy of Luxembourg while the Offer Shares will be listed on a regulated market in Poland. Consequently, Luxembourg will be the home Member State of the Company for the purpose of the EU securities regulations and Poland will be its host Member State. The EU directives provide different competencies for home Member State and host Member States with respect to rights and obligations of the investors in public companies, depending on the subject of regulations. In addition, the directives are not always implemented in the proper manner at a national level. Consequently, the investors in the Shares may be forced to seek complex legal advice in order to comply with all regulations when exercising its rights or when fulfilling obligations. In case an investor fails to fulfill its obligations or violates law when exercising rights from or regarding Shares, he or she may be fined or sentenced for such non-compliance or be unable to exercise rights from the Shares. Investors may have problems enforcing judgments against the Company. The Company is a holding company organized and existing under the laws of the Grand Duchy of Luxembourg with virtually no assets except for the equity interest in its subsidiaries. The Group assets are located in Ukraine. For this reason investors may encounter difficulties in service of process and the conduct of proceedings with respect to any other entities within the Group and their assets. Tax treatment for non-luxembourg investors in a Luxembourg company may vary. The Company is organized and existing under the laws of the Grand Duchy of Luxembourg and as such Luxembourg tax regime applies to distribution of profit and other payments from the Company to its investors. The taxation of incomes from such payments as well as other incomes, from sale of shares, for instance, may vary depending on tax residence of particular investors as well as on provision of double tax treaties with Luxembourg in force. Provisions applying to particular investors may be unfavourable or may change adversely. There is no guarantee that the Issuer will pay dividends in the future. The Company is under no continuous obligation to pay regular dividends to its shareholders. Any payment of dividends in the future will depend upon decisions of the Board of Directors and the General Meeting (at which the Principal Shareholder may represent a majority of voting rights). Payment of (future) dividends may be made only if mandatory provisions so allow, as required by law or by the Articles of Association and the respective articles of association of the Group Subsidiaries. Furthermore, for the decision to pay dividend the following factors (among others) shall also be taken into account: future results of operations, cash flows, financial position, reinvestment needs, expansion plans, contractual restrictions, and other factors the Board of Directors and/or the General Meeting deem relevant, which do not necessarily have to coincide with the short-term interests of all the Company s shareholders. There can be no assurance that the Company will make any dividend payments in the future. As at the date hereof, the Company does not expect to pay dividends in the near future, however the formal decision will be taken each year by the General Meeting. Accordingly, investors cannot rely on dividend income from the Shares and any returns on an investment in the Shares will likely depend entirely upon any future appreciation in the price of the Shares. The price of Issuer s Shares may fluctuate. The market price of shares listed on a regulated market is determined by supply and demand, which depends on a number of factors (including changes in Issuer s financial results, differences between the financial results and market expectations, changes in the profit estimates made by analysts, comparison of the perspectives of various sectors of the economy, the overall economic situation, changes in laws applicable to the sector in which we operate and other events and factors which are independent of the Issuer), as well as reactions of investors which are difficult to predict. In the event of significant price fluctuations, the shareholders may fail to achieve their planned gains or of incurring losses. Furthermore, consideration should be given to the fact that the market value of the Issuer shares may differ significantly from the expected Offer Price. This is possible, in particular, as a result of periodic changes in the Issuer s financial results, the liquidity of the stock market, the conditions prevailing on the WSE, the conditions prevailing on world markets, as well as changes in economic and political factors. Securities or industry analysts may cease to publish research or reports about Issuer s business or may change their recommendations regarding the Issuer s Shares. The market price and/or trading volume of the Company s Shares may be influenced by the research and reports that industry or securities analysts publish about the Company and the Group s business. There can be no guarantee of continued and sufficient analyst research coverage for the Company, as the Company has no influence on analysts who prepare such researches and reports. If analysts fail to publish reports on the Company regularly or cease publishing such reports at all, the Company may lose the visibility in the capital markets, which in turn could cause the Company s 28

30 KSG Agro S.A. Shares price and/or trading volume to decline. Furthermore, analysts may downgrade the Company s Shares or give negative recommendations regarding the Company s Shares, which could result in a decline of the Share price. The Issuer may be unable to list the Shares on the WSE or the Issuer may be delisted from the WSE. The admission of the Shares to trading on the WSE requires that (i) the Shares are registered with the clearing and settlement system of the NDS and (ii) the management board of the WSE approves the listing and trading of the Shares on the WSE. To obtain the WSE management board s approval the Company has to meet certain requirements provided for in the respective regulations of the WSE and other applicable laws. Such requirements include, but are not limited to: (i) the appropriate free float of the Shares (ii) no restriction on transferability of the Shares (iii) preparation and publication of the audited financial statements for the past three accounting years. Furthermore, while examining the Company s application for admission of the Shares to trading on the WSE, the management board of the WSE will take into consideration: (i) the Company s financial situation and its economic forecasts, (ii) the Group s development perspectives, in particular, the chances for successful completion of its investment plans, (iii) experience and qualifications of the members of the Company s Board of Directors and (iv) security of public trading on the WSE. Some of the conditions mentioned above are of discretional nature and, therefore, the Company cannot assure that the management board of the WSE will conclude that the Company meets all of them. The rules of the WSE require the Company to file an application for introduction of Shares to trading on the WSE within a period of six months from the date on which the Company s Shares have been admitted to such trading. If the Company fails to comply with this obligation, the decision of the management board on the admission of the Company s Shares to trading on the WSE could be annulled. The Company intends to take all the necessary steps to ensure that its Shares are admitted to trading on the WSE as soon as possible after the closing of the Offering. However, there is no guarantee that all of the aforementioned conditions will be met and that the Shares will be admitted to trading on the WSE on the Listing Date as expected or at all. Moreover, if the Company fails to fulfil certain requirements or obligations under the applicable provisions of securities laws, including in particular the requirements and obligations provided for under the Polish Public Offerings Act and the Polish Trading in Financial Instruments Act, the PFSA could impose a fine on the Company or delist its Shares from trading on the WSE. The WSE management board shall delist the Shares from trading upon the request of the PFSA, if the PFSA concludes that trading in the Company s Shares imposes a significant threat to the proper functioning of the WSE or the safety of trading on that exchange, or infringes investors interest. The mandatory delisting will be also effected by the WSE management board where: (i) transferability of the Shares has become restricted, (ii) the Shares are no longer in book entry form, (iii) the PFSA has requested so, (iv) the Shares have been delisted from another regulated market by a competent supervisory authority over such market, provided that the Offer Shares were traded on another regulated market. The WSE management board may also delist the Shares where, (i) the Shares cease meeting all requirements for admission to trading on the WSE; (ii) the Company persistently violates the regulations of the WSE; (iii) the Company has requested so; (iv) the Company has been declared bankrupt or a petition for bankruptcy has been dismissed by the court because the Company s assets do not suffice to cover the costs of the bankruptcy proceedings; (v) the WSE considers it necessary to protect the interests of the market participants; (vi) following a decision on a merger, split or transformation of the Company; (vii) no trading was effected in the Shares within a period of three previous months; (viii) the Company has become involved in a business that is illegal under the applicable provisions of laws; and (ix) the Company is in liquidation proceedings. The Company believes that as at the date hereof there are no circumstances which could give grounds for delisting of the Shares from the WSE in the foreseeable future. However, there can be no assurance that any of such circumstances will not arise in relation to the Company s Shares in the future. Delisting of the Shares from the WSE could have an adverse effect on the liquidity of the Shares and, consequently, on investors ability to sell the Shares at a satisfactory price. Trading in the Shares on the WSE may be suspended. WSE management board has the right to suspend trading in the Shares for up to three months (i) at the request of the Company, (ii) if the Company fails to comply with the respective regulations of the WSE (such as specific disclosure requirements), or (iii) if it concludes that such a suspension is necessary to protect the interests and safety of market participants. Furthermore, the WSE management board shall suspend trading in Shares for up to one month upon the request of the PFSA, if the PFSA concludes that trading in the Shares is carried out in circumstances which may impose a possible threat to the proper functioning of the WSE or the safety of trading on that exchange, or may harm investors interest. 29

31 KSG Agro S.A. The Company will make all endeavours to comply with all applicable regulations in this respect. However, there can be no assurance that trading in the Shares will not be suspended. Any suspension of trading could adversely affect the Share price. The Issuer may have a limited free float, which may have a negative effect on the liquidity, marketability or value of its Shares. Prior to the Offering, the Principal Shareholder owns 98 per cent. of the Issuer s outstanding Shares and immediately after the Offering the Principal Shareholder will own per cent. of the Issuer s outstanding Shares, provided that all Offer Shares are placed with investors. Consequently, the free float of Shares held by the public will be limited up to 33 per cent. of the Issuer share capital. In addition, the WSE requires that the share capital of a company to be listed on the main market of the WSE must be adequately diluted, i.e. part of the capital must be held by minority shareholders holding individually less than 5 per cent. of that company s share capital. If the Offer Shares are acquired by a limited number of large investors, there is a risk that the share capital would not be adequately diluted and as a result the WSE would not approve the Shares for listing on the main market of the WSE and, consequently, the Shares would be listed on the parallel market. There can be no assurance regarding the future development of the market for the Shares and its liquidity. There was no prior market for the Shares and therefore, there can be no assurance regarding the future development of such market and future demand for the Offer Shares. The lack of a primary and/or developed and liquid public market for the Shares may have a negative effect on the ability of shareholders to sell their Shares or the price at which the holders may be able to sell their Shares. Moreover, if a market for the Shares on the WSE was to develop, the Shares could trade at prices that may be higher or lower than the Offer Price, depending on many factors. Therefore, there can be no assurance as to the liquidity of any trading in the Shares or that the Shares will be actively traded on the WSE, which may limit or prevent the Company s shareholders from readily selling their Shares. The marketability of the Issuer s Shares may decline and the market price of the Issuer s Shares may fluctuate disproportionately in response to adverse developments that are unrelated to the Group s operating performance and decline below the Offer Price. The Company cannot assure that the marketability of the Company s Shares will improve or remain consistent. The Offer Price in the Offering may not be indicative of the market price for the Company s Shares after the Offering has been completed. Shares listed on regulated markets, such as the WSE, have from time to time experienced, and may experience in the future, significant price fluctuations in response to developments that are unrelated to the operating performance of particular companies. The market price of the Company s Shares may fluctuate widely, depending on many factors beyond the Company s control. These factors include, amongst other things, actual or anticipated variations in operating results and earnings by the Group Companies and/or its competitors, changes in financial estimates by securities analysts, market conditions in the industry and in general the status of the securities market, governmental legislation and regulations, as well as general economic and market conditions, such as recession. These and other factors may cause the market price and demand for the Company s Shares to fluctuate substantially and any such development, if adverse, may have an adverse effect on the market price of the Company s Shares which may decline disproportionately to the Group Companies operating performance. The market price of the Company s Shares is also subject to fluctuations in response to further issuance of shares by the Company, sales of Shares by the Company s major shareholders, the liquidity of trading in the Shares and capital reduction or purchases of Shares by the Company as well as investor perception. As a result of these or other factors, there can be no assurance that the public trading market price of the Company s Shares will not decline below the Offer Price. The Company has no experience in complying with requirements for publicly-listed companies. A public company is subject to a number of obligations mostly relating to disclosure of respective information, in particular current and periodic reports as well as making public of notifications on large shareholdings made by investors. The Company has never been subject to such obligations and may fail to fulfill such obligations. As a consequence, the investors may not be provided on time or at all with price-sensitive information or the content of materials made public may be of unsatisfactory quality. In addition, the Company may be fined or punished otherwise for non-compliance with regulations relating to public company what may have adverse impact on the Company s financial results, share price and demand for Shares. 30

32 EXCHANGE RATES KSG Agro S.A. EXCHANGE RATES The Combined Financial Statements included in this Prospectus are presented in US Dollars ( USD or US$ ). Financial statements were prepared by means of summarizing the share capital, assets, liabilities, revenues and expenses of the companies, which are under the control of the KSG Agricultural and Industrial Holding Limited (Cyprus). All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full. The following table shows, for the periods provided, and unless indicated otherwise, certain information regarding the exchange rates between Hryvnia USD and EUR and Russian rouble used in the preparation of our Combined Financial Statements appearing in this Prospectus. USD per UAH RUR per UAH EUR per UAH Average weighted rate for the year ended December 31, Closing rate as of December 31, Average weighted rate for the year ended December 31, Closing rate as of December 31, Average weighted rate for the year ended December 31, Closing rate as of December 31, ,57 31

33 SE OF PROCEEDS KSG Agro S.A. USE OF PROCEEDS The amount of the gross proceeds raised from the Offering depends on the number of the Offer Shares actually placed and the set Offer Price. The Company expects the gross proceeds from the Offering, provided that all of the Offer Shares are subscribed, paid and allotted, to be approximately USD 43.7 million. The net proceeds that the Issuer will receive from the issue of the Offer Shares in the Offering, after deducting the estimated commissions, costs and expenses associated with the Offering are estimated to be approximately USD 40.9 million. The final amount of proceeds may however change due to possible fluctuations in PLN/USD ratio. The net proceeds from the sale of the Offer Shares will be aimed at further land bank expansion, working capital financing, execution of capital investment program and other value added projects: (i) approximately USD 10,7 million land bank expansion The Company has entered into call option agreement for purchase of the profitable companies with sufficient machinery and lease rights to 10,360ha of arable land in total. According to the agreement the purchase price for the target companies shall be USD 6.5 million. The option is planned to be exercised till the end of August Further increase of the land bank by 10,000 ha of land, with existing equipment and machinery required, at cost of up to USD 4.2 million. (ii) approximately USD 10 million working capital Working capital will be used to cover operational needs related to land bank expansion, including new land, lease rights to which would be acquired after executing rights under call option agreement and other purchases planned. (iii) approximately USD 6 million acquisition of modern elevator The Company targets to acquire an elevator located in the Company s main operational region and facilitated with railway branch. Planned storage capacity will be about 30 thousand tons of grain. (iv) approximately USD 4.2 million investment into vegetables production segment Investment into additional storage capacities with micro climate control systems of approximately 2.5 ths tons. Mechanization and irrigation of additional 98 ha for vegetable cultivation. Investment into washing, packaging and sorting equipment. (v) approximately USD 6.5 million machinery USD 1.5 million of investment into modernization of current machinery and USD 5 million for equipment for newly acquired land. (vi) approximately to USD 2 million land irrigation Putting into operation irrigation on 2 thousand ha by purchasing of necessary equipment and machinery. (vii) approximately USD 1.5 million pay off leasing payments The Company plans to use USD 1.5 million to pay off its outstanding lease payments in advance to the dates set up in the respective lease contracts for the machinery and equipment. To the extent the net proceeds of the Offering of the Offer Shares are not invested in any way described above they will be used to cover entry costs related to land bank expansion, for supporting the Group s working capital needs and optimising cost and size of its debt obligations, for other general corporate purposes in line with our business strategy. 32

34 DIVIDENDS AND DIVIDEND POLICY KSG Agro S.A. DIVIDENDS AND DIVIDEND POLICY The Company intends to pursue a dividend policy consistent with the Group s growth and development plans, reflecting the planned investments the Group is making in order to drive future growth and the cash generated by the existing operations. Pursuant to this policy, the Company does not expect that the Board of Directors will recommend to the General Meeting any dividend payments in the medium term. In accordance with the Articles of Association of the Company, every year five per cent (5%) of the net profit of the Company will be set aside in order to build up the legal reserve until this reserve amounts ten per cent (10%) of the share capital. The remaining balance of the net profit will be at the disposal of the General Meeting upon recommendation of the Board of Directors. Dividends, when payable, will be distributed at the time and place fixed by the Board of Directors within the limits of the decision of the General Meeting. Furthermore, interim dividends may be paid by the Board of Directors, in accordance with the conditions provided for by the Luxembourg Companies Act 1915 and the Issuer s Articles of Association. Payment of any future dividends will effectively depend on the discretion of the General Meeting after taking into account various factors, including the Group s business prospects, future earnings, cash requirements, financial position, expansion plans and the requirements of the Luxembourg law (as described above). All Shares, including the Offer Shares, carry equal dividend rights. As a holding company the ability of the Company to pay dividends will principally depend upon dividends or interest paid to it by its subsidiaries. For information related to dividend rights and dividend payments, please see Dividends and Other Distributions Description of the shares and corporate rights and obligations. 33

35 APITALISATION AND INDEBTEDNESS KSG Agro S.A. CAPITALISATION AND INDEBTEDNESS The following table sets out our indebtedness and capitalization on a combined basis as at March 25, This information should be read in conjunction with the section Operating and Financial Review and the Combined Financial Statements, including accompanying notes. As at March 25, 2011 (USD thousands) Total current debt: Secured/guaranteed (1) 5,403 Unsecured/unguaranteed Total current debt 5,403 Total non-current debt, net of current portion of long term debt: Secured/guaranteed (1) 8,924 Unsecured/unguaranteed 1,191 Total long-term liabilities 10,115 Shareholders equity: Share capital 100 Share premium Other reserves Total shareholders equity 100 Minority interest Total capitalisation and indebtedness 15,618 (1) Secured and guaranteed debt consists of bank loans which are secured by property plant and equipment and bank deposit; Source: the Company, based on management combined IFRS accounts as at March 25, 2011 Net indebtedness as at March 25, 2011 As at March 25, 2011 (USD thousands) Cash 875 Cash equivalents Trading securities Liquidity Current financial receivable Current bank debt 3,702 Current portion of non current debt Other current financial debt lease 1,701 Current financial debt 5,403 Net current financial indebtedness 5,403 Non current bank loans 9,866 Bonds issued Other non-current financial debt 249 Non-current financial indebtedness 10,115 Subordinated loan NET FINANCIAL INDEBTEDNESS 14,634 Source: the Company, based on management combined IFRS accounts as at March 25,

36 SELECTED HISTORICAL FINANCIAL INFORMATION KSG Agro S.A. SELECTED HISTORICAL FINANCIAL INFORMATION The following tables set out selected consolidated financial and operating information of the Group for the financial years ended December 31, 2008, 2009 and 2010, respectively. Such information is extracted without material adjustment from the Combined Financial Statements as at and for the years ended December 31, 2008, 2009 and Such financial statements, together with the reports of BDO dated December 27, 2011 and dated March 10, 2011 and the accompanying notes, are included in this Prospectus, starting on page F2. It should also be read in conjunction with Operating and Financial Review section of this Prospectus. Income statement Data (in USD thousand) For the year ended December 31, Sales revenue 15,628 13,785 6,863 Change in fair value of biological assets 16,919 4,251 5,204 Gross profit 12,091 5,934 3,147 Operating profit/(loss) 11,607 5,240 2,826 Profit before income tax 10,049 2,531 (914) Profit for the year 10,047 2,526 (914) EBITDA reconciliation data (in USD thousand) For the year ended December 31, Operating profit/(loss) 11,607 5,240 2,826 Depreciation and amortization EBITDA 12,207 5,810 3,231 EBITDA is defined as operating profit/(loss) before depreciation and amortization. EBITDA provides additional performance measure to show effects of the Company s operations which are difficult to recognize directly from the Combined Financial Statements. EBITDA calculations have not been subject to separate auditor s review although items used for calculation of EBITDA have been derived from the audited Combined Financial Statements. This measure should not be considered in isolation or as an alternative to net profit for the period or other data presented in Combined Financial Statements as indicators of financial performance. EBITDA measure is not determined in accordance with generally accepted accounting principles, and thus is susceptible to varying calculations. Balance sheet data (in USD thousand) As at December 31, Total non-current assets 10,846 10,605 10,679 Total current assets 15,484 15,528 12,083 Total equity 11,662 4,998 2,019 Total non-current liabilities 2,367 2,904 3,863 Total current liabilities 12,301 18,231 16,880 Cash and cash equivalents 30 2,564 2,785 35

37 PERATING AND FINANCIAL REVIEW KSG Agro S.A. OPERATING AND FINANCIAL REVIEW Certain information contained in the section set forth below includes forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and assumptions about the Group. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Prospectus might not occur. Any statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. The following review relates to the Group s historical financial condition and results of operations in the financial years ended on December 31, 2008, 2009 and 2010 respectively. The Operating and Financial Review section was based on the Consolidated Financial Statements that are contained in the Prospectus and this section should be read in conjunction with the Consolidated Financial Statements Overview KSG Agro is an agricultural holding with total controlled land bank of approximately 33,700 hectares. The strategic focus of the Group s management is on strengthening its dominant position in its target region (Dnipropetrovsk, Kirovograd, and neighboring areas of Kherson, Mykolayiv, and Kharkiv, the Target Region ). The Target Region is rich in black soils and has favorable geographic location due to proximity to Dnipro River, main railways and Black Sea ports. The Group is primarily engaged in production of grains such as sunflower, wheat, barley, rapeseed, soybeans, etc., vegetables production and also produced groceries for retail chains. The Group uses new agricultural machinery park comprised of more than 330 items. Grain production is executed in line with farming model based on modern agricultural technologies such as no-till, mini-till, and other, which were adopted and by specialists of the Group. (For more details see Crop production process and farming management ). Total Group s sales amounted to USD 6.9 million, USD 13.8 million and USD 15.6 million in 2008, 2009 and 2010, respectively. Major local consumers of the Group s production are oil refineries, flour producers, and livestock feed producers. Also, the Company supplies vegetables, fruit, meat and groceries processed under feedstock production scheme to retail chains, such as Ukrainian franchisers of SPAR International. KSG Agro management believes that the Company has strong base for further horizontal and vertical expansion within its Target Region focusing on grain production, vegetable production, and food production for retail chains. Factors Affecting the Group s Results of Operations The Group s performance and results of operations have been and continue to be affected by a number of factors, including, among others, macroeconomic conditions in Ukraine, state support for agricultural production, tax laws, exchange rates and interest rates, prices of commodities, harvest yields and seasonality. See also Risk Factors. Macroeconomic conditions in Ukraine The Group s results of operations and financial condition are dependent on general economic conditions in Ukraine and particularly on economic growth and inflation and their impact on the purchasing power of the Ukrainian population. Ukraine s economy was one of the most severely affected by the global economic crisis of 2008/2009. In 2009, Ukraine s real GDP decreased by 14.8 per cent. Growth in real GDP started to recover in 2010 reaching 4.9 per cent., 5.9 per cent., and 3.4 per cent., in the first, second and third quarters of 2010, respectively. In 2008, Ukraine s real GDP increased by 2.3 per cent., industrial production decreased by 5.2 per cent. And agricultural output increased by 17.1 per cent. The decline in industrial production in 2008 and the more modest rate of real GDP growth for the full year 2008 as compared to the 6.3 per cent. growth recorded in the first half of 2008 are largely attributable to a 26.3 per cent. decline in industrial production in the fourth quarter of 2008 resulting from external shocks. In particular, starting from the end of the third quarter of 2008, a decrease in production was recorded in export oriented industries and industries that are dependent on borrowings due to the global economic downturn and reduced external demand. At the same time, positive growth dynamics were recorded in industries oriented on the domestic market. In particular, in 2008, in the service industries, such as wholesale and retail trade and the transport and communications sector, gross added value increased by 2.4 per cent. and 9.6 per cent., respectively, as compared to In 2008, compared to 2007, gross added value in agriculture, hunting and forestry increased by 16.6 per cent., while gross added value in construction, education, and health and social assistance decreased by 29.1 per cent., 0.5 per cent., and 0.1 per cent., respectively. In 2009, Ukraine s real GDP decreased by 14.8 per cent., industrial production decreased by 21.9 per cent and agricultural output decreased by 1.8 per cent. The decline in GDP in 2009 was a result of unfavourable external conditions, including both reduced external demand and low export prices, decreased domestic demand and limited volumes of available 36

38 KSG Agro S.A. financing due to the global financial downturn. However, Ukraine s economy was gradually adjusting to external shocks caused by the global economic and financial downturn. As a result, in 2009, cumulative rates of decline in GDP decelerated throughout the year. In particular, in the second quarter of 2009, the rate of decline in real GDP compared to the second quarter of 2008 (17.8 per cent.) decelerated as compared to the decline recorded in the first quarter of 2009 compared to the first quarter of 2008 (20.2 per cent.). In the third quarter of 2009, the rate of decline in real GDP compared to the third quarter of 2008 was 16.0 per cent., and the rate of decline in real GDP further decelerated in the fourth quarter of 2009 compared to the fourth quarter of 2008 (6.8 per cent.). The largest decreases in industrial production were recorded in machinery manufacturing (44.9 per cent.), production of other non metallic mineral products (38.5 per cent.), metallurgy (26.7 per cent.) and construction (48.2 per cent.). In addition, in 2009, gross added value in agriculture, transport and the communications and the trade sectors declined by 2.0 per cent., 7.2 per cent. and 17.5 per cent., respectively. According to preliminary data from the SSCU, during the first quarter of 2010, Ukraine s real GDP increased by 4.9 per cent., compared to a 20.3 per cent. decline in the first quarter of 2009; during the second quarter of 2010, real GDP increased by 5.9 per cent. compared to 17.8 per cent. decline in the second quarter of 2009; and during the third quarter of 2010, real GDP increased by 3.4 per cent. compared to a decrease by 15.9 per cent. in the third quarter of 2009 during the forth quarter of 2010 real GDP increased by 1 per cent. comparing to a decrease by 7 per cent. in the fourth quarter of It is expected that for 2010 real GDP will have increased by more than 4.0 per cent. to USD billion (using average UAH/USD exchange rate according to National Bank of Ukraine) and that trend is expected to continue in 2011 with an expected increase in real GDP of approximately 4.5 per cent. State support for agricultural production in Ukraine Taking into consideration the importance of the agricultural sector to the national economy as well as the need to improve living conditions in rural areas, support of the agricultural sector is one of priorities for the Ukrainian Government. During the periods under review, state support to the agricultural sector was provided in various forms, including special tax regimes, tax privileges, direct subsidies and compensations. Grants and other privileges to the agricultural sector are established by the Parliament of Ukraine, as well as by the Agrarian Ministry, the Ministry of Finance, the State Committee of the Water Industry, customs authorities and local state district administrations, among other governmental departments and agencies. Special tax regimes Eight of the twelve Group s Ukrainian Subsidiaries elected to pay FAT in accordance with Tax Code. FAT is paid in lieu of corporate income tax, land tax, duties for geological survey works and duties for trade patents. The amount of FAT is calculated as a percentage of a deemed value of all land plots (determined as of July 1, 1995) leased or owned. VAT refunds Ukrainian agricultural companies are entitled to retain the VAT collected on their taxable sales with view to recovering VAT paid on purchases of so-called production factors. The excess of VAT collected over VAT paid is allowed to be used for other production needs. The Group recorded other income related to retained VAT in the amount of USD 1.3 million, USD 1.4 million and USD 0.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. Foreign currency exchange rate The Group s operating assets are located in Ukraine and its revenues and costs are denominated primarily in Hryvnia, while the Group s reporting currency is U.S. dollar. However, a material portion of the Group s finance costs (primarily in relation to finance lease) has a currency reference to U.S. dollar, and any depreciation of Hryvnia against this currency has a negative effect on the Group s results of operations. Ukrainian Hryvnia remained stable against the U.S. dollar during the period from 2006 till September 2008, it began to depreciate against U.S. dollar and other currencies in the fourth quarter of 2008 due to the impact of the global financial crisis on the Ukrainian economy. The table below shows the nominal exchange rate for Hryvnia to U.S. dollar in 2010, 2009 and 2008 according to the NBU. Year ended December, Average exchange rate for the period 7,94 7,79 5,27 Exchange rate as at the period end 7,96 7,99 7,70 As at December 31, 2010, USD 2.2 million or 28.6 per cent. of the total amount of the Group s long-term and short-term borrowings consisted of debt with currency reference to U.S. dollar. 37

39 KSG Agro S.A. As at December 31, 2009, USD 3.9 million or 27.8 per cent. of the total amount of the Group s long-term and short-term borrowings consisted of debt with currency reference to U.S. dollar. As at December 31, 2008, USD 5.2 million or 39.8 per cent. of the total amount of the Group s long-term and short-term borrowings consisted of debt with currency reference to U.S. dollar. In accordance with market practice and certain regulatory restrictions in Ukraine, the Group does not use any derivative financial instruments to hedge against currency exchange rates. Prices of commodities Substantial portion of the Group s revenues is generated from the sale of sunflower and wheat. As a result, its revenues are directly related to the market prices of these crops. Historically, the market prices of these crops have fluctuated. They are affected by a great number of factors over which producers do not have control. These factors are: international economic and political conditions, levels of supply and demand, the availability and costs of substitutes and the trading actions of participants in the commodities markets. Price variations and market cycles have historically influenced the financial results of the Group and management expects that they will continue to do so in the future. The actual prices the Group receives for its crops can vary significantly from international spot prices. This is due to a number of factors, the quality of the crop that is being sold, the time of year that the crop is being sold and the delivery terms for such sale. Major part of the Group s sales is made in the Ukrainian domestic market and prices in the Ukrainian domestic market tend to vary from international prices primarily due to transportation costs, local supply and demand patterns, the absence of a regulated domestic trading market and quotas on export of Ukrainian crops. Prices for seeds, fertilizers, plant protectors, fuel, labor, and land lease have a significant effect on the Group s costs in production of crops. In order to reduce costs and improve operational efficiency, the Group has implemented certain measures, including the mending of fences with direct suppliers of plant protectors. In 2010, the cost of seeds, fertilizer, plant protectors, fuel, labor, and land lease payments represented approximately 82.0 per cent. of the Group s total cost of sales (excluding fair value adjustment). In 2009, the cost of seeds, fertilizers, plant protectors, fuel, labor, and land lease payments represented approximately 73.3 per cent. of the Group s total cost of sales (excluding fair value adjustment). In 2008, the cost of seeds, fertilizers, plant protectors, fuel, labor, and land lease payments represented approximately 78.0 per cent. of the Group s total cost of sales (excluding fair value adjustment). Harvest yields The adverse weather conditions, which is outside of the Group s control, if significant, could result in a material adverse impact on harvest yields and consequently on the Group s operations and financial condition. In the event that the Group experiences significant decrease of its harvest yields, it would have an adverse impact on the Group s revenues. But then again, the impact of propitious weather conditions could result in a material positive impact on harvest yields and consequently on the Group s operations and financial results. Seasonality A substantial majority of the Group s revenues are generated by crop production. Therefore the Group s business is highly seasonal, and its production cycle is different from its financial year. Production of crops is influenced by both the time of the year and weather conditions. Substantial portion of the crops produced by the Group are sunflower and wheat. Sunflower is generally sown during the period from April to May and harvested in the period from September to October. Wheat is generally sown during the period from August to October and harvested in the period from June to July of the following year. Due to the seasonal nature of agricultural activity, the Group typically generates significantly higher revenues in the second half of the year, when the harvested crops are typically sold, than in the first half of the year. The Group s business cycle is long and may vary from year to year. The Group aims to sell crops when prices are at their peak. If prices are not favorable following a harvest, the Group may store a particular crop and sell it when prices are more favorable, which may be as late as December of a particular year or even during the first quarter of the following year. Changes in the timing of receipt of revenues may result in variations in the Group s results on a quarterly basis from year to year and may result in increased working capital requirements for the Group, particularly during periods when crops are stored prior to being sold. 38

40 KSG Agro S.A. Factors Affecting the Reflection of the Group s Results and Financial Condition The reflection of the Group s performance and results of operations have been and continue to be affected by a number of factors, including, among others, critical accounting policies, basis of combination, going concern assumption. Critical Accounting Policies The Group s significant accounting policies are described in the Combined Financial Statements. The Group has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the Combined Financial Statements in conformity with IFRS. Actual results could differ from these estimates. The Group has identified the following accounting policies that it believes are the most critical to an understanding of the results of operations and financial condition of the Group: Biological assets and agricultural products Generally, biological assets are measured at fair value less costs to sell with any change therein recognized in profit or loss. Costs to sell include all costs that would be necessary to sell the assets. Crops are initially recognized at their fair value less estimated point-of-sale costs at the time of harvesting. The fair value of crops is determined based on market prices in the local region. A gain or loss arising on initial recognition of arable crops at fair value less estimated point-of-sale costs is recognized in the period in which it originated. Un-harvested crops are valued at fair value, being the present value of the expected net cash flow from the asset in its present condition. Fair value of crops under cultivation as at the relevant reporting date is based on the following key assumptions: (i) expected crop yield based on past crop yields and adjusted for weather conditions, (ii) grain prices in Ukraine as established by certain publicly available, third party sources (Source: Apk-Inform leading agri agency in Ukraine), (iii) cultivation and production costs based on historical costs and (iv) a discount rate which takes into account certain interest and currency rate calculations. Inventories Inventories are stated at the lower of cost or net realizable value. For agricultural produce, fair value less estimated point-of-sale costs at the point of harvest is considered to be the cost. Subsequent to initial recognition agricultural produce is stated at the lower of cost or estimated net realizable value. Cost is assigned using the FIFO method. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Inventories are periodically reviewed and provisions established for deteriorated, excess and obsolete items. Basis of combination The Group comprises of the companies, which are under the common control of the Beneficial Owner, but, until recently, have not been connected by the formal structure and have not had single parent company. The special purpose combined financial statements were prepared for the purpose of the presentation of combined balances and transactions results, which show that the Group is under the common control of the Beneficial Owner. Business combination, which includes the companies under the common control is not regulated by IFRS 3 Business combination, therefore financial statements were prepared by means of summarising of the share capital, assets, liabilities, revenues and expenses of the companies, which are under the common control of the Beneficial Owner. All intra-group balances, income and expenses, unrealised gains and losses and dividends resulting from intra-group transactions are eliminated in full. Going concern assumption This combined financial information has been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The recoverability of the Group s assets, as well as the future operations of the Group, may be significantly affected by the current and future economic environment. The management believes that the Group has reliable access to sources of financing capable to support the appropriate operating activity of the Group s entities. The combined financial information does not include any adjustments should the Group be unable to continue as a going concern. 39

41 KSG Agro S.A. Operating and Financial results Year ended December 31, 2010 compared to year ended December 31, 2009 The following table sets forth the Group s results of operations for the year ended December 31, 2010 and 2009 derived from the audited combined financial statements (in USD thousand): For the year ended December 31, Change Income 15,628 13,785 13% Change in fair value of biological assets 16,919 4, % Cost of sales (20,456) (12,102) 69% Gross profit 12,091 5, % General and administrative expenses (787) (1,158) (32%) Other operating income, net (35%) Result from operating activities 11,607 5, % Finance income (expenses), net (1,558) (2,144) (27%) Losses from impairment of financial assets (565) 100% Profit before income tax 10,049 2, % Income tax expenses (2) (5) 100% Profit for the year 10,047 2, % The Group s EBITDA for the year ended December 31, 2010 amounted to USD 12.2 million and increased per cent. in comparison with 2009, when it amounted to USD 5.8 million. Sales income The Group s sales revenue increased 13.4 per cent. to USD 15.6 million for the year ended December 31, 2010 from USD 13.8 million for the year ended December 31, The following table sets forth the breakdown of the Group s income by business segments for the years indicated (in USD thousand): For the year ended December 31, Change Crops 13,514 12,174 11% Vegetables % Horticulture % Livestock production (22%) Grocery 167 Other 1,403 1,061 32% Total 15,628 13,785 13% 88.7 per cent. of the Group s revenues are generated from sale of crops. The following table sets forth the breakdown of the Group s income from sale of crops by cereals for the years indicated (in USD thousand): For the year ended December 31, Change Wheat 633 5,056 (87%) Barley 998 1,987 (50%) Rape Seed (100%) Sunflower 11,846 4, % Other (67%) Total 13,514 12,174 11% 40

42 KSG Agro S.A. The Group s sales of wheat decreased to USD 0.6 million for the year ended December 31, 2010 from USD 5.1 million for the year ended December 31, The Group s sales of barley decreased to USD 1.0 million for the year ended December 31, 2010 from USD 2.0 million for the year ended December 31, The decrease of income from sales of wheat and barley is in line with decrease of sales of these cereals and is mainly due to the fact that Group increased share of sunflower in its crop rotation schedule. The Group s sales of sunflower increased to USD 11.8 million for the year ended December 31, 2010 from USD 4.6 million for the year ended December 31, Sunflower is high marginal and liquid commodity which helped the Group to secure stable financial position during crisis. The following table sets forth the volumes of the Group s sales of crops in tones for the years indicated (in tonnes): For the year ended December 31, Change Wheat 6,037 34,565 (83%) Barley 7,088 17,108 (59%) Rape Seed 11 1,494 (99%) Sunflower 29,761 17,364 71% Other 34,565 (100%) Total 42,897 71,221 (40%) Cost of sales The Group s cost of sales increased 69.0 per cent. to USD 20.5 million for the year ended December 31, 2010 from USD 12.1 million for the year ended December 31, The following table sets forth the breakdown of the Group s cost of sales by business segments for the years indicated (in USD thousand): For the year ended December 31, Change Crops 19,532 11,280 73% Vegetables (35%) Horticulture % Livestock production % Grocery % Other (56%) Total 20,456 12,102 69% 95.5 per cent. of the Group s cost of sales are generated from sale of crops. The following table sets forth the breakdown of the Group s cost of sales from sale of crops by cereals for the years indicated (in USD thousand): For the year ended December 31, Change Wheat 652 2,884 (77%) Barley 584 1,140 (49%) Rape Seed 246 (100%) Sunflower 3,412 2,495 37% Other % Fair value adjustment 14,762 4, % Total 19,532 11,280 73% 41

43 KSG Agro S.A. The cost of wheat sold decreased to USD 0.7 million for the year ended December 31, 2010 from USD 2.9 million for the year ended December 31, The decrease is mainly due to decrease in volumes of wheat sold. The cost of barley sold decreased to USD 0.6 million for the year ended December 31, 2010 from USD 1.1 million for the year ended December 31, The decrease is mainly due to decrease in volumes of varley sold. The cost of sunflower sold increased to USD 3.4 million for the year ended December 31, 2010 from USD 2.5 million for the year ended December 31, The increase is mainly due to increase in volumes of sunflower sold. The following table sets forth the principal components of the Group s cost of sales for the years indicated (in USD thousand): For the year ended December 31, Change Fertilizers 1,081 1,376 (21%) Plant protectors 316 1,025 (69%) Fuels and lubricants (7%0 Seeds % Wages % Land lease payments 930 1,152 (19%) Other 1,023 2,037 (50%) Fair value adjustment 14,762 4, % Total 20,456 12,102 69% Costs related to crop production, which primarily consist of expenses for fertilizers, fuel, seeds and plant protectors, decreased 25.4% to USD 5.7 million for the year ended December 31, 2010 from USD 7.6 million for the year ended December, Gross profit Gross profit increased per cent. to USD 12.1 million for the year ended December 31, 2010 from USD 5.9 million for the year ended December 31, Administrative expenses Administrative expenses decreased 32.0 per cent. to USD 0.8 million for the year ended December 31, 2010 from USD 1.2 million for the year ended December 31, The decrease in administrative expenses was primarily due to decrease in transport services and services of crop storage and refining. The following table sets forth the principal components of the Group s administrative expenses for the years indicated: For the year ended December 31, Change Transport services (95%) Services of crop storage and refining (99%) Salary and social taxes % Taxes % Informational, expert and consulting services % Combustive materials 8 44 (82%) Lease % Bank services % Amortization % Marketing expenses 0 7 (100%) Repairs and maintenance of fixed assets 1 6 (83%) Communication costs 2 5 (60%) Materials % Insurance ,200% Other costs (44%) Total 787 1,158 (32%) 42

44 KSG Agro S.A. Transport costs, which are expenses assossiated with shipment of exported goods, decreased 95 per cent. to USD 18 thousand in 2010 from USD 0.4 million in 2009, due to the fact that the Group decided to focus on domestic market and there were no significant export sales in Services of crop storage and refining decreased 95 per cent. to USD 2 thousand in 2010 from USD 0.2 million in 2009, mainly due to the fact that the major part of the Group s sales for the year 2010 were performed at the point of harvesting. Other operating income (expenses), net The Group s other income (expenses), net decreased to USD 0.3 million for the year ended December 31, 2010 from USD 0.5 million for the year ended December 31, The following table sets forth the principal components of the Group s other income (expenses) for the years indicated (in USD thousand): For the year ended December 31, Change State subsidies (VAT) 1,271 1,386 (8%) Provision for doubtful debts (1,009) (427) 136% (Expenses)/income from sale of non-current assets (1) 7 (114%) Income from sale of current assets (4) (83) (95%) Penalties, fines and forfeits (73) (3) 2,333% (Expenses)/income from exchange differences ,400% Income from sale of foreign currency % Impairments of assets (2) (106) (98%) Other (expenses)/income (472) (313) 51% Total % Financial income (expenses), net The Group recorded net financial expenses in each of 2010 and Net financial expenses decreased 27.3 per cent. to USD 1.6 million for the year ended December 31, 2010 from USD 2.1 million for the year ended December 31, This decrease was mainly due to change in financial lease liabilities caused by restructuring of such liabilities. Profit for the year For the reasons set out above, the Group s profit increased per cent. to USD 10.0 million for the year ended December 31, 2010 from USD 2.5 million for the year ended December 31, Year ended December 31, 2009 compared to year ended December 31, 2008 The following table sets forth the Group s results of operations for the year ended December 31, 2009 and 2008 derived from the audited combined financial statements (in USD thousand): For the year ended December 31, Change Income 13,785 6, % Change in fair value of biological assets 4,251 5,204 (18%) Cost of sales (12,102) (8,920) 36% Gross profit 5,934 3,147 89% General and administrative expenses (1,158) (835) 39% Other operating income, net (10%) Result from operating activities 5,240 2,826 85% Finance income (expenses), net (2,144) (3,740) (43%) Losses from impairment of financial assets (565) 100% Profit before income tax 2,531 (914) (377%) Income tax expenses (5) 100% Profit for the year 2,526 (914) (376%) 43

45 KSG Agro S.A. The Group s EBITDA for the year ended December 31, 2009 amounted to USD 5.8 million and increased 79.8 per cent. in comparison with 2009, when it amounted to USD 3.2 million. Sales income The Group s sales revenue increased per cent. to USD 13,8 million for the year ended December 31, 2009 from USD 6,9 thousand for the year ended December 31, The following table sets forth the breakdown of the Group s income by business segments for the years indicated (in USD thousand): For the year ended December 31, Change Crops 12,174 6,237 95% Vegetables % Horticulture % Livestock production % Other 1, (142%) Total 13,785 6, % 94.0 per cent. of the Group s revenues are generated from sale of crops. The following table sets forth the breakdown of the Group s income from sale of crops by cereals for the years indicated (in USD thousand): For the year ended December 31, Change Wheat 5,056 3,415 48% Barley 1, % Rape Seed 439 1,201 (63%) Sunflower 4,589 1, % Other % Total 12,174 6,237 95% The Group s sales of wheat increased to USD 5.1 million for the year ended December 31, 2009 from USD 3.4 million for the year ended December 31, The increase is mainly due to increase of volumes of wheat sold in 2009 in comparison with The Group s sales of barley increased to USD 2.0 million for the year ended December 31, 2009 from USD 0.5 million for the year ended December 31, The increase in income from sales of wheat and barley was mainly due to increase of volumes of wheat and barley sold in 2009 in comparison with The Group s sales of rape seed decreased to USD 0.4 million for the year ended December 31, 2009 from USD 1.2 million for the year ended December 31, The Group s sales of sunflower increased to USD 4.6 million for the year ended December 31, 2009 from USD 1.1 million for the year ended December 31, The Group implemented the strategy of increasing the share of sunflower crop rotation in

46 KSG Agro S.A. The following table sets forth the volumes of the Group s sales of crops in tones for the years indicated (in tonnes): For the year ended December 31, Change Wheat 34,565 20,906 65% Barley 17,108 6, % Rape Seed 1,494 2,684 (44%) Sunflower 17,364 9,832 77% Other % Total 71,221 40,055 78% Cost of sales The Group s cost of sales increased 35.7 per cent. to USD 12.1 million for the year ended December 31, 2009 from USD 8.9million for the year ended December 31, The following table sets forth the breakdown of the Group s cost of sales by business segments for the years indicated (in USD thousand): For the year ended December 31, Change Crops 11,280 8,487 33% Vegetables (58%) Horticulture % Livestock production 162 0% Grocery 343 0% Other 105 0% Total 12,102 8,920 36% 93.2 per cent. of the Group s cost of sales are generated from sale of crops. The following table sets forth the breakdown of the Group s cost of sales from sale of crops by cereals for the years indicated: For the year ended December 31, Change Wheat 2,884 1,885 53% Barley 1, % Rape Seed (33%) Sunflower 2,495 2,003 25% Other % Fair value adjustment 4,465 3,688 21% Total 11,280 8,487 33% The cost of wheat sold increased to USD 2.9 million for the year ended December 31, 2009 from USD 1.9 million for the year ended December 31, The increase is mainly due to increase of volumes of wheat sold. The cost of barley sold increased to USD 1.1 million for the year ended December 31, 2010 from USD 0.5 million for the year ended December 31, The increase is mainly due to increase of volumes of barley sold. The cost of sunflower sold increased to USD 2.5 million for the year ended December 31, 2010 from USD 2.0 million for the year ended December 31, The decrease is mainly due to increase of volumes of sunflower sold. 45

47 KSG Agro S.A. The following table sets forth the principal components of the Group s cost of sales for the years indicated (in USD thousand): For the year ended December 31, Change Fertilizers 1, % Plant protectors 1, % Fuels and lubricants % Seeds % Wages (43%) Land lease payments 1, % Other 2,037 1,154 77% Fair value adjustment 4,465 3,688 21% Total 12,102 8,920 36% Costs related to crop production, which primarily consists of expenses for fertilizers, fuel, seeds and plant protectors, increased 46.0% to USD 7.6 million for the year ended December 31, 2009 from USD 5.2 million for the year ended December 31, Gross profit Gross profit increased 88.6 per cent. to USD 5.9 million for the year ended December 31, 2009 from USD 3.1 million for the year ended December 31, The increase in gross profit was mainly due to an increase in the Group s total revenue. Administrative expenses Administrative expenses increased 39 per cent. to USD 1.2 million for the year ended December 31, 2009 from USD 0.8 mllion for the year ended December 31, The increase in administrative expenses was primarily due to an increase in payroll of administrative personnel and related tax expenses. The following table sets forth the principal components of the Group s administrative expenses for the years indicated (in USD thousand): For the year ended December 31, Change Transport services % Services of crop storage and refining % Salary and social taxes % Taxes % Informational, expert and consulting services % Combustive materials (25%) Lease % Bank services (88%) Amortization % Marketing expenses % Repairs and maintenance of fixed assets % Communication costs % Materials 3 26 (88%) Insurance 2 19 (89%) Other costs (30%) 1, % Transport costs, which are expenses assossiated with shipment of exported goods, increased 551 per cent. to USD 0.4 million in 2009 from USD 0.1 million in 2008, mainly due to growth of the Group s export sales in

48 KSG Agro S.A. Other operating income (expenses), net The Group s other income (expenses), net for the years ended December 31, 2009 and 2008 remained on the same level of USD 0.5 million. At the same time some components of other income (expenses) have changed significantly. The following table sets forth the principal components of the Group s other income (expenses) for the years indicated: For the year ended December 31, Change State subsidies (VAT) 1, % Provision for doubtful debts (427) 199 (315%) Sponsorship and charity (4) (Expenses)/income from sale of non-current assets 7 (5) (240%) Income from sale of current assets (83) 347 (124%) Income from assets received for free 277 Penalties, fines and forfeits (3) (42) (93%) (Expenses)/income from exchange differences 1 (150) (101%) Income from sale of foreign currency 2 Impairments of assets (106) (1) 10,500% Other (expenses)/income (313) (376) (17%) Total (10%) Financial income (expenses), net Net financial expenses decreased 43 per cent. to USD 2.1 million for the year ended December 31, 2009 from USD 3.7 million for the year ended December 31, This decrease was mainly a result of foreign exchange losses that had arisen on revaluation of financial lease liabilities of the Group in Total amount of such foreign exchange losses in 2008 was USD 2.3 millions. Profit for the year For the reasons set out above, the Group s profit for the year was USD 2.5 million in 2009 compared to a loss for the year of USD 0.9 million in Liquidity and Capital Resources The Group s liquidity needs arise principally from the need to finance its working capital and purchase of agricultural equipment. In the periods under review, the Group has met most of its liquidity needs through cash generated from its operating activities and financing activities, consisting of credit lines and overdrafts, loans, financial lease. Working capital, calculated as current assets minus short-term liabilities, was USD 4.8 million, negative USD 4.8 million, negative and USD 2.7 million as at December 31, 2010, December 31, 2009 and December 31, 2008, respectively. The Group s current assets primarily consist of current biological assets cash and cash equivalents, inventories and trade accounts receivable. The Group had USD 7.6 million, USD 3.7 million and USD 2.7 million in current biological assets as at December 31, 2010, 2009 and 2008, respectively. The Group had USD 30 thousand, USD 2.8 million and USD 2.6 million in cash and cash equivalents as at December 31, 2010, 2009 and 2008, respectively. The Group had USD 5.1 million, USD 3.2 million and USD 4.6 million in inventories as at December 31, 2010, 2009 and 2008, respectively. The Group had USD 1.7 million, USD 1.7 million and USD 4.0 million in trade accounts receivable as at December 31, 2010, 2009 and 2008, respectively. The Group s short-term liabilities primarily consist of short-term loans and current portions of long-term loans and financial lease liabilities. The Group had USD 5.4 million, USD 11.0 million and USD 9.1 million in short-term liabilities as at December 31, 2010, 2009 and

49 KSG Agro S.A. Cash flows The following table sets out a summary of the Group s cash flows for the periods indicated: For the year ended December 31, Net cash flows received from (used in) operating activities 10,027 1,306 (2,473) Net cash flow received from (used in) in investment activities (759) (654) (95) Net cash flow received from (used in) financing activities (11,802) (873) 5,580 Net cash flow for the period (2,534) (221) 2,742 Net cash flows received from (used in) operating activities The Group s net cash flow received from operating activities increased per cent. to USD 10.0 million for the year ended December 31, 2010 from USD 1.3 million for the year ended December 31, The increase in 2010 was mainly due to a significant increase in prices for agricultural commodities. The Group s net cash flow received from operating activities was USD 1.3 thousand for the year ended December 31, 2009 compared to a net cash flow used in operating activities amounting to USD 2.5 thousand for the year ended December 31, Net cash flow received from (used in) in investment activities The Group s net cash flow used in investment activities increased 16.1 per cent. to USD 0.8 million for the year ended December 31, 2010 from USD 0.7 million for the year ended December 31, The Group s net cash flow used in investment activities increased 588 per cent. to USD 0.7 thousand for the year ended December 31, 2009 from USD 0.1 thousand for the year ended December 31, The increase in 2009 was mainly due to the purchase of new machinery and equipment in connection with the expansion of the Group s harvested land bank. Net cash flow received from (used in) financing activities The Group s net cash flow used in financing activities increased 1,251.9 per cent. to USD 11.8 million for the year ended December 31, 2010 from USD 0.9 million for the year ended December 31, The increase in 2010 is mainly deu to the fact that in 2010 the net cash flow used to settle bank loans amounted to USD 4.3 million and in 2009 the net cash flow received from bank loans amounted to USD 2.4 million. The Group s net cash flow used in financing activities was USD 0.9 million for the year ended December 31, 2009 compared to a net cash flow received from financing activities amounting to USD 5.6 million for the year ended December 31, The difference between 2008 and 2009 was mainly due to the Group s repayments of debt and related interests and refinancing of certain lease obligations during the year Capital resources The Group expects to fund its current and anticipated capital resources in the short term from net cash generated from operating activities. In the medium and long term the Group plans to fund its capital resources from net cash generated from operating activities as well as a variety of debt and equity sources (including the proceeds from the Offering and bank borrowings). The funds will be sufficient for its anticipated capital expenditure and other operating needs under its current strategic plan. In the medium and long term the actual amount of the Group s financing requirements however, will depend on its future performance, market conditions and other factors, many of which are outside the Group s control and cannot be predicted with any certainty. As a result, the Group s future financing requirements may vary significantly from its expectations. The following table sets forth the Group s Interest cover ratio for the years ended December 31, 2010, 2009 and 2008 (the data used for calculation is derived from audited Combined financial statements of the Group): For the year ended December 31, Profit before income tax 10,047 2,531 (914) Interest expenses 2,306 2,342 1,436 Interest cover ratio N/A 48

50 KSG Agro S.A. The following table sets forth the Group s Debt to Equity ratio as at December 31, 2010, 2009 and 2008 (the data used for calculation is derived from audited Combined financial statements of the Group): As at December 31, Total equity 11,662 4,998 2,019 Total liabilities 14,668 21,135 20,743 Debt to Equity ratio There are no material legal or economic restrictions on the ability of subsidiaries to transfer funds to the Group s holding company in the form of cash dividends, loans or advances that could impact the ability of the Group s holding company to meet its cash obligations. The Group s existing financing arrangements are subject to financial covenants which could limit the Group s ability to obtain future financing and limit the terms on which such financing may be available. See also: Risk Factors Covenants in the debt agreements of the Group Subsidiaries may restrict the ability to borrow and invest, which could affect the Group s flexibility to operate and ability to expand. Borrowings The Group s borrowings primarily consist of long-term and short-term bank loans and long-term and short-term finance lease liabilities. As at December 31, 2010, the outstanding balance on long-term loans was USD 1.8 million and the outstanding balance on short-term bank loans was USD 3.8 million; the outstanding balance on long-term financial lease liabilities was USD 0.6 million, the outstanding balance on short-term financial lease liabilities was USD 1.7 million. The following table sets forth details of the Group s long-term and short-term bank loans as of the periods under review: Currency Nominal rate % Maturity, year Current debt As at December 31, Long-term debt Current debt Long-term debt Current debt Long-term debt JSC Rodovid Bank UAH 17,00% ,507 7,112 AT Bank National Investments UAH 22,00% ,400 CB Credit-Dnepr UAH ,074 Soyuz CB UAH ,678 ICD Investments SA* USD 5% Olbis Invesnments Ltd SA USD OJSC Astra Bank UAH 22,00% JSC Rodovid Bank UAH 21, ,746 AK Prominvestbank UAH 18% 21% PJSC Red-plaza UAH 29% Total 3,752 1,806 9, ,834 49

51 KSG Agro S.A. The following table sets forth certain information with respect to the Group s long-term finance lease liabilities for the periods indicated: As at December 31, Future minimum lease payments Present value future of minimum lease payments Future minimum lease payments Present value future of minimum lease payments Future minimum lease payments Present value future of minimum lease payments Amounts payable: Within 1 year 1, ,934 1,496 1,934 1,308 From1to5years 1, ,616 2,367 4,550 3,863 Total 3,527 1,138 4,550 3,863 6,484 5,171 Financial risk management The Group s principal financial instruments comprise of interest-bearing loans, financial lease, cash and cash equivalents. The Group has various other financial instruments, such as trade receivables and trade payables, which arise directly from its operations. The Group has not entered into any derivative transactions. It is the Group s policy not to trade in financial instruments. The Group s overall risk management program focuses on the unpredictability and inefficiency of the Ukrainian financial markets and seeks to minimize potential adverse effects on the financial performance of the Group. The main risks, arising from the Group s financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk. The management reviews and agrees policies for managing each of these risks. The essence of these approaches is disclosed below. Interest rate risk Risk of changes in interest rate is generally related to interest-bearing loans and other debt obligations of the Group. The Group s management analyses market interest rates to minimize interest rate risk of the Group. The following table sets forth certain information with respect to the Group s sensitivity to changes in interest rates for the periods indicated: Increase/ (decrease) Effect on profit before tax For the year ended 31 December 2010 Change in interest rate 20 (34) Change in interest rate (20) 34 For the year ended 31 December 2009 Change in interest rate 20 (34) Change in interest rate (20) 34 For the year ended 31 December 2008 Change in interest rate 20 (22) Change in interest rate (20) 22 Currency risks Currency risk is the risk of a change in the value of financial instruments due to changes in foreign currency exchange rates. The Group has significant exposure to U.S. dollar and therefore is exposed to risk in the event of adverse movements in the exchange rate between this currency and the Hryvnia. The exchange rate between the Hryvnia and the U.S. dollar has historically fluctuated, but in recent years the Hryvnia has depreciated against the U.S. dollar. See Exchange Rates. 50

52 KSG Agro S.A. The Group does not use derivative financial instruments to hedge currency risks. The following table sets forth certain information with respect to the Group s exposure to currency risk for the periods indicated: USD EURO USD EURO USD EURO Cash and cash equivalents 2,475 Long-term loans and borrowings ,672 The Group s financial lease liabilities for the total amount of USD 1.1 million, USD 3.9 million and USD 5.2 million as at December 31, 2010, 2009 and 2008 respectively are Hryvnia denominated. However, the Agreements have currency reference to U.S. dollar. Therefore, currency risks are applicable for these liabilities. Credit risks Credit risk is the risk of financial loss due to the non-fulfillment of the obligations of the Group s customers and counterparties. Financial instruments that potentially expose the Group to the concentration of credit risks primarily include trade receivables. Credit risk related to trade receivables is minimized due to the limited number of customers grain traders with sound reputation. The Group manages this risk through monitoring of the customers credit capacity. Cash is placed in financial institutions, which are considered to have minimal risk of default at the time of deposit. The Group management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. Most of the Group s sales are made to the customers with an appropriate credit history or on a prepayment basis. The Group does not require collateral in respect of its financial assets. The credit risk exposure of the Group is monitored and analyzed on a case-by-case basis and, based on historical collection statistics, the Group s management believes that there is no significant risk of loss to the Group beyond the impairment allowances recognized against the assets. The Group has made provisions relating to trade accounts receivable in 2010, 2009, 2008 and the first six months of 2010 of USD 1.8 million, USD 0.7 million, and USD 0.3 million, respectively. Liquidity risk The Group s objective is to maintain a balance between continuity of funding and flexibility through the use of loans provided by banks and suppliers. The Group monitors its assets and liabilities as to circulation and mature terms and plans its liquidity depending upon the expected term of obligations fulfillment. When liquidity of individual entities is insufficient or redundant, the Group redistributes its resources and funds to achieve optimal financing of every Group s entity needs. The table below summarizes the maturity profile of the Group s financial liabilities at December 31, 2010, 2009 and 2008 based on contractual undiscounted payments: Less than 3 months 3to12months 1to5years Total For the year ended 31 December 2010 Long-term portion of borrowings 2,367 2,367 Short-term loans and borrowings 5,414 5,414 Trade and other accounts payable 18 6,681 6,699 For the year ended 31 December 2009 Long-term portion of borrowings 2,904 2,904 Short-term loans and borrowings 11,008 11,008 Trade and other accounts payable 7,008 7,008 For the year ended 31 December 2008 Long-term portion of borrowings 3,863 3,863 Short-term loans and borrowings 9,142 9,142 Trade and other accounts payable 7,692 7,692 51

53 KSG Agro S.A. Investments General Information The information in this section presents an overview of the Group s investments in non-current assets (property, plant and equipment) during the years ended 31 December 2010, 2009, and Investments of the Group include investments made by the Company and its Subsidiaries. Property, Plant and Equipment The following table presents the Group s investments into property, plant and equipment (in USD thousand). Property, plant and equipment, Year ended December 31, Buildings and construction Agricultural equipment Vehicles and office equipment Total The most material investments were conducted in 2008, when the Group s management made a decision to renovate substantially its park of agricultural machinery, making a total investment of more USD 5 mln. In 2009 and 2010 agricultural equipment also constituted the most material items in the investments made by the Group. All investments made in 2008, 2009, and 2010 were in Dnipropetrovsk region of Ukraine. Investments for the period of 31 December 2010 up to the date of the Prospectus were limited to purchase of agricultural equipment with the total value of USD 238 thousands in Dnipropetrovsk region of Ukraine. The investments were financed via bank loan received by the Group. Projected investments The Issuer s management has made a decision to expand the agricultural business via acquisitions of corporate rights of other agricultural companies, as well as purchase of agricultural equipment, irrigation systems, elevator, and other material assets. For detailed description of the projected investments and their value, please, see Use of Proceeds section. Working capital statement Having done due analysis, the management is of the opinion that taking into account the Group s current banking facilities and the net proceeds to be received from the offering the working capital available to the Group is sufficient to meet its present requirements for at least the next 12 months following the date of publication of this Prospectus. 52

54 INDUSTRY OVERVIEW KSG Agro S.A. INDUSTRY OVERVIEW Introduction With area of 603,500 sq. km and population of approximately 46 million., Ukraine is the second largest country in Europe in terms of agricultural land area and fifth largest in terms of population. The total area of Ukraine represents 5.7 per cent. of the total area of Europe (Source: SSCU). Ukraine has favorable geographic location in the center of Europe and borders with Russia, Hungary, Poland, Moldova, Belarus, and Slovakia. It has diversified system of auto-transport, railway and sea transport and serves as a transit country for cargos from different countries and has easy access to foreign markets. The Ukrainian economy grew at an annual average of approximately 7 per cent. in real GDP terms from 2000 to 2008, driven mainly by a rapid increase in foreign demand, rising commodity prices on external markets and the availability of foreign financing. Ukraine s real GDP increased by 7.3 per cent. and 2.1 per cent. in 2007 and 2008, respectively and decreased by 14.8 per cent. in In 2010 the real GDP began to recover and increased by 4.9 per cent., 5.9 per cent., and 3.4 per cent., in the first, second and third quarters respectively. Agricultural output decreased by 6.5 per cent. in 2007, increased by 17.1 per cent. in 2008 and decreased by 1.8 per cent. in Nominal GDP (U.S. $ million) 142, , ,228 Real GDP (end of period, % change) (14.8) Exchange rate UAH to USD (annual average) Exchange rate UAH to EUR (annual average) Consumer price index (end of period, % change) Source: State Statistics Committee of Ukraine, National Bank of Ukraine Global agriculture market In 2009/2010 marketing year (June May), global wheat production is forecasted to reach nearly 682 million tones, remains on the same level compared to 2008/2009. (Source: USDA). Ukraine accounts in TOP-5 leading grain producers and indicated as net exporter and its market depends on global price trends. The following table indicates TOP-10 global grain* exporters in 2009/2010: Country Million tons US 75 EU Russia 22 Argentina 21 Ukraine 21 Canada 20 Australia 18 Brazil 10 Kazakhstan 8 Turkey 5 *Grain means: wheat, burley, corn; Source: USDA Currently there is a substantial price growth on the global grain market, as indicated by FAO Food Price Index which reached its maximum in nominal and real terms since 1990, when it was established. Market Drivers According to researches of global agricultural organization such USDA, FAO, FAPRI, the global demand for grains will grow in long-term. The main factors which are contributing to stable demand and potential prices growth are as follows: Increase in world population, including increase in life expectancy effect. The growth of world population is pushing demand on agricultural production up, including food and feed grains. In many countries, especially in developing ones, the population growth outpaces food availability. The world population is expected to increase from about 6 billion to more than 9 billion in less than 50 years. (Source: UN, US Census Bureau) 53

55 KSG Agro S.A. Increase in standard of life in developing countries. The stable growth of disposable income in developing countries leaded to increase in food consumption and change of food preferences. Such changes lead to increase in consumption of food and feed grains due to growth in demand for livestock production. As consumption in the emerging markets increase, the IMF expects GDP growth of Emerging and Developing Economies at a rate 6.6 per cent. CAGR between Development of bio-fuel production which switch part of agricultural land to cultivation of technical crops. According to researches of FAO secretaries, average annual growth for of bioethanol production will be 6.3 per cent. and for biodiesel production will be 7.3 per cent. respectively. Limitation in potential yields per hectare of arable land. In spite of continual improvement of the agricultural technologies, every crop has its genetic constrain on maximum possible yields which also limits global agricultural production. Limitation of agriculture land and its further deterioration of agricultural land due to soil erosion and changes in climate. Global warming and further erosion of soils are likely to constrain agricultural production growth. Grain global market The principal cereals which are grown in the world are wheat, barley, corn, rice, oats, sorghum, and rye. Ukrainian principal grains are wheat, barley and corn and technical cultures are sunflower and sugar beet. Ukraine is one of the top-5 wheat exporters in the World and accounts for about 7 per cent. of global net export in 2010, and about 21 per cent. of sunflower seed. Wheat market The table below sets out global wheat production breakdown: Production, ths. tons 2006/ / / /2010 EU , , , ,051 China 108, , , ,120 India 69,350 75,810 78,570 80,680 Russia 44,900 49,400 63,700 61,700 United States 49,217 55,821 68,016 60,366 Canada 25,265 20,054 28,611 26,848 Australia 10,822 13,569 21,420 21,923 Ukraine 14,000 13,900 25,900 20,900 Argentina 16,300 18,600 11,000 11,000 Brazil 2,234 3,825 5,880 5,026 World 596, , , ,654 Source: USDA The table below sets out global wheat export breakdown: Export, ths. tons 2006/ / / /2010 United States 24,873 34,282 27,101 23,977 EU-27 13,813 12,272 25,319 22,117 Canada 19,278 16,561 18,674 19,023 Russia 10,790 12,220 18,393 18,556 Australia 11,241 7,449 13,450 14,790 Ukraine 3,366 1,236 13,037 9,337 Argentina 12,231 10,228 8,621 5,099 Brazil ,162 China 2,783 2, India World 115, , , ,645 Source: USDA 54

56 KSG Agro S.A. The table below sets out global wheat harvesting area: Harvested area, ths. hectares 2006/ / / /2010 Russia 23,600 24,400 26,650 28,700 India 26,400 28,000 28,150 27,900 EU-27 24,466 24,712 26,671 25,737 China 23,613 23,721 23,617 24,290 United States 18,939 20,639 22,541 20,191 Australia 11,798 12,578 13,530 14,028 Canada 9,682 8,640 10,032 9,638 Ukraine 5,500 5,950 7,050 6,750 Argentina 6,210 6,580 5,250 3,650 Brazil 1,758 1,819 2,400 2,428 World 213, , , ,658 Source: USDA Global sunflower market The table below sets out global sunflower production: Production, ths. tons 2006/ / / /2010 EU-27 6,502 4,799 7,130 6,940 Ukraine 5,300 4,200 7,000 6,500 Russia 6,750 5,650 7,350 6,425 Argentina 3,500 4,650 2,440 2,300 China 1,500 1,250 1,790 1,630 United States 972 1,301 1,553 1,377 India 1,280 1,120 1, Canada Brazil Australia World 29,739 27,196 33,274 30,393 Source: USDA The table below sets out global sunflower export: Export, ths. tons 2006/ / / /2010 EU Ukraine United States China Argentina Canada Russia India Australia Brazil 1 World 1,898 1,476 2,142 1,565 Source: USDA 55

57 KSG Agro S.A. The table below sets out global sunflower harvested area: Harvested area, ths. hectares 2006/ / / /2010 Russia 5,900 5,000 6,000 5,600 Ukraine 3,900 3,400 4,500 4,350 EU-27 3,978 3,339 3,755 3,908 Argentina 2,400 2,576 1,810 1,488 India 2,145 1,630 1,530 1,400 China United States Canada Brazil Australia World 23,361 21,106 23,681 22,226 Source: USDA Barley The table below sets out global barley production: Production, ths. tons 2006/ / / /2010 EU-27 56,220 57,545 65,509 61,980 Russia 18,100 15,650 23,100 17,900 Ukraine 11,350 6,000 12,600 11,800 Canada 9,573 10,984 11,781 9,517 Australia 4,257 7,160 7,997 7,909 United States 3,923 4,575 5,230 4,949 China 3,115 2,785 2,823 2,500 India 1,220 1,330 1,200 1,690 Argentina 1,330 1,600 2,110 1,356 Brazil World 136, , , ,603 Source: USDA The table below sets out global barley export figures: Export, ths. tons 2006/ / / /2010 Ukraine 5,103 1,044 6,371 6,232 Australia 1,851 3,386 3,234 3,915 Russia 1,547 1,046 3,444 2,657 Canada 1,224 3,046 1,483 1,309 EU-27 3,476 3,803 3,597 1,134 Argentina , United States India China Brazil 29 World 15,428 15,482 20,036 17,121 Source: USDA 56

58 KSG Agro S.A. The table below set out global barley harvested area Harvested area, ths. hectares 2006/ / / /2010 EU-27 13,833 13,797 14,504 13,988 Russia 9,950 9,600 9,600 9,050 Ukraine 5,200 4,100 4,150 5,000 Australia 4,182 4,902 5,015 4,446 Canada 3,223 3,998 3,502 2,918 United States 1,194 1,417 1,529 1,260 India China Argentina Brazil World 56,828 57,343 55,916 55,330 Source: USDA Ukrainian agricultural market Historically, from the Soviet Union time Ukraine was oriented on large scale agricultural production for demand of other republics. In 2009, Ukrainian agriculture comprises about 7 per cent. of GDP in large part of national economy. Currently, the agricultural sector is rebounding and grain production reaching levels before Soviet Union break-up. Ukrainian agriculture industry is export-oriented mainly supplies wheat, sunflower and barley. The Ukraine produces about 2 per cent. of the world s grain (SSCU). In 2010, export of agriculture production was second largest after metals and accounted of about 18 per cent. total county s export. Market Drivers In addition to Global market drivers, Ukrainian market can be influenced by the following ones: Rebound of i.a. livestock production, poultry. The livestock production, especially pork and poultry production have started to recover during last decade but is still below the level of In 2009, the total pig herd was about 38 per cent. and poultry about 75 per cent. from the 1990 level. Further increase of livestock will support demand on feed grains in Ukraine. For example, average feed conversation ratio for poultry is about 2, cattle is about 8, pig 3.5 per kg of meat. (Source: FAO) Development of food processing facilities. Ukraine is one of leading sunflower oil producers. The total sunflower oil crushing capacities accounted about 9 million tons in In addition, some of the local grain traders implement flour mills on the elevators with purpose to diversify their risk and earn additional margin. Further increase in efficiency of agro-holdings. Further improvement of agricultural technologies will lead to increase in supply. Some of agricultural holdings are implementing or already implemented no-till and other technologies. According to World Bank research, the average wheat yield potential in Ukraine is higher than 6 tons per hectare. Further increase of grain port cargo terminals which support export activities. Currently 12 of 18 Ukrainian sea ports have grain terminals. For example, Bunge plans to lunch 3 million capacity grain terminal in Mykolaiv port in Competition The Ukrainain agriculture market is fragmented. TOP-20 agricultural holdings account for approximately 10 per cent. of the market in terms of controlled land. The largest agricultural players in Ukraine are: Mrya Agro Holding PLC, Sintal Agriculture PLC, MCB Agricole Holding AG, Landkom International PLC, Astarta holding N.V, MHP S.A., Agroton PLC, Ukrainian Agricultural Investments group, Ukrlandfarming PLC Privat-Agro-Holding LLC, Kernel Holding S.A., Nibulon LLC, Agrocomplex imeni Illicha OJSC MMK imeni Illicha, Agro-industrial complex Shakhtar, OJSC Shahta imeni Zasad ko, Corporation Agro-Soyuz, etc. Implications of joining the WTO for Ukrainian agriculture Ukraine became a member of the WTO on May 16, This has forced the country to reduce tariffs and eliminate export quotas according to WTO rules. The Government lifted export quotas for grain, resulting in the export of 25 million tons of grain in In 2010, the Ukrainian Government imposed quotas for export of grains in the amount of 2.7 million tons. In the end of 2010, the total amount was increased to 4.3 million tons. On 30 March 2011 the Government extended 57

59 KSG Agro S.A. the quotas until 30 June 2011 within the same amounts for all crops, except for corn, quoted amount of which has been increased for 2 mln tones. Thus, the total amount was increased to 6.3 million tones. In long term, membership of Ukraine in WTO will give following benefits for Ukrainian agriculture: implementation of a more stable and transparent agricultural policy; a voice in future debates on international rules governing agricultural trade; access to the WTO s dispute settlement mechanism to battle import quotas from other countries. refusal from rapeseed quota introduction. WTO membership will ensure easier access of Ukrainian goods to the global market and protect them against discrimination. WTO membership will have no negative impact on the industry on the whole, since the relatively low level of bound tariff rates on agricultural produce after accession to the WTO should produce no additional pressure on producers, as agricultural products are more price competitive than imported analogues. Moreover, the competitiveness of the Ukrainian agricultural industry will even increase due to absorption of advanced technologies and modern practices of business management. Agriculture inputs Ukraine has many prerequisites important for effective and large scale agricultural production. It has climatic conditions suitable for cultivating major grains, rich agricultural soils, access to abundant land and water resources, sufficient level of working staff and favorable geographic position. Natural conditions impacting agriculture Geography and landscape According to the SSCU, total arable land in Ukraine amounted 42.9 million hectares or about 71 per cent. of the country s surface area. For example, in the European Union, agricultural land represents 41 per cent. of the total surface. Arable land in Ukraine accounts for 76 per cent. of total agricultural land compared to 61 per cent. in the European Union. The total amount of the Ukrainian arable land is equal to 19 per cent. of EU arable land (Source: Eurostat). The table below compares agricultural areas of Ukraine and selected EU countries: Country Total agricultural area, ml hectares Arable land million hectares US India China Russia EU Brazil Canada Argentina Ukraine France Germany Poland World 4,932 1,411 Source: Slate Statistics Committee of Ukraine, FAO, Eurostat Flat landscape which is favorable for agricultural activities and large-scale farming constitutes about 95 per cent. of Ukrainian area. Approximately 60 per cent. of agricultural land is practically flat and the remaining 35 per cent. has slopes ranging from 1 to 3. Climate Ukraine has a moderate, continental climate with evident seasonal changes within the year. Average annual precipitation is about 500 millimeters, including approximately 300 millimeters during the grains growing season, generally lasts from April to October, which is suitable for cultivation and sowing of both winter and spring crops of wheat, winter and spring barley, sunflower, rapeseed, soybeans, corn and other crops (Source: WDC). 58

60 KSG Agro S.A. The following table shows average annual precipitation and temperature levels in regions of the Issuer activities and strategic land bank expansion regions: Region Average temperature in winter, C Average temperature in summer, C Average annual precipitation level, mm Mykolayiv region -5 C +28 C Dnipropetrovsk region -5 C +23 C Kherson region -3 C +23 C Kharkiv region -8 C +22 C Kirovohrad region -6 C +21 C Khmelnitsk region -6 C +18 C Source: Gateway Ukraine (rada.gov.ua), National Exhibition of Ukraine in the USA, Wikipedia, Ukrindustrial, Nash Kray, Government Portal, Crimean Tourism, Ukraine today The average annual temperature in Ukraine ranges from -10 C to -3 C in winter and from 20 C to 25 C in summer. The level of snow coverage is above average and able to protect winter crops from being killed by frosts. Snow generally covers the ground for days, from early December to the end of February, but eventually can last till April. Soil Ukraine s famous humus-rich black soil accounts for one-third of the world s black soil and holds great potential for agricultural production. The average humus layer is enriched centimeters and has abilities to longer keep moisture compared to other types of soils. The region of Issuers operation mainly located in the area of black soils indicated by FAO (common cherozems) which has average humus layer enriched and formed on moist-loamy strata. The black soils accounts for 62 per cent. of Ukrainian agricultural land or 44 per cent. of total country s area. (Source: FAO). Employment Ukraine s rural population is mostly engaged in agricultural production. Currently Ukraine has a large surplus of labor in the agricultural industry. According to SSCU, the unemployment rate has increased from 6.9 per cent. in 2007 to 9.6 per cent. in As a result of the oversupply of rural labour, agricultural companies can pay wage levels that are almost half the level those paid to workers in other industries. The table below sets out average level of wages in Ukraine: Average level of wages, USD per month Average level of wages in agriculture Average level of wages for all industries Source: Slate Statistics Committee of Ukraine, National Bank of Ukraine Chemicals The present fertilizers consumption in Ukraine is much lower compared to the level of 1990 when it reached 4.2 million tons or 124 kg per hectare (source: FAO). The Institute of Agronomy and Agrochemistry states that the annual need of Ukraine for mineral fertilizers is about 4.4 million tones. However, many of agriculture producers, especially small farmers have low purchasing power and the total demand is limited to 27 per cent. of the annual needs. In 2009, the average fertilizers consumption per hectare was about 59 kg. (Source: RBK-Ukraine) Although Ukraine has a highly developed chemical industry which has potential to supply about 7 million tones of fertilizers per year, most agricultural enterprises apply little to no fertilizers. Proper financing of agricultural enterprises may result in an increase in fertilizers application and, as a result, an increase in agricultural yields achieved. The main fertilizers producers in Ukraine are DnirpoAzot LLC, Odessa Prot Plant LLC, Severodonetsk union Azot LLC, Azot LLC, Rivenazot LLC, Concern Stirol LLC, Sumykhim LLC, Crimian Titan CJSC and Dniprovksy plant of mineral fertilizers CJSC. 59

61 KSG Agro S.A. The table below sets out average fertilizers consumption per hectare as of 2007: Country Fertilizers consumption, kg per hectare of arable land Poland 213 France 208 Germany 194 Ukraine 33 Russia 14 World 129 Source: World Bank Machinery and mechanisation According to SSCU estimates, the current level of physical depreciation of agricultural machinery and equipment is about per cent. in Ukraine. The need to replace obsolete machinery and equipment is crucial. High-quality agricultural machinery and equipment could have a positive effect on agricultural productivity in the country. The table below presents the average quantity of tractors per 10,000 hectares of arable land in selected countries as of 2007: Country Tractors per 100 sq. km of arable land Poland 1,243 Germany 646 France 616 Ukraine 103 Russia 33 World 192 Source: World Bank Storage facilities Grain storage allows agribusinesses and farmers to increase their grain trading and profitability from farming. The current number of certified elevators in Ukraine is 698 with total storage capacities about 30 mln. Also, many of agricultural enterprises have own uncertified storage capacities which can be used for storage during several months. The table below sets out number and certified storage capacities in the region of operation and further expansion of the Group: Region Number of certified elevators Storage capacity, ths. tons % from total Ukrainian storage Dnipropetrovsk 54 2, % Kirovograd 49 1, % Mykolayv 30 1, % Kharkiv 60 2, % Kherson 39 1, % Khmelnitsky 31 1, % Ukraine , % Source: Derzhreestr of Ukraine Agricultural land market in Ukraine The Land Code of Ukraine imposes a moratorium on the sale, alienation or other disposal of privately held agricultural land until the laws On the Land Market and On the State Land Cadastre are adopted, but not earlier than 1 January 2012, unless such sale, alienation or other disposal results from inheritance or state appropriation. Any change in the designated use of agricultural land is also prohibited. The Land Code of Ukraine also bars any sale, purchase or other disposal of state or municipal agricultural land. Presently, the moratorium remains effective and is unlikely to be lifted in the nearest future. 60

62 KSG Agro S.A. Introduction to the land market The private ownership of land in Ukraine was established after the break-up of the Soviet Union in Former collective farms were restructured and land was distributed to individuals, a process known as rozpayuvannya. New land owners have had two options historically: use the land as a productive asset or lease it to agricultural enterprisers or farmers. Most of these land owners are pensioners for whom the lease payments constitute a key source of income and who are not able to cultivate the land and therefore they lease it out. Currently, Ukraine s average private land ownership is about 1.7 hectares of agricultural land per person. Ukraine is a world leader in relation to its quality fertile soils with one-third of the world s richest black soils. Ownership status of agricultural land The principal types of agricultural land owned by rural citizens are the following: Land plot an identified plot of land included in the state cadastre; Land share a partial interest in a land plot previously owned by the state held together with other shareholders. Boundaries of the land allotment cannot be known until it is converted into a land plot and the holder of the land allotment does not have the right to cultivate the land personally. The only way in which the holder of the land share can derive any benefit from the land share is to lease the shares to a separate enterprise. The majority of agricultural land owners are represented by Ukraine s rural population, most of whom are pensioners who do not have access to reliable market information on land and rent values. For these reasons, the land rent remains at globally record low levels. Land price determinants Prices for acquiring agricultural land vary across different countries and regions. Main factors mostly influenced prices are the following: Development of land market in the country Limitations upon foreigners right to acquire the land; Current and expected crop prices Climate conditions Fertility of the land and level of its quality Additional facilities accessible within the land (e.g. irrigation) Location of the land (access to the market) Taxation and other country specific factors The table below sets out average prices for arable land in selected countries: Country Average price per arable land, USD per ha England 17,100 France 12,500 US 11,000 Poland 6,600 Romania 4,855 Australia 3,450 Bulgaria 3,120 Russia 800 Source: Knight Frank Due to gradual improvements in technologies, production methods used, and land market liberalization; differences in land prices across different countries are constantly being reduced and eliminated. In Ukraine, prices of acquiring control over land plot can depend on following factors: The quality of land, including soil quality, slope, previous crop rotation, etc. Size of a land plot. Entities with larger size are more interesting as potential acquisition targets for agro-holdings. Existence of additional facilities such as artificial irrigation, proximity to elevator or key customers, etc. 61

63 KSG Agro S.A. Existence of additional assets such as machinery park, storage capacities, real estate, etc. Sometimes, owners of the land don t want to sell land without its assets, even if they are not useful for new owner. Existence of work in process, already sowed crop. Land sales and the lease market The lease of the agricultural land is the only way to use the agricultural land in Ukraine due to the existence of the moratorium on the sale, alienation or other disposal of the agricultural land. In the event that the moratorium is lifted, many agricultural companies that presently lease the land will enjoy a pre-emptive right to acquire the freehold title to the leased land, subject to such companies compliance with the terms of the original lease and the absence of any other potential purchasers offering better terms for the land. Due to their dominant position in local market many agricultural companies will enjoy substantial bargaining power in the process of land acquisition once the moratorium is lifted. The Land Code of Ukraine establishes a maximum term of 50 years for land leases. The term of a lease may be extended as many times as the parties wish, provided that they re-execute the lease agreement upon each extension and register the re-executed agreement. Under Ukrainian law, a lessee has a right of first refusal to enter in to a new lease agreement with the lessor in respect of the same land plot, provided that the lessee has fulfilled all of its obligations under the original lease and provided that the new lease is on terms at least as favorable as any to other offer or bid lease the relevant land. Usually, private land owners are interested in the re-execution of the land leases entered into with the agricultural companies, since the land owners are often unable to cultivate the land personally. Also, the land owned by the individuals has a small area and usually it constitutes part of a large filed being leased by the previous lessee, and, as such, another agricultural companies are not interested in leasing this land and, therefore, it may be difficult to the land owners to lease out such land to other agricultural companies. The Ukrainian Parliament has been prolonging the land moratorium on an annual basis for several years in a row. The sale of agricultural land will be allowed once the necessary legislation changes are adopted, but not earlier than January 1, In case of necessary changes to legislation are adopted, massive sale of agricultural land can be expected due the following factors: 53% 56% of land owners are pensioners who live on government pensions, the level of which currently averages USD 108 per month (Source: Ministry of Labor and Social Policy of Ukraine); 30 per cent. of those pensioners do not have heirs, or their heirs are residing abroad (Source: Center for Reform and Policy in Ukraine); Leasing is not a logical choice for current land owners, because it is currently set at about USD per year per hectare; The level of living conditions for rural land owners is extremely low. Management believes that foreigners will be prohibited from acquiring land rights in Ukraine, once the sale of agricultural land starts. Regulation of the Ukrainian agricultural market Development of agricultural industry is one of the strategic focuses of the state policy. Ukrainian Government implemented several programs focused on support of agricultural producers. The following types of financial support or subsidies are currently available to Ukrainian agricultural producers: Income tax exemption The agricultural companies engaged in the production, processing and sale of agricultural products able to apply special regime of taxation called the FAT. The tax is paid in lieu of corporate income tax, land tax, duties for geological survey works and duties for trade patents. The amount of FAT payable is calculated as a percentage of the deemed value of all of the land plots leased or owned by a taxpayer (determined as of July 1, 1995). Agricultural companies engaged in theproduction, processing and sale of agricultural products may apply to be registered as payers of FAT provided that their agricultural products accounts for more that 75 per cent. of total production for the preceding tax reporting year. Special VAT regime Certain qualified, agricultural producers may retain VAT collected on their raxable sales with view to recovering VAT paid on purchases of so-called production factors ; the excess of VAT collected over VAT paid is allowed to be used for other production needs. This VAT regime will be cancelled as of January 1,

64 KSG Agro S.A. Other state subsidies Since May 16, 2008, the date of Ukraine s accession to the WTO, Ukraine has been able to provide so-called yellow and green subsidies to its agricultural producers. Green subsidies (subsidies which do not affect the trade financing of infrastructure, marketing services, environmental matters, education etc.) are not limited by the WTO. The yellow subsidies are capped on an annual basis at (i) 5 per cent. of the overall agricultural production value generated in Ukraine in the relevant year in non-product-specific support, (ii) 5 per cent. of the total value of production of each of the basic agricultural products in the relevant year in product-specific support, plus (iii) up to an additional UAH 3 billion. This type of subsidy may be provided in the form of direct financial aid to agricultural producers as well as through tax exemptions and minimum price support. The Law of Ukraine On State Support of Agriculture of Ukraine dated June 24, 2004 provides also for other state subsidies, but their scope and availability generally depends on the funds allotted for these purposes in the state budget for relevant financial year. Partial Compensation for Finance Costs The state partially subsidizes interest paid by agricultural producers on loans received from Ukrainian commercial banks. The amounts of such subsidies are determined annually by respective Resolution of the Cabinet of Ministers of Ukraine (no such resolution for 2011 has, as yet, been passed). The state also partially subsidizes agricultural machinery purchased by agricultural producers. Agricultural producers are required to meet certain criteria to qualify for these subsidies. In December of 2010, Ukrainian Parliament adopted the country s state budget for The new budget includes about UAH 14 billion of financing of Ministry of Agriculture of Ukraine. 63

65 ENERAL INFORMATION ON THE ISSUER KSG Agro S.A. GENERAL INFORMATION ON THE ISSUER The Issuer KSG Agro S.A. is a public limited company (société anonyme) of unlimited duration that was incorporated, exists and operates under the laws of Luxembourg, in compliance with the Companies Act of 1915, other applicable Luxembourg regulations, and in accordance with its Articles of Association. The Issuer was incorporated as a public limited holding company by a notarial deed certified by Maitre Edouard Delosh, a notary residing at Rambrouch, Grand Duchy of Luxemburg, on November 16, 2010, under the name Borquest S.A. On November 16, 2010 the Issuer was registered with Registre de Commerce et des Sociétés in Luxembourg under registration number B The Articles of Association of the Issuer were published on 28 December 2010 in the Mémorial C, Recueil des Sociétés et Associations number On March 8, 2011 by virtue of the General Meeting of shareholders resolution certified by Maitre Francis Kesseler, a notary residing at Esch-sur-Alzette, Grand Duchy of Luxemburg, dated March 8, 2011 the Issuer was renamed into KSG Agro S.A. The Issuer s registered office is at 46A, Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg. The Issuer s telephone number to its registered office in Luxembourg is KSG Agro S.A. is a holding company of the Group whose principal assets are interests in equity of the Group s subsidiaries incorporated and operating in Ukraine in the crop farming industry. The Issuer does not carry any business operations except for direct and indirect holding of interests in equity in the Group s companies. The Group s business operations are conducted through its Ukrainian subsidiaries. The Group s principal business is farming business, mainly on production and sales of wide range of crops products, vegetables cultivation and fruit production. KSG Group is the agricultural producer in Easter Ukraine with approximately 33,700 ha of land under control in 4 regions of Ukraine: Dnipropetrovsk, Khmelnitsky, Kherson and Kharkiv regions. KSG Group headquarter in Ukraine is located at 40-b Komsomolskaya Street, Dnipropetrovsk, Ukraine. Its telephone number is and its fax number is Corporate Purpose According to Article 4 of the Issuer s Articles of Association the purpose of the Issuer is the acquisition of ownership interests, in Luxembourg or abroad, in any companies or enterprises in any form whatsoever, holding and the management of such ownership interests. The Issuer may in particular acquire by way of subscription, purchase and exchange or in any other manner any stock, shares and securities of whatever nature, including bonds, debentures, certificates of deposit and other debt instruments and more generally any securities and financial instruments issued by any public or private entity whatsoever. It may participate in the creation, development and control of any company or enterprise. It may further invest in the acquisition and management of a portfolio of patents and other intellectual property rights. The Issuer may also borrow in any form. KSG may issue notes, bonds and debentures and any kind of debt or other equity securities. The Issuer may lend funds, including the proceeds of any borrowings and/or issues of debt securities to its subsidiaries, affiliated companies or to any other companies which form part of the same group of companies as the Issuer. The Company may also give guarantees and grant security interests in favour of third parties to secure its obligations or the obligations of its subsidiaries, affiliated companies or any other companies, which form part of the same group of companies as the Issuer. The Issuer may further mortgage, pledge, hypothecate, transfer or otherwise encumber all or some of its assets. The Company may generally employ any techniques and utilise any instruments relating to its investments for the purpose of their efficient management, including techniques and instruments designed to protect the Issuer against credit risk, currency fluctuations risk, interest rate fluctuation risk and other risks. An additional purpose of the Issuer is to carry out any commercial, financial or industrial operations and any transactions with respect to real estate, movable property, corporate rights, intellectual property rights and any other type of property, which may be or are conducive to the above-mentioned activities. Corporate Resolutions and the Share Capital Upon the Issuer s incorporation on November 16, 2010, its issued share capital amounted to EUR 31,000 consisting of 3,100,000 ordinary registered shares, with a nominal value of EUR 0.01 each. On March 8, 2011, pursuant to a shareholders resolution, the Issuer s name was changed into KSG Agro S.A. On March 8, 2011, pursuant to an amendment of the articles of association of the Company the existing 3,100,000 shares with of a nominal value of EUR 31,000 were converted into USD and their nominal value were reduced to USD 0.01 each. As a result of these changes the share capital was USD 42, represented by 4,279,699 shares 64

66 KSG Agro S.A. having a par value of one cent (USD 0.01) each. On the same day the share capital was increased by USD 57,203.01, to USD 100,000 through the issue of 5,720,301 new shares with a nominal value of USD 0.01 each. By virtue of a shareholder s resolution dated March 8, 2011, the board of directors of the Company has been authorized, during a period expiring 5 (five) years after the publication of the authorisation in the Mémorial C, Recueil des Sociétés et Associations, to increase in one or several times the share capital within the limits of the authorized capital, by issue up to 20,000,000 Shares, with the power to limit or exclude any preferential subscription rights of the existing shareholders. Pursuant to Luxembourg corporate law, an appropriate report on the motives and reasons of the right to suppress the shareholder s preferential subscription rights has been submitted by the board of directors. The Board of Directors intends to use the authorisation to issue the Offer Shares in the Offering. As a result of the Offering, the issued share capital of the Company may be increased up to USD 149,255 through the issuance of 4,925,500 Offer Shares. Consequently, as at the date of this Prospectus, all of the Shares are ordinary Shares, are fully paid up and rank pari passu with each other and there is no other class of shares authorised. There are no different voting rights, and each share shall carry one vote. No depositary receipts for Shares in the capital of the Issuer have been issued with the agreement of the Issuer, and the Issuer has not been informed that depositary receipts for Shares in the capital of the Issuer have been issued without its agreement. All the Shares including the Offer Shares have been or will be issued under Luxembourg Companies Act. The table below shows the current Issuer s issued and paid-up share capital and the Issuer s issued and paid-up share capital after all of the Offer Shares have been issued: Cumulative number of shares Nominal value (USD per share) Current shares issued as at the date hereof 10,000, Offer Shares to be issued for the Offering 4,925, Total issued shares post-offering 14,925,

67 ROUP STRUCTURE KSG Agro S.A. GROUP STRUCTURE Description of the Group The following chart describes the Issuer s principal subsidiaries and interests in those as of date hereof as well as the structure of the Group, as on the date of the Prospectus. For a more detailed description of the assets, see: Business. Chart 1: structure of the Group KSG Agro S.A. (Luxemburg) 100% KSG Agricultural and Industrial Holding Limited (Cyprus) 99.9% Ukrainian Trading Company 0.1% 99.9% 99.9% 99.9% 99.9% 99.9% 99.9% 69.9% 99.88% 99.54% 99.9% 100% Scorpio Agro LLC Souz-3 LLC Goncharovo Agricultural LLC Agro-Dnister LLC TH-UAIH LLC Pivdenne Agricultural LLC ATD Dneprovsky LLC Unirem- Agro Plus LLC Askoninteks LLC Agro- Golden LLC PUAIH-2 LLC 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.12% 0.46% 0.1% KSG Agricultural and Industrial Holding Limited does not have 100 per cent. shares in all of its subsidiaires due to requirements of Ukrainian law under which a single shareholder companies cannot be a sole participant in a limited liability company, and a company may be a single participant only in one limited liability company. The remaining 30 per cent. in the share capital of the ATD Dneprovsky LLC is held by a former owner of the company. KSG Agro S.A. (the Issuer) The table below indicates the most important information on KSG Agro S.A. Company name: KSG Agro S.A. Registered office: 46A, Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg Date of incorporation: 16 November 2010 Registration number: B Profile of business Holding company Names of the Board of Directors members Sergiy Kasianov, Sergii Mazin, Oleksandr Shakhmatov, Jacob Mudde, Gwenaëlle Bernadette Andrée Dominique Cousin TheinformationonKSGAgroS.A.ispresentedin General information on the Issuer. Subsidiaries KSG Agricultural and Industrial Holding Limited, is a Cypriot holding company that is a direct sole or major shareholder of Ukrainian operating companies. The Issuer holds 100 per cent. of share capital and voting power in KSG Agricultural and Industrial Holding Limited. 66

68 KSG Agro S.A. Company name: KSG Agricultural and Industrial Holding Limited Registered office: Lampousas Street, 1095, Nicosia, Cyprus Date of incorporation: 02 August 2008 Registration number: Profile of business Holding company Names of the board of Sergiy Kasianov, Inter Jyra Cy (Directors) Limited, Inter Jyra Cy (Management) Limited directors members The Group s business is carried out by operating companies incorporated under the laws of Ukraine. The tables below indicate the most important corporate information on the Group s operating companies: Company name: ENTERPRISE #2 OF UKRAINIAN AGRICULTURAL AND INDUSTRIAL HOLDING LLC (PUAIH-2 LLC) Registered office: Ukraine Dnipropetrovsk region, Dnipropetrovsk, 40B, Komsomolska Street Date of incorporation: 08 April 2008 Registration number: Profile of business Production company agriculture Head of the Management Sergii Mazin Company name: UKRAINIAN AGRICULTURAL AND INDUSTRIAL HOLDING LLC (UAIH LLC or Ukrainian Trading Company) Registered office: Ukraine 01021, Kyiv, 16, Hrushevskoho Street, office 7 Date of incorporation: 22 February 2008 Registration number: Profile of business Trading of agricultural products Head of the Management Yuriy Hohol Company name: Scorpio Agro LLC Registered office: Ukraine Dnipropetrovsk region, Dnipropetrovsk, 40B, Komsomolska Street Date of incorporation: 28 July 2008 Registration number: Profile of business Production company agriculture Head of the Management Sergii Mazin Company name: Souz-3 LLC Registered office: Ukraine, Dnipropetrovsk region, Dnipropetrovsk, 40B, Komsomolska Street Date of incorporation: 04 January 1999 Registration number: Profile of business Production company agriculture Head of the Management Sergii Mazin 67

69 KSG Agro S.A. Company name: Goncharovo Agricultural LLC Registered office: Ukraine, Dnipropetrovsk region, Dnipropetrovsk, 40B, Komsomolska Street Date of incorporation: 25 March 2000 Registration number: Profile of business Production company agriculture Head of the Management Sergii Mazin Company name: Registered office: Agro-Dnister LLC Ukraine 32600, Khmelnitsky region, Novoushytsky district, town Nova Ushytsia, 26, Podilska Street Date of incorporation: 29 May 2008 Registration number: Profile of business Production company agriculture Head of the Management Volodymyr Drahanchuk Company name: TRADE HOUSE OF THE UKRAINIAN AGROINDUSTRIAL HOLDING LLC (TH UAIH LLC) Registered office: Ukraine, Dnipropetrovsk region, Dnipropetrovsk, 40B, Komsomolska Street Date of incorporation: 11 July 2008 Registration number: Profile of business Supply equipment and machinery to other members of the Group. Head of the Management Sergii Mazin Company name: Pivdenne Agricultural LLC Registered office: Ukraine, Kherson region, Beryslavskyy district, village Kachkarivka, 6, Lenina Street Date of incorporation: 18 October 2001 Registration number: Profile of business Production company agriculture Head of the Management Oleksandr Yavonenko Company name: ATD Dneprovsky LLC (Agro-Trade House Dneprovsky LLC) Registered office: Ukraine, 49000, Dnipropetrovsk region, Dnipropetrovsk, 6, Abkhazska Street, Apt. 40 Date of incorporation: 01 March 2002 Registration number: Profile of business Production company agriculture Names of the board of Sergii Mazin directors members 68

70 KSG Agro S.A. Company name: Unirem-Agro Plus LLC Registered office: Ukraine, Dnipropetrovsk region, Dnipropetrovsk, 40B, Komsomolska Street Date of incorporation: 16 April 2009 Registration number: Profile of business Production company agriculture Head of the Management Sergii Mazin Company name: Askoninteks LLC Registered office: Ukraine, 49000, Dnipropetrovsk region, Dnipropetrovsk, 40B, Komsomolska Street Date of incorporation: 07 June 2007 Registration number: Profile of business Holder of equipment and machinery fleet Head of the Management Sergii Mazin Company name: Registered office: Agro-Golden LLC Ukraine, 64120, Kharkiv region, Pervomaisky district; Verkhniy Byshkyn village, 67 Kosynova Street Date of incorporation: 10 March 2009 Registration number: Profile of business Production company agriculture Head of the Management Sergii Mazin 69

71 EY FORECASTS OF FINANCIAL DATA KSG Agro S.A. KEY FORECASTS OF FINANCIAL DATA KSG Agro S.A. has compiled the Group s financial outlook for year 2011 in March Financial data as well as operational assumptions used to derive such data have been examined by BDO Ukraine. The most material factor having an effect on projected 2011 financials is land bank expansion. As of the forecast compilation date, the Group has approximately 33,700 hectares of land under control. The forecast is based on the assumption that the Group would be able to increase land bank under control to at least 54,200 hectares as of the end of Assumptions about factors which the Group s management can influence are limited to new land acquisition forecasts for The Group s management believes that it would be able to achieve the set goal with regards to land acquisition due to the following factors: (i) Call option agreement for purchase a number of companies controlling land bank of approximately 10,360 hectares has been already signed; (ii) Availability of a number of alternative offers with regards to land bank acquisition that are currently under consideration of the Group s management Assumptions about factors which are primarily outside the Group s management influence relate to: (i) prices for agricultural commodities for 2011, as the Group has no influence on setting or controlling such prices; (ii) harvest yields for 2011 and 2012, which depends, besides other operational factors such as fertilizer input, which could be controlled by the Group, on such factor as weather conditions, which is certainly beyond the Group s control. The compiled forecast is based on the following assumptions that were used in order to avoid overstatement of the projected financial results: (i) The Group s management assumes that the newly acquired land will not include crops that are already planted by the current owners; the only financial effect associated with the newly acquired land will be that of winter crops revaluation; (ii) The prices for agricultural commodities are taken as of March 2011 Key financial projections, examined by the auditors, are summarized in the table below, as well as a summary of historical financials, which have been audited, except of EBITDA. EBITDA provides additional performance measure to show effects of the Group s operations which are difficult to recognize directly from the Combined Financial Statements of the Group. EBITDA calculations have not been subject to separate auditor s review although items used for calculation of EBITDA have been derived from the audited Combines Financial Statements, except for projected figure for Note that EBITDA measure should not be considered in isolation or as an alternative to net profit for the period or other data presented as indicators of financial performance. Presented EBITDA measure may not be comparable to other similarly titled measures of performance of other companies. Financial information, USD ths Net Revenue 6,863 13,785 15,628 26,511 Revaluation effect 5,204 4,251 16,919 25,470 EBITDA 3,231 5,810 12,207 24,239 Net income (914) 2,526 10,047 19,954 BDO Ukraine, an independent auditor of the Group, has issued a report on the forecast and gave its consent to include the report in the Prospectus. 70

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73 USINESS KSG Agro S.A. BUSINESS Overview KSG Agro is an agricultural holding with controlled land bank of approximately 33,700 hectares. The strategic focus of the Group s management is to strengthen its dominant position in its target region (Dnipropetrovsk, Kirovograd, and neighboring areas of Kherson, Mykolayiv, and Kharkiv regions, the Target Region ). The Target Region is rich in black soils and has favorable geographic location due to proximity to Dnipro River, main railways and Black Sea ports. The following map illustrates the Group s target region: The Group is primarily engaged in production of grains such as sunflower, wheat, barley, rapeseed, soybeans, etc., vegetables production and also produced groceries for retail chains. The Group uses new agricultural machinery park comprised of more than 330 items. Grain production is executed in line with farming model based on modern agricultural technologies such as no-till, mini-till, and other, which were adopted and by specialists of the Group. (For more details see Crop production process and farming management section ). Total Group s sales amounted to USD 6.9 million, USD 13.8 million and USD 15.6 million in 2008, 2009 and 2010, respectively. Major local consumers of the Group s production are oil refineries, flour producers, and livestock feed producers. Also, the Company supplies vegetables, fruit, meat and groceries processed under feedstock production scheme to retail chains, such as Ukrainian franchisers of SPAR International. KSG Group management believes that the Company has strong base for further horizontal and vertical expansion within its Target Region focusing on grain production, vegetable production, and food production for retail chains. Company History and Development The Group has grown from relatively small agricultural entity with land bank of approximately 5,000 thousand hectares of land in 2001 to one of the largest regional players with total land bank of approximately 33,700 thousand hectares as of the date of the Prospectus. In 2008, the companies belonging to the Group were consolidated under Cypriot holding company KSG Agricultural and Industrial Holding Limited with ultimate beneficiary owner Mr. Sergiy Kasianov. In , the Group extended its land bank to approximately 26,500 hectares by acquisitions of and establishment of several agricultural entities. Approximately USD 5 mln was invested into park of modern machinery. After this, the Company restrained its land bank expansion and focused reorganization of business processes. 72

74 KSG Agro S.A. The table below sets out the Group s historical milestones: 2001 Establishment of ATD Dneprovsky LLC with total land bank amounting to approximately 5,000 hectares 2007 Decision to focus on development of agricultural business is made by shareholders 2008 Increase of land bank under control to approximately 24,000 hectares by purchasing Scorpio Agro LLC, Souz-3 LLC, Goncharovo Agricultural LLC and Pivdenne Agricultural LLC Establishment of PUAIH-2 LLC and signing long-term lease agreements for approximately 1,000 hectares Revision of existing agricultural machinery park and replacement in principle outdated items. Total investments into new machinery amounted to USD 5 million and were mostly financed by leasing Acquisition of approximately 1,500 hectares in Khmelnitsky region via purchase of Agro-Dnister LLC. The land is used as an experimental base for implementing model of distant farming using same equipment park as for larger base region 2009 Launch of vegetables production on 42 hectares Start of vegetables, fruit and groceries shipments to retail chains 2010 Start of full scale vegetables production on 56 hectares of land by implementing capillary irrigation and vegetables storage facilities with capacities amounted to approximately 1,200 tons 2011 Further land bank expansion realized through acquisition of Unirem-Agro Plus LLC with land bank amounting to approximately 5,787 hectares and Agro-Golden LLC with approximately 611 hectares. Conclusion of option agreement for purchase of a number of companies with approximately 10,360 hectares of land leased. KSG Agro has a right to exercise the call option in case of successful IPO. Group s Strategy The Group s strategy is to strengthen its leading position in its Target Region and to develop into the largest vertically integrated agro holding in Central Ukraine. Group s vision: High marginal agricultural business resulting from long term cooperation with land owners, state and community Key strategic goals of the Group are summarized below: Increase land bank to 150,000 hectares by 2016 Management plans to increase its land bank under control to 150,000 ha over the next five years with major focus on Dnipropetrovsk and Kirovograd regions. Double operational efficiency of the land usage by the end of 2015 The Company sees efficient use of land as its core competitive advantage. The Group plans to increase net income per hectare substantially by the end of Key-strategic aspects facilitating such efficiency are summarized below: Further development of vegetables segment The Company plans to continue actively developing its vegetables segment. With only a few relatively large players and constantly growing demand for a qualitative large-scale supplies, Ukraine s vegetables segment currently represents a very promising and higher-marginal business niche. The vegetables share in the Company s revenues should increase from current 2 per cent. to 10 per cent. in Closer cooperation with retail chains The Group aims to achieve higher margins by gradually increasing proportion of revenue generated by sale of final product rather than agricultural commodities. Utilization of the irrigation potential in full The Group has control over approximately 2,000 hectares of land with irrigation infrastructure inherited from the soviet times and represented by pipe and channel networks. Use of artificial irrigation brings several benefits such as base for further vegetable sector expansion, ability to have higher grain yields and less exposure to weather risks. 73

75 KSG Agro S.A. Competitive Strengths and Advantages The Group s management relies on the following competitive advantages for its further development: Location right in the center of Ukraine s sunflower industry The Company operates in regions where around 40 per cent. of Ukraine s total sunflower crushing capacities are installed. This allows the Company to enjoy almost guaranteed demand for its sunflower harvest, the Company s major crop. Central Ukraine favorable climate, less competition and closer to export routes Majority of the Group s land is located in steppe and forest-steppe region which is characterized by softer winters, longer sunny days compared to northern regions and less risks of drought compared to southern. Company enjoys limited competition in the region with only one agroholding of comparable land bank size (approximately 37 thousand ha). The Company has been constantly approached by global grain traders due to its favorable geographical location (access to Dnieper river and close proximity to the Sea ports). Quality of black soil in the area of the Group s operations The land controlled by the Group lies in the region of high-quality black soils which are favorable for attaining high yields without excess fertilization. The average humus layer in the area is cm compared to average Ukrainian cm. Land bank development KSG Agro is performing its agricultural activities on land bank totaling approximately 33,700 hectares located in Dnipropetrovsk, neighboring areas of Kherson and Kharkiv regions, and Khmelnitsky regions. The Group established its operations in Khmelnitsky region as experiment with purpose to investigate possibility to diversify whether risks by cultivating land in different climatic zones and increase returns on assets based on use of same agricultural machinery park on larger land bank. The table below summaries land bank structure as of the date of the Prospectus: Name of Company Region Hectares Agro-Dnister LLC Khmelnitsky 1,607 Agro-Golden LLC Kharkiv region 611 ATD Dniprovsky LLC Dnipropetrovsk 3,500 PUIAH-2 LLC Dnipropetrovsk 2,194 Goncharovo Agricultural LLC Dnipropetrovsk 2,494 Pivdenne Agricultural LLC Kherson 1,671 Scorpio Agro LLC Dnipropetrovsk 6,011 Souz-3 LLC Dnipropetrovsk 6,722 Souz-3 LLC Kharkiv 3,054 Unirem-Agro Plus LLC Dnipropetrovsk 5,787 Total 33,652 The land cultivated by the Group is leased under agreements for the period of up to 10 years in average. The table below summarises land bank controlled by the Group with regards to lease agreements termination: Land bank Share Years before lease termination Land lease termination year 4,466 13% ,048 3% ,167 39% ,638 29% ,535 11% % ,720 5%

76 KSG Agro S.A. The Group has the right to extend the majority of current leases and has not experienced any difficulties with extension of the terms of such leases in the past. Under existing legislation, the Group has pre-emptive right to purchase the land plots being leased and, once the moratorium on sales of agricultural land is lifted, would consider such purchases on a case-by-case basis. The strategic focus of the Group s management is on retaining leading position in its Target Region. The special department responsible for land bank expansion activities was established. Its specialists search for potential targets, perform due diligence and structure deals. Also, they are involved in close work with owners of land plots. In order to keep control over quality land plots the Group s focuses on providing competitive rent payments to land owners Land bank with irrigation potential The Group has control over approximately 2,000 hectares of land with irrigation infrastructure inherited from the soviet times and represented by pipe and networks of irrigation channels. The infrasturcture can used for implementation of different irrigation approaches such as cappilary irrigation for vegetable production, frontal sprinkling machines, etc. Also this land bank can be easily extended up to about 3,000 hectares by attracting neighbor fields with minimal capital expenditures. The Group plans to further expand land bank with irrigation potential and plans in mid terms to increase it up to 5,000 hectares. Having an irrigation system is essential for vegetables production and cultivation of grains with higher yields. The Group plans to cultivate soybeans, corn and wheat reaching superior yields with less exposure to dry whether risks and prepare land for further vegetables sector expansion. Principal business segments overview Crop production Crops Crop production is core business of the Group. It is generally focused on production of sunflower, wheat, barley, rapeseed, soybeans, and other crops. The Group s land bank devoted to grain production is totaling approximately 32,000 hectares and is located in black soil regions of Dnipropetrovsk, Kharkov, Kherson and Khmelnitsky. Total production of grains amounted 56,609 ths tones in 2008, 69,614 ths. in 2009 and 54,930 ths tones in 2010, with grain sales amounting to 40,055 tones in 2008, 71,221 in 2009 and 42,897 in 2010, respectively. The Group currently focuses on the following crops: Sunflower. Used as row material for sunflower oil production it is essential for food industry. Ukraine is the leading exporter of sunflower oil and has approximately 9 millions tones per year of sun seed crushing capacities; therefore the crop has high demand ensures generation of high income per hectare. It is adopted to Ukrainian climate and therefore quite popular with local farmers. The Group uses hybrid seeds of sunflower which are resistant to diseases and less sensitive to crop protectors negative effects. Winter wheat. The crop is mainly used in food and animal fodder production. It is one of the most compatible crops with Ukrainian black soils. The well-draining conditions of loamy, black soils helps moisture penetrate down deep to root systems, reducing stress from dry conditions. Winter wheat is seeded in August or September and is usually harvested in July. Such a planting approach allows plant to acquire substantial level of moisture in the land during spring and generate higher yields compared to spring crops. The Group sees winter wheat as a strategic crop thanks to its high yield potential which can be realized on the cultivated land. Barley. The crop is mainly used for animal fodder production and in a less degree for food production. It has close qualities to wheat but has less exigent to soils quality and but more vulnerable to cold winters. The Group is focusing on production of winter barley thanks to higher yields compared to spring barley. Opposite to winter barley, spring barley production generally used in seed production activities. Rapeseed. The crop is mainly used for biodiesel production, fodder and other purposes. This crop is highly marginal but has exposure to risks of cold temperature during dormant period. Thanks to its ability to generate high incomes per hectare in can easily substitute sunflower without drop in sales. 75

77 KSG Agro S.A. Soy beans. The crop is commonly used as source of plant protein. Cropping soy beans is one of strategic focuses of the Group due to its ability to generate high income per hectare and high demand from food processing industry. The Group is also engaged in production of other crops such as corn, triticale, peas, buckwheat. The table below summarizes crop rotation applied by the Group during seasons Harvested area, hectares Crop Sunflower 8,974 9,262 14,973 Winter wheat 6,961 8,350 5,660 Winter barley 898 2,991 2,945 Soybeans 425 Spring barley 1,440 2, Rapeseed 1,148 1,179 Other crops Fallow land 4,065 1,145 1,000 Total 23,757 25,673 25,457 The Group harvests substantial share of sunflower for several reasons: sunflower is high marginal and liquid commodity which helped the Group to secure stable financial position during crisis and was also used as a part of crop-rotation scheme relatedtopreparationoflandinrespectofownfarmingmodel. The management plans to reduce share of sunflower by substituting it with winter wheat, soy beans and rapeseed. The following table summarizes Group s production figures for periods Crop production, tons Crop Sunflower 16,037 19,556 29,996 Winter wheat 29,171 30,372 17,206 Winter barley 3,685 11,362 6,521 Spring barley 4,630 6, Soybeans 495 Rapeseed 2,684 1,504 Other crops Total 56,609 69,914 54,929 In 2010 Ukrainian grain production was damaged by severe weather conditions: cold winter and dry summer which decreased yields. Still, the Group showed yields higher than average Ukrainian proved. Crop yields compared to average Ukrainian, tons per hectare Group Ukraine Group Ukraine Group Ukraine Wheat* Barley Sunflower Soybeans Rapeseed Source: Ukrstat 76

78 KSG Agro S.A. Crop production process and farming management The main factors effecting crop yields are climate conditions, land quality, plant nutrition and level of moisture in land. The climate conditions and land quality cannot be influenced by agriculture technologies. Plant nutrition level can be increased through fertilization but its effect is also limited by level of moisture in the upper level of soil. The Group s farming model is concentrated on increasing the level of moisture in upper level of soil and more effective use of fertilizers and plant protection. The Group s staff selects parts of modern agricultural technologies and adopt them to specific conditions of the Target Region. For example, the Group has implemented part of no-till framework combined with own research related to control of roots residuals focused on keeping higher moisture level. Selective approach to implementation of new agricultural technologies also allows the Group to have less capital expenditure. The Group s farming model is being continuously upgraded with purpose of delivering higher crop yields and reducing costs per hectare. For example, in 2010 the Company has successfully finished experiment of having two harvests per season on 100 hectares of non-irrigated land. The Company always implements new approach on relatively small land plot usually not more than 2 3 thousand hectares. After several successful experiments, the new approach is gradually implemented through all land plots under control. In addition to farming model, the Group s management tends to explore full potential of additional benefits related to certain land plots. For example, the Group plans to provide use of anhydrous ammonia which will reduce cost on fertilization thanks to ammonia pipeline which covers approximately 2,000 of Group s hectares. Grain production process consists of the following main stages: Tillage: tillage includes use of disks and ploughs to break up the top layer of the soil. Tillage is used to remove weeds, mix in soil additives like fertilizers, shape the soil into rows and prepare the surface for seeding. This process also includes roots residuals control and retention and is used to prepare land for newly sowed crop and keep higher level of moisture in the soil layer. Sowing: the most sensitive process in terms of starting time. It should be done within a relatively short period depending on the crop s biology. Time of sowing and level of moisture in land highly influences future yields. This process includes preparative actions such as calibration of seeds and treatment them with plant protectors. Plant cultivation: plant cultivation process begins after sowing is finished. The core of the process is control of plant nutrition, which is a part of the Company s faming model and is comprised of fertilization, application of plant protectors, and performing additional land processing. The Group specialists use step-by-step process of plant nutrition which is executed 1 3 times during season. Such an approach allows to estimate effect of fertilizers and plant protectors injections and spend them as much as required without making additional harm to plant and incur additional costs Harvesting: the harvesting season starts in July August for winter wheat and barley and ends in October with sunflower harvesting. The Group precisely plans time of start of harvest for every crop with focus on minimization of loss due to overripe seeds fall. The process also includes control of stubble remains focused on keeping level of moisture left in land after harvesting which is valuable for winter crops The table below indicates schedule of cultivation processes for crops cultivated by KSG Agro: Tillage Sowing Fertilization Harvesting Winter wheat August September September, February, April, June July Sunflower October April, May April, May September, October Winter barley August September, October September, October, February, April, June June, July Rapeseed July, August August, September August, September, February, April, June June, July Corn October May May September, October Barley October March March, May July Soybeans October May May August Suppliers and raw materials Use of appropriate raw materials in right time is essential issue for success in grain cultivation. The Group focuses its strategy on use of superior raw materials simultaneously searching for the ways to reduce costs by implementing new technologies such as precise farming, no-till planting, etc. The key raw materials for grain production are seeds, fertilizers, plant protectors, fuel and lubricants, etc. Supply of raw materials is centralized and performed by head office according to purchases budget prepared by agronomists and entity 77

79 KSG Agro S.A. directors and approved by the Group s top management. Such an approach allows the management to control inventory and outsource all business processes not related to farming into one center. Seeds: use of quality seeds is essential factor for maximizing high crop yields. The Group focuses on use of high quality seeds from leading local producers such as: Agroskop, Bison-Tekh, Agroshpera, Soyyeviy Vek, Silena, etc. The Group has also established own seed production facilities which cover its needs in full with regards to winter wheat and barley seed material. The management is continuously expanding area of its seed production facility by cooperation with local seed producers and scientific organizations. Fertilizers: fertilizers is core element of plant nutrition process and have critical impact on yield levels. The agronomists of KSG Agro mainly use ammonia nitrate, carbamide, nitroammophoska, ammophos, etc. and plans to implement use of anhydrous ammonia reducing costs spent on fertilization. The Group purchases fertilizers from official distributors of Russian and Ukrainian producers such as Ukragro NPK, Sicheslav, Khimtrademanagement, etc. Plant protectors: plant protectors are another core element of plant cultivation process. They are including herbicides, fungicides, insecticides, etc. The Company generally purchases plant protectors from reliable international brands such as Basf, Singenta, etc., and from official distributors like Khimagromarket, Bizon-Tech, Agro-Soyz, Agrosphera, Eridon, and others. Fuel: KSG Agro purchases certified fuel and lubricants from local suppliers. The management is motivated to establish long term relationships with suppliers and receive favorable working conditions. Many payments for raw materials are linked to revenues from harvest. Agricultural machinery and equipment KSG Agro has sufficient agricultural machinery to cultivate all its land bank. It employs modern equipment produced by European and US manufactures such as New Holland, Great Plains, Case, John Deer, etc. as well as best equipment produced by CIS manufactures. The Management applies principal of maximization of return on assets when investing into equipment; therefore it invests in modern efficient equipment such as wide-cut combiners and seeders, and dispose of old ones gradually. For example, in 2008 the Group sold out most of its old machinery and purchased new equipment using leasing schemes. Total cost of newly acquired machinery was about USD 5 million. The Group has established business process for use of machinery with purpose to get on time for every production process. Management divides machinery park into three classes depending on time of deployment on a field: Class A: Light machinery and equipment dislocated at area of each Group s entity. This park of machinery can be deployed on the field within several hours Class B: Machinery located in centers covering several entities in km radius. This park of machinery can be deployed on the field within one day Class C: Heavy machinery such as combines and power tractors. Use of this machinery is regulated by schedule prepared in respect of production milestones which is tightly linked to dates of sowing and harvesting Services and maintenance of modern and expensive agricultural equipment and machinery are outsourced to providers certified by producers. The Group uses detailed schedule of equipment technical checkups with focus to minimize idle time during critical agricultural processes. 78

80 KSG Agro S.A. The following table summarizes the Group s principal agricultural machinery and equipment as of December 31, 2010: Machinery and equipment Number of units Tractors 82 New Holland 20 Case 1 CIS Producers 61 Seeders 48 Great plains 3 John Deere 1 Flexi Coil 1 Agricola 1 Kinze 1 CIS Producers 41 Combines 14 New Holland 10 Case 2 CIS Producers 2 Sprayers 15 Berthoud 3 CIS Producers 12 Cultivator 63 Great plains 5 Case 1 Kverneland 1 CIS Producers 56 Harrowers 50 Great plains 3 Kuhn 1 Quivogne 5 CIS Producers 41 Weeder 26 Case 5 CIS Producers 21 Chipper 3 Quivogne 2 CIS Producers 1 Fertilisers spreader 12 Rauch 2 CIS Producers 10 Field baler 9 Spima 5 Case 1 Claas 1 Welger 1 CIS Producers 1 Roller 12 CIS Producers 12 Total

81 KSG Agro S.A. Crop storage facilities and transportation The Group has 30,000 tones of own storage facilities. Most of them are floor storage type facilities. The management believes the Group has sufficient level of storage capacities facilities thanks to excess supply of storage capacities in the Target Region. To ensure availability of storage capacities, the Group plans to purchase modern silo type elevator with total capacity of approximately 30 thousand tons located near its land plots and facilitated with railway branch. The table below indicates current storage facilities of the Group: Entity Region of location Total storage capacities, tonnes Processing capacities, tons per hour Scorpio Agro LLC Dnipropetrovsk 14, ATD Dneprovsky LLC Dnipropetrovsk 1, Goncharovo Agricultural LLC Dnipropetrovsk 5, Souz-3 LLC Dnipropetrovsk 8, Total 30,000 Crops sales In line with the current market practice, the Group normally enters into delivery contracts for up to 1 year or into single consignment contracts. Given the commodity nature of the market, its sale volumes would not be materially affected if it changed customers or lost one or more existing customers. Supply contracts with its customers are entered into for a maximum term of one year, which is a generally adopted business practice in the Ukrainian crop market. Crops are sold mainly within domestic market. The table below presents details of third-party sales of grain crops: Grain tons USD thousand tons USD thousand tons USD thousand Wheat 20,906 3,415 34,565 5,056 6, Sunflower 9,832 1,089 17,364 4,589 29,761 11,846 Barley 6, ,108 1,987 7, Rapeseed 2,684 1,201 1, Other Total sales 40,055 6,237 71,221 12,174 42,897 13,514 The following table presents agricultural business sales to its TOP customers: Name Sales, USD thousand %, from total sales Name Sales, USD thousand %, from total sales Name Sales, USD thousand %, from total sales Optimus LLC 1,473 21% Optimus LLC 3,147 23% Optimus LLC 12,838 82% UAF % UAF 1,681 12% SPAR International 709 5% Toepfer International 376 5% Nidera 1,566 11% WJ Grain LTD 385 2% Kernel Trade 239 3% CHS 1,083 8% Glencore 269 2% Other 3,959 58% Other 6,308 46% Other 1,427 9% Total 6, % 13, % 15, % In 2010, the Group sold all its sunflower harvest amounted approximately 28,000 tones to Optimus LLC, one of the leading oil producers in Ukraine thanks to favorable agreement conditions which included premium paid to the Group in case of retrospective change of commodity prices. The Ukrainian oil producers had competed for limited sunflower production on the market and tried to secure its needs in raw materials, therefore the Company executed this agreement with one customer, obtaining better conditions on providing bulk product volume. 80

82 KSG Agro S.A. Government support for the agriculture sector The Ukrainian Government provides various types of financial support to agricultural producers, including certain forms of price regulation. Income tax exemption The agricultural companies engaged in the production, processing and sale of agricultural products able to apply special regime of taxation called the FAT. The tax is paid in lieu of corporate income tax, land tax, duties for geological survey works and duties for trade patents. The amount of FAT payable is calculated as a percentage of the deemed value of all of the land plots leased or owned by a taxpayer (determined as of July 1, 1995). Agricultural companies engaged in theproduction, processing and sale of agricultural products may apply to be registered as payers of FAT provided that their agricultural products accounts for more that 75 per cent. of total production for the preceding tax reporting year. Special VAT regime Certain qualified, agricultural producers may retain VAT collected on their raxable sales with view to recovering VAT paid on purchases of so-called production factors ; the excess of VAT collected over VAT paid is allowed to be used for other production needs. This VAT regime will be cancelled as of January 1, Other state subsidies Since May 16, 2008, the date of Ukraine s accession to the WTO, Ukraine has been able to provide so-called yellow and green subsidies to its agricultural producers. Green subsidies (subsidies which do not affect the trade financing of infrastructure, marketing services, environmental matters, education etc.) are not limited by the WTO. The yellow subsidies are capped on an annual basis at (i) 5 per cent. of the overall agricultural production value generated in Ukraine in the relevant year in non-product-specific support, (ii) 5 per cent. of the total value of production of each of the basic agricultural products in the relevant year in product-specific support, plus (iii) up to an additional UAH 3 billion. This type of subsidy may be provided in the form of direct financial aid to agricultural producers as well as through tax exemptions and minimum price support. The Law of Ukraine On State Support of Agriculture of Ukraine dated June 24, 2004 provides also for other state subsidies, but their scope and availability generally depends on the funds allotted for these purposes in the state budget for relevant financial year. Partial Compensation for Finance Costs The state partially subsidizes interest paid by agricultural producers on loans received from Ukrainian commercial banks. The amounts of such subsidies are determined annually by respective Resolution of the Cabinet of Ministers of Ukraine (no such resolution for 2011 has, as yet, been passed). The state also partially subsidizes agricultural machinery purchased by agricultural producers. Agricultural producers are required to meet certain criteria to qualify for these subsidies. In December of 2010, Ukrainian Parliament adopted the country s state budget for The new budget includes about UAH 14 billion of financing of Ministry of Agriculture of Ukraine. Vegetables production The Group commenced vegetables production in 2008, when 36 hectares were sowed with cabbage. The vegetables production generate much higher incomes per hectare compared to grain production and has less exposure to whether conditions thanks to artificial irrigation base. In 2010, the group harvested 56 hectares of vegetables and plans to expand it up to 154 hectares in In 2010, total production of vegetables was 1,435 tons and mostly was sold to retail chains. The Group started vegetables production because of unsatisfied demand for quality vegetables generated by retail chain SPAR-Center, currently comprised of 18 stores, franchiser of global retailer SPAR International. Delivering standards of SPAR franchise, the Group established relationships with other SPAR franchisers in Ukraine such as SPAR-Kharkov and SPAR-Lugansk and one Russian franchise SPAR-Tula. Also, the Group supplies its production to ATB Market, leading Ukrainian chain in terms of number of shops. The Group supplies retail chains with vegetables for two different segments: economy segment and premium one, which differs because of additional package and processing. In 2010, the Group constructed vegetables storage facilities with total capacity of 1,200 tons to supply retail chains during winter and spring seasons. This facility became core completive advantage because many local vegetables producers 81

83 KSG Agro S.A. are relatively small farmers which have to sell all their production after harvest pushing prices down and are unable to construct own storage facilities due to high capital expenditure requirements. The management plans to construct additional 2,500 tons storage capacities in 2011, using placement proceeds. This facility will able to expand vegetables cropping area up to about 200 hectares. The following table summarizes harvested land and production volumes for 2010 for vegetables segment: Harvested land hectares Yields, tons per hectare Production volumes, tons Bulb onion Red beet Carrot Other cabbage Red cabbage Cabbage Total 1,435 Food Processing Business Because of the established relationships with retail chains the Group sees opportunities to get additional income by selling more groceries. Currently the Group produces flour, sunflower oil, packaged crops as SPAR private label products and plans to lunch macaroni production. All production is based on feedstock scheme. The management analyzing possibility to establish own processing facilities when turnover with retailers will be sufficient to fulfill its capacities. Employees As of 31 December 2010, number of permanent KSG Group employees was equal to 220. Due to high seasonality of agriculture industry, the Group employs a significant number of seasonal workers to perform key operations at certain periods of the agricultural year. The number of employees (with seasonal) employed in the year ended 31 December 2010 was 415. The following table indicates average number of employees according to business division as at the end of 2008, 2009 and March 12, 2011 December 31, 2010 December 31, 2009 December 31, 2008 Agricultural business Processing business Administrative Sales Other Total number of employees Seasonal staff The table below indicates the number and functional breakdown of our employees as at December 31, 2008, 2009 and 2010: March 12, 2011 December 31, 2010 December 31, 2009 December 31, 2008 Top management* Middle management Workers Total *including directors of departments and directors of enterprises As at the date of this Prospectus, according to the Issuer s knowledge the Group s employees do not have any shareholdings in the Company, do not hold any stock options or other rights to Shares and do not participate in any other way, in the capital of the Company. There are no arrangements relating to such participation. 82

84 KSG Agro S.A. The remuneration package of the Group s management comprises a fixed based salary and a performance-related bonus. Salaries are paid to the management according to standards and safeguards stipulated by Ukrainian employment legislation. Performance-related bonuses are calculated by reference to the net profit of the relevant farms. The Group s other employees are paid according to the requirements of Ukrainian employment legislation and prevailing market rates. The Operating Companies are subject to the Ukrainian state pension plan. The Company s pension provisions are calculated based on the individual salary of its employees, in accordance with respective laws and regulations of Ukraine. KSG does not operate a private pension plan for its employees and is not liable for any supplementary pensions, post-retirement health care, insurance benefits or retirement indemnities to its current or former employees. The Group s Ukrainian employees, including seasonal workers, work under employment contracts as required under Ukrainian law and their labor relations with the Group are regulated by such contract and by law. Some of the Group Companies enter into collective bargaining agreements with their employees. Collective bargaining agreements provide for certain benefits to the employees. Management considers that it has good relations with its employees. There has been no significant industrial action or labour dispute at the Group s operating companies since their establishment. Insurance The Group maintains insurance coverage for some of its assets. The insurance strategy is determined by a number of factors, including legal regulations, contractual obligations, and internal risk management and requirements. The Group s businesses and assets are subject to varying degrees of risk and uncertainty. Therefore, the Group maintains insurance for its winter crops, as well as assets used by the Group on the basis of the leasing agreements. The Group also maintains the mandatory insurance required by Ukrainian law. The above mentioned insurances are for amounts which the Company believes are sufficient and customary in Ukraine. The Group generally does not maintain any other insurance either because of its unavailability in the Ukrainian market or because of high cost. See also Risk Factors Risks Relating to the Group The Group s insurance coverage may be inadequate. Legal and Administrative Proceedings From time to time in the ordinary course of business, the Group is involved in legal proceedings relating to its operational and trading activities. To the Group s best knowledge, there were no material governmental, legal or arbitration proceedings involving the Issuer and/or the Group (including any such proceedings which are pending or threatened) during a period covering the previous 12 months which may have or have had in the recent past significant effects on the Group s financial position or profitability. Environmental Matters The Group is subject to various environmental protection and occupational health and safety laws and regulations relating to pollution, protection of the environment and protection of human health and safety in Ukraine. Its production facilities may release certain substances, which may be regulated or limited by applicable laws and regulations. As Ukrainian laws and regulations dealing with environmental protection are subject to frequent amendments, forcing the Group to respond quickly by adjusting to new and usually more stringent environmental requirements and standards, the Group makes all the necessary efforts to comply with environmental regulations and to prevent and minimize all the environmental hazards associated with its activities. While compliance with environmental laws and regulations is one of the Group s main concerns and responsibilities, such compliance did not materially affect its capital expenditure or earnings in the financial year ended 31 December 2010, and, based on current laws and regulations, we do not expect that it will affect the Group s financial year Licenses and permits The business of the Group depends on the continuing validity of several licenses and permits, the issuance to it of new licenses and permits and its compliance with the terms of the licenses and permits. The management of the Group believes that the Group is in the possession of all material licences and permits, which are necessary for the operation of its business. The Group has not been subject to any material claims relating to the safety of its products, compliance with sanitary, health and safety, use of genetically modified materials, agrochemicals etc. in the last three years. Production facilities and technological processes The effective Ukrainian laws require each company to obtain permits from the Fire Safety and Labour Safety authorities before starting the operation. Furthermore, Ukrainian laws require obtaining and maintain the validity of permits for the use 83

85 KSG Agro S.A. of dangerous equipment. Ukrainian Subsidiaries trading in food products are required to obtain an operational permit from the State Sanitary and Epidemiological Services of Ukraine for each such facility. The raw materials, food products as well as materials and equipment used for their production, storage, transportation and sale should comply with applicable sanitary standards and are usually subject to mandatory certification. Conducting business without obtaining such permits may result in substantial fines imposed on the company and its officials, and even more adverse sanctions, such as temporary prohibition to conduct business or cancellation of the state registration of a company. Environmental and Other Licenses and Permits The Group is subject to laws, regulations and other legal requirements relating to environmental protection, including those governing the discharge of substances into the air and water, the management and disposal of hazardous substances and waste, the clean-up of contaminated sites and the protection of flora and fauna. According to the Environmental Protection legislation, pollutants discharge and adverse physical/biological effect on environment are permitted within discharge limits and are subject to discharge permits. Ukrainian environmental laws and regulations establish limits for: (1) adverse physical and biological effect on atmosphere caused by the stationary sources, (2) air pollutants discharge, (3) sewage discharge and (4) waste for storage or utilization. Some of the above limits are established at a legislative level and some of them are to be determined under normative standards for each stationary source on a case-by-case basis in the respective permits. Pollutants and wastes discharge within respective limits is subject to a discharge fee, which is to be calculated according to the regulation of the Government of Ukraine. If the discharge limits are exceeded, five-fold rate apply to the excess volumes of discharge, and obligation to compensate respective damages caused to environment arise. The Group is generally in compliance with these requirements. Use of pesticides and agro-chemicals Pesticides and agro-chemicals may be imported to, produced, traded, used and advertised in, Ukraine only subject to their prior registration with the Ministry of Environmental Protection. Such registration is valid for a period of up to ten years. After the expiry of the registration, the relevant pesticide or agro-chemical must be re-registered. The Ministry of Environmental Protection publishes the list of pesticides and agro-chemicals that may be used in Ukraine every two years and provides annual updates to such list. Companies must submit to the state authorities information on the amounts of pesticides and agro-chemicals, which they possess and/or use on an annual basis. Technical equipment for the use of pesticides and agro-chemicals must also be registered. Such equipment must be re-registered every five years. In addition, technical equipment for the use of pesticides must be certified. Generally, companies which store or use pesticides or agro-chemicals purchase insurance in respect of liabilities that may arise as a result of such activities. However, as mentioned under Insurance, because generally this type of insurance is unavailable in the Ukrainian market, most of the companies engaged in the kind of activities in question in Ukraine do not maintain this type of insurance. Management believes that, to the extent the Group uses pesticides and agro-chemicals in its operations, it complies with the requirements in relation to their use. Export Quotas and Price Regulations On 4 October 2010, the Ukrainian Government introduced export quotas for wheat, meslin, corn, barley, rye and buckwheat which were expected to last until 31 December However, on 8 December 2010, the Government extended the quotas until the end of March On 30 March 2011 the Government extended the quotas until 30 June 2011 within the same amounts for all crops, except for corn, quoted amount of which has been increased for 2 million tones. While the Group s revenues from sales of agricultural commodities were, in proncipal, derived from domestic sales in year 2010, the Group was prevented from exporting such commodities due to being unable to obtain quotas permitting to export of crops. Accordingly, the Group had to reposition its strategy and focus on sales in domestic market and export of processed crops. Such restrictions and limitations can also affect agriculture volumes and prices in national, regional and world markets. The Government of Ukraine supports the domestic agricultural industry in accordance with the Law of Ukraine On State Support of Agriculture of Ukraine, dated 24 June 2004 (the State Support Law ). The State Support Law authorises the CMU to set minimum and maximum wholesale purchase prices for the some agricultural products, in particular: wheat, barley, rye, sunflower seeds, soybeans, rape and others in the respective marketing year 1. For the years 2011/2012 the CMU 1 Marketing year is a period starting from a month in which the supply of a good of the current harvest starts and ends on the last day of a month, preceding the month when the supply of the same good of the next harvest starts. 84

86 KSG Agro S.A. established a list of products which are subject to the state price regulations, in particular: soft and durum wheat, winter and spring rye, barley, buckwheat, corn, meslin, wheat and rye flour, beat sugar, dry milk and dairy butter. The total mark-up for these products shall not exceed 20 per cent of the producer s price. Real Property KSG Agro is performing its agricultural activities on land bank totaling approximately 33,700 hectares located in Dnipropetrovsk, neighboring areas of Kherson and Kharkiv regions, and Khmelnitsky regions. The land bank of the Group consists of the land plots leased by the companies of the Group on the basis of the land lease agreements entered into with the land owners and local authorities and lease agreements of land shares entered into with the owners of shares of land. The land cultivated by the Group is leased under agreements for the period of up to 10 years in average with pre-emptive rights for land lease prolongation, and purchase, in case of cancellation of the moratorium on sale of agricultural land in Ukraine. The companies of the Group also own certain agricultural buildings, such as garages, workshops, few granaries. The companies of the Group exercise the ownership right to real estate objects on the basis of (i) contracts of purchase and sale, (ii) certificates of acquisition of real estate property trough public tender, and (iii) certificates of ownership. The real property was acquired by the Group from the third parties or from the public tenders. Encumbrances and ownership over leased machinery Majority of the Group s assets, including real estate property, winter wheat crops, vehicles and machinery, are encumbered under a number of mortgage and pledge agreements concluded to secure our existing loan facilities and financial lease agreements. Further, the real estate property of Scorpio Agro LLC is mortgaged to OJSC Rodovid Bank to secure repayment of 12 million UAH loan due on 11 October Additionally, the majority of the real estate property of Soyuz-3 LLC is mortgaged to OJSC Bank Credit Dnipro to secure repayment of 20 million UAH loan due on 28 December See also Material Contracts below. Some of the Group s assets, in particular, agricultural machinery and equipment, are used based on finance lease contracts and the Group will not have ownership right to such machinery until full repayment of debt under the respective lease agreements. Failure to timely perform obligations under the lease agreements may result in seizure of such machinery and equipment and jeopardizing normal operation of the Group. Trend information To the best knowledge of the Company there are no other trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the Issuer s prospects for at least the current financial year. Furthermore, to the best knowledge of the Company there were no significant trends in production, sales and inventory, and costs and selling prices since 31 December 2010 to the date of this Prospectus. 85

87 ATERIAL CONTRACTS KSG Agro S.A. MATERIAL CONTRACTS The following contracts are the contracts that (i) have been entered into by the Company or any of its Group Subsidiaries within the two years immediately preceding the date of this Prospectus which are or may be material to their business or (ii) have been entered into by the Company or any of its Group Subsidiaries at any other time but which contain provisions under which the Company or any of its Group Subsidiaries has an outstanding obligation or entitlement that is material to the Group as at the date of this Prospectus. Share purchase agreements In 2010 and 2011, in preparation for the IPO and for various other corporate purposes, the Group has completed the reorganisation to restructure the Group s corporate structure. The Group s shareholding structure following the reorganisation is described in detail under Group structure. Option agreement The Company has entered into a call option agreement for purchase of shares in a number of Ukrainian based companies with 10,360 hectares of land bank in total and own machinery. The purchase price payable for the shares is USD 6.5 million. The option may be exercised by the Company till the end of August Financing agreements From time to time the Group companies enter into long term and short term loan agreements with Ukrainian banks to finance their operations. The principal outsanding loan agreements, concluded by Group companies are listed below: The Loan Agreement No dated 01 June 2010 with the Public Joint Stock Company Bank Credit Dnepro as lender (the BCD ) and Souz-3 LLC as borrower. The revolving credit facility in the amount of million UAH carries interest at 18 per cent. per annum. The loan is due on November 30, As of February 28, 2011, the aggregate amount outstanding for repayment by the borrower is approximately 22.8 million UAH. Souz-3 LLC intends to repay this loan not later than 30 November The Loan Agreement No dated 14 January 2011 with BCD as lender and Goncharovo Agricultural LLC as borrower for the principal amount of 2 million UAH with interest rate at 18 per cent. per annum. The loan is due on December 15, As of February 28, 2011 the aggregate amount outstanding for repayment by the borrower to BCD was approximately 0.8 million UAH. The Loan Agreement No dated 14 January 2011 with BCD as lender and ATD Dneprovsky LLC as borrower for the principal amount of 5 million UAH with interest rate at 18 per cent. per annum. The loan is due on December 15, As of February 28, 2011, the aggregate amount outstanding for repayment by the borrower to BCD was approximately 2.5 million UAH. The Loan Agreement No dated 14 January 2011 with BCD as lender and Scorpio Agro LLC as borrower for the principal amount of 3 million UAH carrying an interest rate at 18 per cent. per annum. The loan is due on December 15, As of February 28, 2011, the aggregate amount outstanding for repayment by the borrower to BCD was approximately 2.7 million UAH. The Loan Agreement No The Loan Agreement No /1 dated 17 February 2011 with BCD as lender and Souz-3 LLC as borrower for the principal amount of 10 million UAH having an interest rate at 17 per cent. per annum. The loan is due on December 25, As of February 28, 2011, the aggregate amount outstanding for repayment by the borrower to BCD was 10 million UAH. The Loan Agreement No /2 dated 17 February 2011 with BCD as lender and Goncharovo Agricultural LLC as borrower for the principal amount of 4 million UAH carrying an interest rate of 17 per cent. per annum. The loan is due on December 25, As of February 28, 2011, the aggregate amount outstanding for repayment by the borrower to BCD was 4 million UAH. The Loan Agreement No /3 dated 17 February 2011 with BCD as lender and Scorpio Agro LLC as borrower for the principal amount of 25 million UAH having an interest rate at 17 per cent. per annum. The loan 86

88 KSG Agro S.A. is due on December 25, As of February 28, 2011, the aggregate amount outstanding for repayment by the borrower to BCD was 25 million UAH. The Loan Agreement No /4 dated 17 February 2011 with BCD as lender and PUAIH-2 LLC as borrower for the principal amount of 1 million UAH having an interest rate at 17 per cent. per annum. The loan is due on December 25, As of February 28, 2011, the aggregate amount outstanding for repayment by the borrower was 1 million UAH. The Loan Agreement No. 066/ dated 27 February 2008 with the Public Joint Stock Company Rodovid Bank as lender and Scorpio Agro LLC as borrower for the principal amount of 12 million UAH having an interest rate at 16.5 per cent. per annum. The loan is due on October 11, As of February 28, 2011, the aggregate amount outstanding for repayment by the borrower was 12 million UAH. Some of the above loans are secured by pledge over future crops with the Group companies acting as property sureties under such pledge agreements. Financial Lease Agreements Some of the Group companies enter into the financial lease agreement under which they lease agricultural machinery. The main lessors of the Group companies are LLC SG Equipment Lease Ukraine, LLC Raiffeisen Lease Aval, LLC VAB Lease and Open JSC National Joint Stock Company UkrAgroLease. The leased machinery includes tractors, seeding machines, combines, spraying machines, rippers equipment etc. The lease agreements are usually entered into for a period from 42 to 65 months and provide for an option to buy out the equipment upon the expiration of the lease. The aggregate amount of outstanding lease payments and interest under the lease agreements as of February 28, 2011 constitutes approximately UAH12.8 million. Most of the lease agreements were entered between 2008 and 2009 years and are effective until the years In several instances the Group companies have restructured the debts under the lease agreements. The lease agreements provide for an advance payment in an amount per cent. of the value of the machinery. Generally, the lease payments depend on exchange rate of UAH to USD or Euro. The leased machinery is insured for the period of the lease agreement for the benefit of the lessors. Sales and Distribution agreements The companies of the Group sell barley, sunflower seeds, sunflower oil, wheat, flour, fruits and vegetables and certain other goods to their customers as described in more detail in the table below. Sales, tons Crop Sunflower 9,832 17,364 29,761 Barley 6,486 17,108 7,088 Winter wheat 20,906 34,565 6,037 Rapeseed 2,684 1, Other grains Total 40,055 71,221 42,897 A typical contract provides for general undertakings of the parties as to the sale of the goods with the price and characteristics indicated in the specifications to a contract. The sale is usually conducted on the basis of pre-payment or the basis of payment within 1 14 days upon the delivery of goods. From time to time the Group companies enter into the forward contracts for sale of grain on the Agrarian Exchange. Prior to year 2010 the Group exported significant amounts of wheat, corn, barley, rape as well as some processed products, such as sunflower oil. The typical export contract provides for slate of the goods on the basis of CPT (Incoterms 2000). All export sales of the Group conducted via UAIH LLC. In 2010 the Group continued export sunflower oil. Upon introduction of the quotas to the sale of grain as described in more details above (see Risk Factors Export restrictions on agricultural commodities imposed by regulatory authorities could adversely affect our business), the export sales of the Group of wheat, corn, barley and rape were partially replaced by sales of grain and other products to customers in domestic market as well. The Group Companies sell wheat to Agrarian Fund of Ukraine. The contracts are concluded for a short term and provide for 50% pre-payment. The quantity, price and terms of delivery are usualy determined in the contract. 87

89 KSG Agro S.A. The Group Companies sell barley and sunflower seeds to LLC Optimus. The contracts are concluded for a short term and provide either for 100% pre-payment, for payments in instalments, or for full payments made during three days following the receipt of the warehous document. The delivery of the goods is subject to FCA, EXW, DDP terms (INCOTERMS 2000) depending on a contract. The Group Companies sale sunflower seeds to LLC Kernel-Trade. The contracts are concluded for a short term. Payments under the contracts are made during three days following the date of receipt of the documents provided in the contract. The delivery of the goods is subject to EXW terms (INCOTERMS 2000). The top customers of the Group companies and sales figures to such customers for the past three years are summarized in the table presenting agricultural business sales to the Issuer s TOP customers (see: Business Principal business segments overview ). Other material agreements Supply Contracts The Group Companies purchase petroleum, seeds, plant protectors and fertilizers from the supplyers as described in more detail below. Petroleum products supplyers: The Group Companies purchase pertoleum products from LLC Kryvbasoptima based on the short-term (up to one year) agreements, which sometimes have automatic renewal clause. The terms of such agreements provide for 100% pre-payment and the delivery conducted on CPT or PCA basis (Incoterms 2000). The Group Companies purchase pertoleum products from the Firm Popov and Co based on the short-term (up to one year) agreements, which sometimes have an automatic renewal clause. The terms of such agreements provide for 100% pre-payment and the delivery conducted on CPT or PCA basis (Incoterms 2000). The Group Companies also purchase pertoleum products from LLC Trade Company Impuls based on the short-term (up to one year) agreements. The terms of such agreements provide for 100% pre-payment and the delivery conducted on CPT basis (Incoterms 2000). Seeds supplyers: The Group Companies purchase sunflower seeds from LLC Agrosphera. The agreements are usually short-term (up to one year). The payment under the agreements are conducted in Ukrainian gryvnya, however the final price of the contracts depend on the exchange rate of UAH to US Dollar or Euro. The delivery terms are EXW (Incoterms 2000). The payment terms are defined in specifications to the agreements (deferring payment or pre-payment). The Group Companies purchase seeds from LLC Agroscope Ukraine. The agreements are usually short-term. The payment under the agreements are conducted in UAH, however the final price of the agreement depends on the exchange rate of UAH to US Dollar or Euro. The goods are delivered to the location specified in the agreement. The terms of the agreements provide for payment in instalments with 30 40% pre-payment. The Group Companies purchase sunflower seeds and corn seeds from Private Enterprise Bizon-Tech The agreements are usually short-term. The payment under the agreements are conducted in UAH, however the final price of the agreement depends on the exchange rate of UAH to US Dollar. The delivery terms are CPT (Incoterms 2000). The terms of payment terms are defined in specifications to the agreements (usually payment upon delivery or deferring payment payable in instalments). Plant protectors supplyers: The Group Companies purchase plant protectors from LLC Agrosphera. The agreements are usually short-term (up to one year). The payment under the agreements are conducted in UAH, however the final price of the agreement depends on the exchange rate of UAH to US Dollar or Euro. The delivery terms are EXW (Incoterms 2000). The payment terms are defined in specifications to the agreements (usually 100% pre-payment). The Group Companies purchase plant protectors from LLC Production Association Agro-Soyz. The agreements are usually short-term (up to one year). The payment under the agreements are conducted in UAH, however the final price of the agreement depends on the exchange rate of UAH to US Dollar or Euro. The delivery terms are EXW or CPT (Incoterms 2000). The payment terms are defined in specifications to the agreements (usually % pre-payment). The Group Companies purchase plant protectors from Private Enterprise Bizon-Tech The agreements are usually short-term. The payment under the agreements are conducted in UAH, however the final price of 88

90 KSG Agro S.A. the agreement depends on the exchange rate of UAH to US Dollar. The delivery terms are DDP (Incoterms 2000). The payment terms are defined in specifications to the agreements (usually deferring payment). The Group Companies purchase plant protectors from the LLC Khimagromarket. The agreements are usually medium-term. The payment under the agreements are conducted in UAH, however the final price of the agreement depends on the exchange rate of UAH to US Dollar. The delivery terms are CPT (Incoterms 2000). The terms of such agreements provide for deferred payment in instalments. Fertilizers supplyers: The Group Companies purchase fertilizers from the LLC Khimtrademanagement. The agreements are usually short-term (up to one year). The delivery terms are EXW (Incoterms 2000). The terms of such agreements provide for 100% pre-payment. The Group Companies purchase fertilizers from the Closed JSC Ukragro NPK. The agreements are usually short-term. The delivery terms are EXW (Incoterms 2000). The terms of such agreements provide for payment in instalments with partial pre-payment or 100% pre-payment (dependning on a contract). Storage Facilities The Group companies enter into the storage agreements for storage of sunflower seeds, wheat and barley. The storage contracts are usually of short term (up to one year) and are extended on annual basis. Suretyship Agreements The Group companies often enter into the suretyship agreements to secure obligations under the loan agreements of the other Group companies. Currently, the following suretyship agreements are in place among the Group companies and their creditors: Suretyship Agreement No /1 between Souz-3 LLC as a surety and BCD, under which Souz-3 LLC acts as a surety under the Loan Agreement No , the Loan Agreement No , the Loan Agreement No and the Loan Agreement No The respective aggregate amount of the secured obligations for repayment of the principal amount of loans is approximately 12 million UAH. Suretyship Agreement No /2 between Goncharovo Agricultural LLC as a surety and BCD, under which Goncharovo Agricultural LLC acts as a surety under the Loan Agreement No , the Loan Agreement No and the Loan Agreement No The respective amount of the secured obligations for repayment of the principal amount of loans is approximately 10 million UAH. Suretyship Agreement No /3 between ATD Dneprovsky LLC as a surety and BCD, under which ATD Dneprovsky LLC acts as a surety under the Loan Agreement No , the Loan Agreement No and the Loan Agreement No The respective amount of the secured obligations for repayment of the principal amount of loans is approximately 7 million UAH. Suretyship Agreement No /4 between Scorpio Agro LLC as a surety and BCD, under which Scorpio Agro LLC acts as a surety under the Loan Agreement No , the Loan Agreement No and the Loan Agreement No The respective amount of the secured obligations for repayment of the principal amount of loans is approximately 10 million UAH. Suretyship Agreement No /1 between Goncharovo Agricultural LLC as a surety and BCD, under which Goncharovo Agricultural LLC acts as a surety under the Loan Agreement No The respective amount of the secured obligations for repayment of the principal loan amount is approximately 20 million UAH. Suretyship Agreement No /2 between ATD Dneprovsky LLC as a surety and BCD, under which ATD Dneprovsky LLC acts as a surety under the Loan Agreement No The respective amount of the secured obligations for repayment of the principal loan amount is approximately 20 million UAH. Suretyship Agreement No /3 between Scorpio Agro LLC as a surety and BCD, under which Scorpio Agro LLC acts as a surety under the Loan Agreement No The respective amount of the secured obligations for repayment of the principal loan amount is approximately 20 million UAH. Interest Free Loans In order to manage cash flows, the Group companies enter into short-term interest free loans for amounts ranging from 1 to 7 million UAH. Under the Law of Ukraine on Financial Services and State Regulation of Financial Services Market, dated 12 July 2001, and other applicable Ukrainian banking and financial legislation, intra-group funding needs can be satisfied by an Ukrainian company (acting as lender) on an interest-free basis only. Indeed, the granting of interest-bearing loans (at arms lenght basis) would be regarded as a financial service for which the Ukranian company 89

91 KSG Agro S.A. acting as lender would need to be granted by a prior banking or a financial institution license. Given that none of the Ukrainian Group companies is a financial (or banking) institution, it is only possible for the Ukrainian Group company to provide an interest-free loan to meet the needs of intra-group funding. Currently the Group companies are parties to the following interest free loan agreements: (1) Interest Free Loan Agreement No. AFG 21/12, dated 21 December 2010, between the Agro-Dnister LLC as a lender and the Scorpio Agro LLC as a borrower. The amount of the loan is UAH 1 million, which has been granted for 6 months; (2) Interest Free Loan Agreement No. DFPV 6/10, dated 6 October 2009, as amended by the Supplementary Agreement No. 1, dated 24 November 2010, between ATD Dneprovsky LLC as a lender and Pivdenne Agricultural LLC as a borrower. The amount of the loan is UAH 2.5 million, which has been granted for 6 months; (3) Interest Free Loan Agreement No. SkF 06/09-2, dated 6 September 2010, as amended by the Supplementary Agreement No. 1, dated 7 September 2010, between Souz-3 LLC as a lender and Goncharovo Agricultural LLC as a borrower. The amount of the loan is UAH 6 million, which has been granted for 6 months; (4) Interest Free Loan Agreement No. SkF 06/09-1, dated 6 September 2010, as amended by the Supplementary Agreement No. 1, dated 7 September 2010, between Souz-3 LLC as a lender and Pivdenne Agricultural LLC as a borrower. The amount of the loan is UAH 3.7 million, which has been granted for 6 months; (5) Interest Free Loan Agreement No. SF 27/10, dated 27 October 2010, between Scorpio Agro LLC as a lender and TH UAIH LLC as a borrower. The amount of the loan is UAH 3 million, which has been granted for 6 months; (6) Interest Free Loan Agreement No. SF 01/15-04, dated 15 January 2009, as amended by the Amendment Agreement, dated 8 September 2010, between Souz-3 LLC as a lender and Agro-Dnister LLC as a borrower. The amount of the loan is UAH3 million, which has been granted for 6 months. 90

92 RELATED PARTY TRANSACTIONS KSG Agro S.A. RELATED PARTY TRANSACTIONS Supply contracts with retail chain SPAR-Center: The Group also supplies vegetables, fruits, flour, sunflower oil, meat and other groceries produced under SPAR private label to SPAR-Center LLC, the Ukrainian franchiser of SPAR International which controls 18 SPAR supermarkets in Ukraine. SPAR-Center LLC is ultimately controlled by the Beneficial Owner. The Group s total sales of products to SPAR-Center LLC accounted for USD 0 in 2008, USD 118 ths in 2009 and USD 646 ths in In addition to this, the Group established relationships with two independent SPAR franchisers in Ukraine SPAR-Lugansk and SPAR-Kharkiv, as well as with Russian SPAR-Tula. Other Related Party Transactions Cypriot memebr of the Group KSG Agricultural and Industrial Holding Limited (Cyprus), has entered into a loan agreement with the Principal Shareholder, dated 8 October 2009, as amended by the amendment agreement, dated 11 March The outstanding amount of the loan as of the 14 March was USD 1,110,886. The contract has been signed for the period until 8 October 2012 with the annual interest rate equal to 5%. Generally, the Group performs transactions with related parties, such as sale and purchase of agricultural products, provision of services concerning the cultivation of land and harvesting in the ordinary course of business. The amount of the Group s turnover with related parties is USD 0 in 2008, USD 32 ths in 2009 and USD 235 ths in 2010 (excluding the amounts of Sales to SPAR-Center indicated above). Some related parties transactions (shares purchase agreements) were also concluded during creation the Group. Related parties comprise the Group parent s associates, the shareholders, companies under common control of the Group s controlling owners, key management personnel of the Group and their close family members, and companies that are controlled or significantly influenced by shareholders. Prices for related party transactions are determined when these transactions are to be effected. Management believes that related party transactions were concluded at arm s lenght prices, it is however possble that the terms of some of these transactions may differ from the market terms. 91

93 ANAGEMENT AND CORPORATE GOVERNANCE KSG Agro S.A. MANAGEMENT AND CORPORATE GOVERNANCE Set out below is a summary of relevant information concerning the Board of Directors, senior management as well as a brief summary of certain significant provisions of Luxembourg corporate law, the Issuer s Articles of Association and particular issues from the corporate governance codes in respect of the Board of Directors. Board of Directors The Issuer has a one-tier management structure consisting of the Board of Directors. Composition, Powers and Functioning The Board of Directors is responsible for the management of the Issuer s operations. It is vested with the broadest powers to take any actions necessary or useful to fulfill the Company s corporate purpose, with the exception of actions reserved by Luxembourg law or the Articles of Association to the General Meeting of shareholders. The Board of Directors must consist of a minimum of three directors. All members of the Board of Directors may be appointed and/or dismissed by the General Meeting of shareholders, for a period not exceeding six (6) years and until their successors are elected. Upon the General Meeting decision the directors may be appointed under two different classes, as class A Director(s) and class B Director(s). Decision to suspend or dismiss a director must be adopted by the General Meeting of shareholders with a majority of more than one-half of all voting rights present or represented. In the event the General Meeting of shareholders has appointed different classes of directors, the Issuer is bound towards third parties in all circumstances by the joint signature of any A Director and any B Director, or by the signature of any duly authorised signatory within the limits of such authorisation delegated by the Board of Directors by means of a decision of majority of the directors, provided that such a decision is approved at least by one A Director and by one B Director. In the event directors are not divided into different classes, the Issuer is validly bound by the joint signature of any two directors of the Company, or by the signature(s) of any other person(s) to whom authority has been delegated by the Board of Directors by means of a decision of majority of the directors. The Issuer intends to promote that as of the date of Prospectus all Directors B are independent from the Issuer. Members of the Board of Directors As at the date hereof, the Issuer s Board of Directors is composed of 5 directors. The table below sets forth the names, respective class, function, election date, and terms of office of the current members of the Board of Directors as of the date of the Prospectus. Name Class/Function Date of Appointment Expiration of term of office Sergiy Kasianov Class A Director, Chairman March 8, Sergii Mazin Class A Director March 8, Oleksandr Shakhmatov Class A Director March 8, Jacob Mudde Class B Director March 8, Gwenaëlle Bernadette Andrée Dominique Cousin Class B Director March 8, The director s term of mandates expires at the annual general meeting in the year indicated above. Any director may be removed at any time, without notice and without cause, the general meeting of shareholders. The business address of B Directors is the Issuer s principal place of business at 46A, Avenue J.F. Kennedy, L-1855 Luxembourg, the Grand Duchy of Luxembourg. The business address of Sergii Mazin is KSG Group headquarter in Ukraine located at 40-b Komsomolskaya Street, Dnipropetrovsk, Ukraine, whereas business address of Sergiy Kasianov is 4A Rognidynska Street, Kiev, Ukraine. A brief description of qualifications and professional experience of the members of the Board of Directors is presented below. Sergiy KASIANOV Mr. Kasianov has been a member of the Board of Directors since March 2011 and is responsible for overall supervision and strategic planning of the Group s business. Mr. Kasianov is also the major shareholder of the Group. He has broad and well diversified business experience: in 1994 he has started his own business by founding a company that was one of the leading importers of household chemistry in Ukraine. In 1997 he founded another company that was engaged in production of well known household chemistry brands. Mr. Kasianov became a major shareholder of the Group in

94 KSG Agro S.A. Mr. Kasianov graduated from the Dnipropetrovsk engineering and building institute (1992). He also holds a doctorate degree in technical science (1998). Sergii MAZIN Mr. Mazin has been a member of the Board of Directors since March 2011 and is responsible for operational management of the Company. Simultaneously he acts as a CEO of Ukrainian holding company of the Group named LLC UAHE No. 2. Before that Mr. Mazin held a position of financial director of the Company. Mr. Mazin began his career in agriculture business in 2000, when he became a co-founder of the agricultural company Diya. Apart from that Mr. Mazin has a significant managerial work experience obtained at agriculture companies MIR LLC and Diya LLC, were he held top-management positions for more than ten years. Mr. Mazin has been working in the Group for over three years. Mr. Mazin completed his higher education, graduating from Dnipropetrovsk institute of engineers of railway transport (1985). Oleksandr SHAKHMATOV Mr. Shakhmatov has been a member of the Board of Directors since March 2011 and is responsible for control of the Company s top-management and key executives. Simultaneously he acts as an internal auditor of the Group. Mr. Shakhmatov has broad experience in finance and advisory services. During the last twelve years he held positions in the Supervisory Boards of large corporations, acted as a crisis manager to big trading enterprise and was the director in agricultural companies. Mr. Shakhmatov has been working in the Group for over four years. Before joining the Issuer, Mr. Shakhmatov worked as Chairman of Tender Committee at Logos LCC in He also worked as Chairman of the Board at JSC Alminsky stone ( ) and deputy chief financial officer at Alma Kiev LLC (2007). Mr. Sharkhmatov graduated from the Dnipropietrovsk State University (1987) with a degree in production of aircraft and Dnipropietrovsk National University with specialization in business economics. He also completed Ukrainian Institute of Stock and Market Development with a degree in asset management in 2007 and National Pharmaceutical University specializing in quality, standardization and certification (2011). Jacob MUDDE Mr. Jacob Muddle has been a member of the Board of Directors since March Before joining the Issuer, Mr. Muddle worked as Administrator Cash & Service at Pricewaterhousecoopers in He also worked as Assistant Concern Controller at Brunel International N.V. ( ), Account Manager ( ) and Senior Account Manager ( ) at Amaco Netherlands B.V and Amaco Curacao N.V. Mr. Jacob Muddle received a European Master in Law and Economics degree in 1994 from International School of Law and Economics at the University of Hamburg, Ghent and Manchester University, moreover holds a degree in Law from Erasmus University Rotterdam (1994). Mr. Muddle is an independent member of the Board of Directors. Gwenaëlle, Bernadette, Andrée, Dominique COUSIN Gwenaëlle, Bernadette, Andrée, Dominique Cousin has been a member of the Board of Directors since March In 1996 she worked as a client administrator at Credit Industriel de L ouest and in 1997 as a securities administrator at Clearstream Banking (Luxembourg). Between 1997 and 2003 she worked as senior external auditor and corporate finance manager at Deloitte & Touche S.A. Ms Dominique Cousin completed Management Courses at the University of Cincinnati (1995) and graduated from the Audencia Business and Management School with specialization in finance (international finance, financial management, financial markets). Since 2002, she holds the title of Chartered Accountant. Ms. Cousin is an independent member of the Board of Directors. Key Executives In the opinion of the Issuer, apart from the Board of Directors members, the following persons are the most important for the KSG Group (the Key Executives ): Vladimir DRAGANCHIUK Mr. Draganchiuk has been a Deputy Director of the Group since July, He is responsible for coordination of production activities of the Group s enterprises. Before that Mr. Draganchiuk held a position of Deputy Director of Production at Privat-Agro LLC. Mr. Draganchiuk began his career in 1986 in Krasnopolskiy State Farm making his way up from mechanic to repair shop manager. Since 1996 Mr. Draganchiuk held executive positions at enterprises operating in the field of agriculture, namely: General Director of AF Vozrozhdenye LLC, Deputy Director of Production 93

95 KSG Agro S.A. in AF Naukova, Director of Agr. Enterprise Podolye, Chairman of cooperative society Urochai-1. Mr. Draganchiuk has been working in the Group for over three years. Mr. Draganchiuk graduated from the Dnipropietrovsk State Agricultural University (1992) with a engineer- mechanic degree. Larisa VELICHKO Ms. Velichko has been a Chief Financial Officer of the Group since March She is responsible for coordination of the Company s financial function. Before that Mrs. Velichko occupied a position of chief accountant in several companies of the Group. Mrs. Velichko began her career in 1973 as an accountant. Beginning from 1996 Mrs. Velichko held a position of chief accountant in various enterprises, such as Dnipropetrovsk Factory of the Mining Equipment, JSC Dneprolux, PE August, SofplPlastic LLC, Dnepr-Contact LLC, Business Management Group LLC. Mrs. Velichko has been working in the Group for over two years, as a Chief accountant ( ) and currently as a Financial Director. Ms. Velichko holds an engineering degree (1983) from Dnipropetrovsk Metallurgical Institute. Irina KOZENKO Ms. Kozenko has been a Director of Marketing Communications and PR Development of the Group since January She is responsible for marketing activities related to the Group s land bank expansion. Before that Mrs. Kozenko held a position of Director at HDI-Insurance LLC. Mrs. Kozenko began her career in 1990 as an officer of Zavoodskoi District Council of Dneprodzerzhynsk. Therein she worked her way up from the Head of Legal Division to Vice-Chairman of District Council. Mrs. Kozenko has been working in the Group for over one year. Mr. Irina Kozenko holds an engineering degree form Dneprodzerzhinsk Industrial Institute (1994) and also received a Master of Public Administration degree (1997) from Dneprodzerzhinsk State Technical University. Irina PALIVODA Ms. Palivoda has been a HR Manager of the Group since September, She is responsible for development and realization of HR management strategy. Before that Mrs. Palivoda held a position of HR manager in CJSC KS Trading. Mrs. Palivoda began her career in 1993 in AMUR Company as a secretary. Since 1999 she worked as HR manager in a recruiting agency. Mrs. Palivoda held executive positions in companies operating in retail sector, for instance Head of Management Service in Negotiant LLC. Mrs. Palivoda has been working in the Group for over two years. Mr. Palivoda completed his higher education, graduating from Dnipropetrovsk State University (1985) with specialization philologist, teacher, translator. Directorships of Directors and Key Executives The following table sets out additional past and current directorships held by the Issuer s Board of Directors members and Key Executives in the past five years: Name Sergiy Kasianov Sergii Mazin Positions Held Former directorships: SPAR-Ukraine LLC President (XII 2009 II 2011) SPAR-Ukraine LLC Director (VI 2010 II 2011) UAIH LLC President (XI 2008 VII 2009); Innovative City Development Investment LLC President (VII 2007 VII 2008); Innovative City Development Investment LLC Director (VI 2007 VII 2007); Current directorships: KSG Agricultural and Industrial Holding Limited Director (from III 2011) ICD UA LLC President (from VII 2008) Former directorships: PUAIH-2 LLC Financial Director (II 2009 VI 2010); KStreiding JSC Financial Director (XII 2008 II 2009); PUAIH-2 LLC Director (VII 2008 XII 2008); Agricultural DIYA LLC Director (I 2007 IV 2007); Agricultural DIYA LLC Chief in department of plan and economic (VI 2005 I 2007); 94

96 KSG Agro S.A. Name Positions Held Current directorships: Unirem Agro Plus LLC Director (from III 2011); Askoninteks LLC Director (from III 2011); PUAIH-2 LLC Director (from VI 2010); Scorpio Agro LLC Director (from VI 2010); Soyuz-3 LLC Director (from VI 2010); Goncharovo LLC Director (from VI 2010); TH UAIH LLC Director (from VI 2010); ATD Dneprovsky LLC Director (from VI 2010); Agro-Golden LLC Head of the Management (from 2011) UAIH LLC Commercial Director (from VII 2009); Aleksandr Shakhmatov Jacob Mudde Gwenaëlle, Bernadette, Andrée, Dominique Cousin Irina Kozenko Vladimir Draganchiuk Irina Palivoda Larisa Velichko Former directorships: Soyuz-3 LLC Financial Director (VII 2008 XI 2008) PUAIH-2 LLC Director (III 2008 VII 2008); Alma Kiev LLC Deputy Chief Financial Officer (IV VII 2007); JSC Alminsky Stone Chairman of the Board (VII 2005 IV 2007); Current directorships: None Jacob Mudde and Gwenaëlle Bernadette Andrée Dominique Cousin are currently and have been in the last five years directors in various companies administered by Domiciliation and Management Agent Equity Trust Co. (Luxembourg) S.A., their current employer. These positions did not have any relation to their membership in the Board of Directors and do not create any conflict of interest. Former directorships: Directorate of Dnipropetrovsk HDI Insurance Director (XII 2006 I 2010) Executive Committee of Factory District Council Deputy head (IV 2002 V 2006) Current directorships: PUAIH-2 LLC Director of development and PR (from I 2010) Former directorships: None Current directorships: PUAIH-2 LLC Deputy director of production, development and PR (from 2008); Former directorships: KStrading CJSC Engineering Company KS LLC HR Director (XI 2003 IX 2009); Current directorships: PUAIH-2 LLC HR Director (from II 2009); Former directorships: None Current directorships: PUAIH-2 LLC Financial Director (from III 2011) 95

97 KSG Agro S.A. Shares or Share Options held Except for Mr. Sergiy Kasianov, who indirectly holds 98 per cent. of the Issuer s share capital as on the date of the Prospectus, no other member of our Board of Directors and no other member of Key Executives holds directly or indirectly any Shares or stock options over such Shares in the Company. For information on the shareholding of Mr. Sergiy Kasianov see Principal Shareholder. No employees of the Group hold any shares in the Group companies. At the date of this Prospectus, the Issuer has no stock option plan or other arrangements in place for members of the Board of Directors, Key Executives or Group employees pursuant to which such persons can acquire shares or options of such shares in the Issuers capital or its subsidiaries. The Company may however implement such arrangements in the future. As far as the Issuer is aware, no member of the Board of Director or member of Key Executives intends to purchase any Offer Shares in the Offering. Remuneration and Terms of Service Contracts The remuneration of the members of the Board of Directors will be determined by the Board of Directors, in accordance with remuneration policy to be adopted by the General Meeting of shareholders after the Admission. The objective of the Group s remuneration policy is to provide a compensation programme allowing for the attraction, retention and motivation of members of the Board of Directors who have the character traits, skills and background to successfully lead and manage the Company. As the Issuer has only recently been established and current members of the Board of Directors have been appointed in March 2011, the Issuer has not paid historically any remuneration to members of the Board of Directors. Current A-class members of the Board of Directors as well as Key Executives have been employed in certain Group Subsidiaries and received in the previous financial year remuneration from the Group s operating companies: Mr. Kasianov received in 2010 EUR as a Director s fee, Sergii Mazin received USD , Oleksandr Shakhmatov USD , Irina Kozenko USD , Vladimir Draganchiuk USD , Irina Palivoda received USD and Larisa Velichko received USD Other benefits granted to Directors and Key Executives as listed above were in total value not exceeding USD 1,000. The total remuneration, paid by the Group to the members of the Board of Directors, Key Executives as well as all other directors and management stuff in the latest ended financial year was approximately USD 203 thousand. The members of the Board of Directors and Key Executives are not granted any pensions, retirement or similar benefits by the Issuer or the Group Subsidiaries. No amounts have been set aside or accrued by the Issuer or its subsidiaries to provide pension, retirement or similar benefits to members of the Board of Directors or Key Executives. Indemnity agreements Members of the Board of Directors and Key Executives do not have any indemnity arrangements with the Issuer except for Directors B who shall be harmless and reimbursed for any and all claims in conract or tort or suits (whether instituted by the Company or any third party) by reason of acting or having acted as a Director and, if such capacity doing or omitting any act or in connection with any act or omission by any other director, for any damages, taxes, costs and expenses sustained, incurred or expended, directly or indirectly, including, without limitation, fees, costs and expenses of attorneys, accountants and experts engaged by Directors B. The Group has not purchased any directors & officers liability insurance policy. Non-compete compensation and employment termination compensation In line with Ukrainian practice, members of the Board of Directors and Key Executives do not have any agreements with the Group under which, after termination of the employment relationship with the Group, such persons would be is obligated to maintain non-competition duty for a certain period following termination of his employment relationship. The Company does not expect to enter into such agreements with members of the Board of Directors or Key Executives in the future. The service contracts, employment agreements or other similar agreements entered into between the Issuer or the Group Subsidiaries and the members of the Board of Directors and Key Executives do not provide for special benefits in the case of dismissal or termination of such persons service, employment contract or other similar agreement. Committees The Board of Directors intends to appoint the Audit Committee from among its members. The Audit Committee will commence its activity after the Offering and listing on the WSE and will be composed of 3 members of the Board of 96

98 KSG Agro S.A. Directors. The Issuer intends to establish only an audit committee. The tasks and duties contemplated by an remuneration committee and selection and appointment committee will be performed by the entire Board of Directors. Audit Committee The Audit Committee will be composed of three Directors: Oleksandr Shakhmatov (Director A), Jacob Mudde (Director B), Gwenaëlle Bernadette Andrée Dominique Cousin (Director B). The Audit Committee will assist in supervising the activities of the Board of Directors with respect i.a. to: monitoring the integrity of the financial information provided by the Company, in particular by reviewing the relevance and consistency of the accounting methods used by the Company and its Group (including the criteria for the consolidation of the accounts of companies in the Group), reviewing at least annually the internal control and risk management systems, with a view to ensuring that the main risks (including those related to compliance with existing legislation and regulations) are properly identified, managed and disclosed, ensuring the effectiveness of the internal audit function (is such is appointed in the Company), in particular by making recommendations on the selection, appointment, reappointment and removal of the head of the internal audit department and on the department s budget, and by monitoring the responsiveness of management to its findings and recommendations. The role and responsibilities of the Audit Committee, as well as its composition and the manner in which it operates and discharges its duties will be set out in regulations for the Audit Committee, as drawn up by the Board of Directors. The Audit Committee regulations and its composition will be placed on the Issuer s website. Other information on the members of the Board of Directors and on the Key Executives At the date of this Prospectus, except as stated above, none of the members of the Board of Directors and no Key Executive: has been convicted of any offences relating to fraud; has been the subject of any official public incrimination or has been sanctioned by statutory or regulatory authorities (including professional associations) or has been disqualified by a court from acting as a member of the administrative, management or supervisory bodies of a company or from acting in the management or conducting the affairs of any company; has been associated with any bankruptcy, receivership or liquidation, or similar proceedings, in their capacity as members of any administrative, managing, or supervisory body or as a senior executive. No member of the Board of Directors and no member of the Key Executives hold a supervisory or a non-executive position in any other listed company or perform principal activities outside the Group which are significant with respect to the Issuer. There are no family relationships among the members of the Board of Directors and Key Executives. There are no actual or potential conflicts of interest between the obligations of the members of the Board of Directors members and the Key Executives, except Mr. Sergiy Kasianov, toward the Issuer and their respective private interests and duties or obligations to the Issuer. Due to the fact that interests of the Group are not always in line with the interests of the Principal Shareholder, there is a potential conflict of interest between private interests of Mr. Sergiy Kasianov and the interests of the Issuer, see Existing shareholder will continue to exert significant influence on the management following the Offering. Except as stated above, there are no arrangements or understandings with principal shareholders of the Issuer, customers, suppliers or others pursuant to which any member of the Board of Directors or of the Key Executives was selected or appointed. Corporate Governance Rules Luxembourg In April 2006, the Luxembourg Stock Exchange (the LxSE ) issued the Ten principles of corporate governance of the Luxembourg stock exchange (second edited-revised version dated October 2009) (the Luxembourg Corporate Governance Code ). The Luxembourg Corporate Governance Code sets forth ten principles regarding in particular the fiduciary duties of the directors, the creation of committees, publication of information in the annual management report and the rights of the shareholders. Each principle is specified by recommendations. The LxSE is responsible for monitoring the application of the principles set out in the Luxembourg Corporate Governance Code. 97

99 KSG Agro S.A. The Luxembourg Corporate Governance Code is only applicable to companies whose shares are admitted to trading and listed (i) on the LxSE or (ii) on the LxSE and on one (or more) foreign regulated markets. The Luxembourg Corporate Governance Code is not applicable to Luxembourg companies that are not listed on the LxSE. Therefore, the Company is not required to comply with the rules set out in the Luxembourg Corporate Governance Code. However, according to the Luxembourg Corporate Governance Code, the principles set forth in such code could also serve as a reference framework for Luxembourg companies listed on a foreign regulated market. The Company does not intend to comply with the provisions of the Luxembourg Corporate Governance Code, since it is not required to do so. Instead, the Company has decided to observe the majority of the WSE Corporate Governance Rules. Poland The Issuer has decided to observe the majority of the WSE Corporate Governance Rules. However, certain principles will apply to the Issuer only to the extent allowed by Luxembourg corporate law and corporate structure of KSG Group, especially the single board structure as opposed to the two-tier system that the WSE Corporate Governance Rules assume. The Issuer does not have two separate governing bodies (supervisory board and management board) which are obligatory in Polish joint stock companies. Instead, its Board of Directors performs both the management and supervisory functions. As a result, the Issuer will apply those principles of the WSE Corporate Governance Rules which refer to relations between supervisory board and management board not directly, but accordingly. 98

100 PRINCIPAL SHAREHOLDER KSG Agro S.A. PRINCIPAL SHAREHOLDER Principal Shareholders As at the date of this Prospectus, 98 per cent. of the outstanding share capital of the Company is held by ICD Investments SA, a Swiss entity, with its registered office at Via Luganetto 4, 6962 Lugano Viganello, Switzerland. 100 per cent. of the ICD Investments SA share capital is owned by Mr. Sergiy Kasianov, a member of the Issuer s Boards of Directors. ICD Investments SA is a holding company which does not carry out any operating activity except for holding shares. Control over the Company As at the date of this Prospectus, so far as the Company is aware, there is no arrangement that might result in the change of control over the Company. Dilution The tables below indicate the Issuer s shareholding structure as at the date of this Prospectus and after the Offering: Shareholder Shares owned prior to the Offering Shares owned after the Offering (1) Number of shares % Number of shares % ICDInvestmentsSA... 9,800, ,800, Minorityshareholder , , Public... 4,925, Total... 10,000, ,925, (1) Assuming that all the Offer Shares are subscribed in the Offering; The voting rights of the Principal Shareholders with respect to its Shares do not differ in any respect from the rights attaching to the Offer Shares. The Principal Shareholder will not have other voting rights from other shareholders, other than the greater or lesser voting power inherent in its percentage ownership in the Company s share capital. Lock-up agreements Except for (i) the issue of the Offer Shares in the Offering, (ii) the issue of securities linked to the Issuer s share capital under any share/management incentive plan that may be implemented by the Issuer, and (iii) the pledge of existing shares and the issuance of any securities convertible into Company s shares or securities that in any other manner represent the right to acquire the Company s shares, both of which are to be allowed provided that the pledged shares or shares subject to conversion can only be transferred in favor of a creditor upon expiration of the lock-up period as described below, the Issuer intends to agree that for the period of 12 months from the Settlement Date, the Issuer and its Board of Directors will not, without the prior written consent of the Offering Broker, which consent shall not be unreasonably withheld, propose or otherwise support an offering of any of the Company s shares, announce any intention to offer new shares and/or to issue any securities convertible into Company s shares or securities that in any other manner represent the right to acquire the Company s shares, or conclude any transaction (including any transaction involving derivatives) of which the economic effect would be similar to the effect of selling the Company s shares. Furthermore, the Principal Shareholder intends to agree that for a period of 12 months from the Settlement Date shall not: (i) sell or announce an intention to sell any of the Company s shares, (ii) issue any securities exchangeable into the Company s shares, (iii) issue any securities that in any other manner represent the right to acquire the Company s shares, and also (iv) conclude any transaction (including any transaction involving derivatives) of which the economic effect would be similar to the effect of selling Company s shares, except the issue of securities linked to the Issuer s share capital under any share/management incentive plan that may be implemented by the Issuer, without the prior consent of the Offering Broker, which consent shall not be unreasonably withheld. In addition, the Principal Shareholder for a period of 12 months from the Settlement Date intends to undertake not to propose, vote in favour of or otherwise support: (i) any increase of the Company s share capital, (ii) any issuance of securities convertible into the Company s shares or (iii) any issuance of any other securities that in any other manner represent the right to acquire the Company s Shares, and also (iv) to conclude any transaction (including any transaction involving derivatives) of which the economic effect would be similar to the effect of causing the Company to issue such instruments except the issue of securities linked to the Company s share capital under any share/management incentive plan that may be implemented by the Company. 99

101 ESCRIPTION OF THE SHARES AND CORPORATE RIGHTS AND OBLIGATIONS KSG Agro S.A. DESCRIPTION OF THE SHARES AND CORPORATE RIGHTS AND OBLIGATIONS Set forth below is the information concerning the Issuer s Shares and related summary information concerning the material provisions of the Articles of Association of the Issuer and applicable Luxembourg law. Because it is a summary, it does not contain all of the information in the Articles of Association. Full text of the Issuer s Articles of Association is available at the Issuer s website: See also Management and Corporate Governance. Form and Transfer of the Issuer s Shares The Issuer s Shares are issued under Luxembourg law and may be converted subject to the provisions of the Articles of Association, the Companies Act 1915 and all other applicable laws. The issued share capital of the Issuer as at the date of this Prospectus is 100,000 and is divided into 10,000,000 Shares, each with a nominal value of USD All of the issued Shares are fully paid up. In connection with the Offering, our Board of Directors will issue up to 4,925,500 Offer Shares, under exclusion of the pre-emptive rights of the existing shareholders. As a result of the issue of Offer Shares the issued share capital of the Issuer may be increased up to 14,925,500. All the Shares, including the Offer Shares, are ordinary bearer shares with equal rights and will exist in book entry form once they have been registered with the NDS. Investors may hold the Offer Shares through the NDS participants, including investment firms and custodian banks. The Issuer will apply for registration of all of the Shares with the National Depository for Securities. It is expected that on or soon after the Settlement Date, all of the Offer Shares, will exist in book-entry form. Bearer Shares Under Luxembourg law, the ownership of bearer shares is established by possession of the bearer certificate. To be valid, a bearer share shall be signed by at least one class A director and one class B director and must contain the following information: date of the constitutive instrument of the Issuer and the date of its publication; capital of the Issuer, number and type of Shares as well as the nominal value of the Shares; brief description of the contributions made to the Issuer and the conditions on which they are made; any special advantages conferred upon the founders; duration of the Issuer; and the day and time of the annual General Meeting and the municipality in which it is to be held. One or more bearer shares can be represented by a single certificate, which shall contain the identification number of each share represented by such certificate. All Offer Shares will be registered with the NDS and will be held by shareholders in book entry form through the NDS and its participants. Transfer of the Offer Shares will take place in book entry form through the facilities of the NDS. Registered shares In accordance with the Issuer s Articles of Association the Company s shares can be also issued in registered form. Ownership of registered shares will exclusively be established by an entry in the register of registered shares that will be kept at the registered office of the Issuer or by one or more persons designated by the Company. Certificates confirming that an entry has been made in the register of registered shares will be provided to the shareholders at their request. Certificates representing the shares in registered form may be issued but they do not constitute conclusive evidence. Title to the shares in registered form passes solely upon the registration of the transfer into the register of registered shares. Any transfer of registered Shares shall be recorded in the register of Shares by delivery to the Company of an instrument of transfer satisfactory to the Company, or by a written declaration of transfer to be inscribed in the register of Shares, dated and signed by the transferor and transferee, or by persons holding suitable powers of attorney to act accordingly and, together with the delivery of the relevant certificate duly endorsed to the transferee, if issued. According to article 40 of the Companies Act 1915, transfers of shares in registered form shall be carried out by means of a declaration of transfer entered into the register of registered shares, dated and signed by the transferor and the transferee or by their duly authorized representatives, and in accordance with the rules on the assignment of claims laid down in article 1690 of the Luxembourg Civil code. The Issuer may accept and enter in the register of registered shares a transfer on the basis of correspondence or other documents recording the agreement between the transferor and the transferee. 100

102 KSG Agro S.A. Articles 39 and 40 of the Companies Act 1915 provide that ownership of registered shares shall be established by an entry in a register of the registered shares, which shall be maintained at the registered office of the Issuer. The register shall specify (i) the precise designation of each shareholder and the number of shares or fractional shares held by him; (ii) the payments made on the shares; and (iii) transfers and the dates thereof or conversion of the shares into shares in bearer form. Book-entry form in Poland Pursuant to the Trading in Financial Instruments Act, securities which are offered in a public offering or admitted to trading on a regulated market in Poland exist in uncertificated form as of the date of their registration under the relevant depository agreement (dematerialization). In particular, before the commencement of a public offering or trading on a regulated market, an issuer of securities is obliged to conclude with the NDS (Krajowy Depozyt Papierów Wartoœciowych S.A., with its registered seat in Warsaw, Ksi¹ êca Str. 4), an agreement to register in the depository of securities the securities offered in a public offering or trading on a regulated market. Therefore, no shares of the Issuer s common stock in physical form will be issued to holders of the Issuer s common stock in Poland. However, share deposit certificates evidencing the Shares may be issued at the request of the account holder. Pursuant to the Article 9 of Trading in Financial Instruments Act, a share deposit certificate confirms the title to exercise all rights arising from the securities which are not or cannot be exercised purely on the basis of entries in a securities account. Rights attached to the Shares Voting Rights At all the General Meetings, each Share confers the right to cast one vote. Each shareholder is entitled to attend the General Meeting either in person or through a proxy attending the meeting in person, and to address such meeting and exercise voting rights, in accordance with the Issuer s Articles of Association. The annual General Meeting should be held each year on 15 May or if such day is a legal or a bank holiday in Luxembourg, on the following business day in Luxembourg at the registered office of the Issuer or at such other place as specified in the notice of the meeting. General Meetings may be convened by the Board of Directors. Shareholders representing 10 per cent. of the Issuer s issued share capital may, pursuant to Article 70 of the Companies Act 1915, request the Board of Directors to convene a General Meeting, the request being made in writing with an indication of the agenda. The Board of Directors must then convene the General Meeting within a period of one month starting on the date of receipt of the written request from the shareholders. An extraordinary General Meeting can be held whenever the Board of Directors deems it necessary. The Board of Directors should determine the items on the agenda of such meeting. If all outstanding shares are in registered form, the General Meetings should be convened pursuant to a notice setting forth the agenda and the time and place at which the meeting will be held, sent by registered letter at least thirty days prior to the meeting, the day of the convening notice and the day of the meeting not included, to each Shareholder at the Shareholder s address in the Shareholder Registry, or as otherwise instructed by such Shareholder. If any of the outstanding shares are in bearer form, the General Meetings should be convened per public notice inserted in the Luxembourg legal Gazette The Memorial and a Luxembourg official newspaper at twice occasions prior to the general meeting within an eight-day interval and at least for the second publication eight days prior to the holding of the general meeting. The shareholders of bearer shares existing only under global certificates will be entitled to participate and vote upon sight of a certificate issued by such global depositary or by any relevant central securities depositary or member of the central securities depositary system, in which such bearer shares are deposited. The following issues fall in particular within the competence of the General Meeting: approval of the annual financial statement, discharge of duties by directors, issues of new shares (except for issues resolved upon by the Board of Directors of the Company on the basis of authorized share capital), redemption of shares, payments of dividends (except for payments of interim dividends resolved upon by the Board of Directors), amendments to the Articles of Association, mergers or divisions (subject to certain exceptions), transfer of the registered office to another municipality or abroad, dissolution of the Company. The Company may allow shareholders to participate in the General Meetings by way of videoconference or similar means of telecommunication allowing their identification, subject to technical and legal conditions allowing for proper identification of the shareholders and exercise of the voting rights. Detailed instructions on participating in the General Meetings by means of telecommunication will be provided to the shareholders at the time of convening the relevant General Meeting. Unless otherwise provided by Luxembourg law or by the Issuer s Articles of Association, resolutions of the General Meeting are passed by a majority of more than one-half of all voting rights present or represented. No business shall be transacted at any General Meeting unless a quorum of shareholders is present at the time when the meeting proceeds to 101

103 KSG Agro S.A. business; save as herein otherwise provided, shareholders holding 40 per cent. of the total votes of Shares issued as of the date of the respective General Meeting, presented in person or by proxy, shall form the quorum. Each Share gives shareholders right to one vote at all General Meetings of Shareholders, that may be executed directly by a shareholder or by giving a written proxy to another person, who need not be a shareholder. Luxembourg is in the process of implementing the Directive 2007/36/EC of the European Parliament and of the Council of July 11, 2007 on the exercise of certain rights of shareholders in listed companies. Therefore, the above described regulations may be amended in a near future as a result of the implementation. Dividends and Other Distributions Dividends, when payable, will be distributed at the time and place fixed by the Board of Directors within the limits of the decision of the General Meeting. Furthermore, subject to the conditions provided for by the Companies Act 1915, the Board of Directors may pay out interim dividends. Distributions are made to shareholders pro rata to the aggregate amount of Shares held by each shareholder. There are no preferred dividend rights, fixed rate of dividend or cumulative dividend rights. Distributions that have not been claimed within five years as from the date that they have become available should lapse in favour of the Company. Dividend payments and other payments made by the Company and relating to the Shares shall be made through the NDS which is a Polish central clearinghouse and depository for securities with its seat at Ksi¹ êca Str. 4, Warsaw, Poland. The payment of the dividends to such depository operating principally a settlement system in relation to transactions on securities, dividends, interest, matured capital or other matured monies of securities or of other financial instruments being handled through the system of such depository shall discharge the Company. All payments shall be in the amount transferred by the Company to the NDS that will transfer the respective amounts to accounts of its respective participants, for the purpose of their further payment to the owners of accounts with the NDS participants on which the Company s Shares will be held, in accordance with the rules and practices of the NDS. Other than the right to dividends, the Shares do not carry any other right to share in the Issuer s profits. There Issuer has not issued any other securities which would carry the right to shares in the Issuer s profits. Issue of Shares and Pre-emptive Rights The subscribed share capital of the Issuer may at any time be increased or reduced by a resolution of the General Meeting adopted in the manner required for amendment of the Articles of Association, subject to the mandatory provisions of the Companies Act Each holder of the Shares should have pre-emptive rights to subscribe for any issue of the Shares pro rata to the aggregate amount of such holder s existing holding of the Shares. Each holder should, however, have no pre-emptive right on the Shares issued for a non-cash contribution. In addition, each shareholder should have no pre-emptive right with respect to a person who exercises a previously acquired right to subscribe for the Shares if pre-emptive rights of existing shareholder in connection with such subscription were duly suppressed. Pre-emptive rights may be restricted or excluded by the Board of Directors within the scope of the authorized capital and/or in case of a contribution in kind. Pre-emptive rights may be restricted or excluded by a resolution of the General Meeting. This should apply mutatis mutandis to the granting of rights to subscribe for Shares (such as warrants) or the issue of securities convertible into shares. If the Company decides to issue new shares in the future and if the pre-emptive rights of existing shareholders are not waived then the Company will publish the decision by placing an announcement in the Luxembourg official gazette and in two newspapers published in Luxembourg. The announcement will specify the period in which the pre-emptive right may be exercised. Such period may not be shorter than 30 days from the date of publication in the Luxembourg official gazette. Luxembourg law does not provide for any procedure for determining the pre-emptive right exercise date and such date is usually defined in the relevant resolution on the issue of shares. The announcement will also specify the details regarding procedure for exercise of the pre-emptive rights. The announcement will be published also in Poland in the manner used for communicating with investors on the WSE. The pre-emptive right is exercised by placing an order with the Company and paying for the newly issued shares. Under Luxembourg law the right to subscribe shall be transferable throughout the subscription period, and no restrictions may be imposed on such transferability other than those applicable to the shares in respect of which the right arises. The Company has not issued any securities convertible into shares of the Company. At present, the Issuer does not have any plans regarding future issues of shares after the Offering. 102

104 KSG Agro S.A. Repurchase of the Issuer s Own Shares The Issuer may acquire the fully paid-up Shares for a consideration, subject to certain provisions of the Companies Act 1915 and the Issuer s Articles of Association, provided that the acquisition must not have the effect of reducing the net assets of the Company below the aggregate of the subscribed capital and the reserves which may not be distributed under law or the Articles of Association. To the extent permitted by Luxembourg law the Board of Directors, is irrevocably authorised and empowered to take any and all steps to execute any and all documents and to do and perform any and all acts for and in the name and on behalf of the Issuer which may be necessary or advisable in order to effectuate the acquisition of the Shares and the accomplishment and completion of all related action. An acquisition of the Shares by the Board of Directors for a consideration should be authorized by the General Meeting, which shall determine the terms and conditions of the proposed acquisition and in particular the maximum number of Shares to be acquired, the duration of the period for which the authorisation is given and which may not exceed five years and, in the case of acquisition for value, the maximum and minimum consideration. Voting rights attached to Shares acquired by the Company in accordance with the above shall be suspended as long as such Shares are held in the Company s own capital. In principle, the Issuer has no obligation to sell or cancel the Shares held by the Issuer in treasury. However, according to the Companies Act 1915, the Issuer should either sell or cancel the Shares that the Issuer keeps in treasury after three years as from the date of their acquisition if the Shares were acquired under certain circumstances. Capital Reduction The General Meeting may, subject to Luxembourg law and the Articles of Association, resolve to reduce the issued share capital. Annual Accounts Annually the Board of Directors is required to prepare and approve the statutory financial statements, which must be accompanied by an annual report and an independent auditor s report. The annual accounts, the annual report and the information to be added pursuant to the law of 10 August 1915, as amended, must be made available to the shareholders for review at the Issuer s registered office from the date on which the General Meeting at which they are to be discussed and, if appropriate, adopted is convened. The financial statements should be approved by the annual General Meeting. Liquidation Rights In the event of dissolution of the Issuer, the Issuer must be liquidated according to applicable Luxembourg law. The balance of the Issuer s equity remaining after the payment of debts (and the cost of liquidation) should be distributed to the Issuer s shareholders pro rata to the aggregate amount of the Shares held by each shareholder. Amendments to the Rights of Shareholders Any amendments to the rights of shareholders require an amendment to the Articles of Association and are subject to the same quorum as for an extraordinary General Meeting. Any resolution to amend the Articles of Association must be taken before a Luxembourg notary and such amendments must be published in accordance with Luxembourg regulations. Articles of Association do not provide for any specific conditions that are more stringent than is required by law. Challenging resolutions of General Meetings Under Luxembourg law and the conflict of law rules, a resolution of the general meeting of shareholders of a Luxembourg company may only be appealed to a Luxembourg court in accordance with the Luxembourg commercial and civil proceedings law. Pursuant to Luxembourg law, a resolution of the general meeting of shareholders may be appealed by each shareholder regardless of the number of shares held by him if the resolution is, amongst others, (i) in conflict with the statutory law, provisions of the Articles of Association or the proceedings for taking resolutions or (ii) made to the sole benefit of the majority shareholder and not in the Issuer s best interest (abus de majorité). The appeal should be filed with a district court having jurisdiction over the relevant company s registered office. The statute of limitation to file an appeal is ten years or thirty years as of the day of passing of the resolution, the duration of such period depending on, amongst other things, the nature of the rule that has been breached. 103

105 KSG Agro S.A. As regards the Issuer, the competent courts are the Courts of Luxembourg-City, Grand Duchy of Luxembourg. The plaintiff should show a legal interest in appealing against the resolution. Under Luxembourg commercial proceedings rules, the appeal may be made in the French, Luxembourg or German language and can be made by an attorney qualified to practice in Grand Duchy of Luxembourg. Generally, the appeal will be subject to court fees. If the court finds in favor of the appealing shareholder, then the resolution will be nullified. Similarly, under Luxembourg law each shareholder also has a right to appeal any action of the Board of Directors on the same grounds as specified above. The same appeal procedure will apply. 104

106 CERTAIN LUXEMBOURG AND POLISH SECURITIES MARKET REGULATIONS... KSG Agro S.A. CERTAIN LUXEMBOURG AND POLISH SECURITIES MARKET REGULATIONS AND PROCEDURES AND THE WARSAW STOCK EXCHANGE The Issuer intends to apply for admission to trading and to list all of the Shares on the main markets of the WSE. As a result, the Issuer will be subject to certain Polish securities and capital market regulations, in particular with respect to disclosure of information. The Issuer will also be subject to supervision of relevant regulatory authorities and of the PFSA in particular. Moreover, the Issuer, being incorporated under the laws of Luxembourg, will be subject to certain aspects of the European Union and Luxembourg securities regulation as well as the Public Takeover Law. The information set out below describes certain aspects of Luxembourg and Polish securities market regulation regarding mandatory takeover bids, squeeze-out and sell-out rules that will apply to the Shares once the Shares are admitted to trading on the WSE and is included for general information only. This summary does not purport to be a comprehensive description of all Luxembourg and Polish securities market regulatory considerations that may be relevant to a decision to acquire, hold or dispose of the Shares. Each prospective investor should consult a professional legal adviser regarding legal consequences of acquiring, holding and disposing of the Shares under the laws of their country and/or state of citizenship, domicile or residence. This summary is based on legislation, published case law, treaties, rules, regulations and similar documentation, in force as at the date of this Prospectus, without prejudice to any amendments introduced at a later date and implemented with retroactive effect. European Union Tender Offer Regulations In the absence of regulatory guidance, a clear resolution to conflicts of laws issues relating to various tender offer regulatory regimes cannot be provided. The relevant conflict of laws provisions of the Takeover Directive explicitly state that if the offeree company s shares are not admitted to trading on a regulated market in the Member State in which the company has its registered office, and if the offeree company s shares are admitted to trading on regulated markets in another Member State, the authority competent to supervise the bid shall be that of the Member State on the market of which the shares are admitted to trading. In respect of governing law, matters relating to the consideration offered in the case of a bid, in particular the price, and matters relating to the bid procedure, in particular the information on the Offering Broker decision to make a bid, the contents of the offer document and the disclosure of the bid, shall be dealt with in accordance with the rules of the Member State of the competent authority. In matters relating to the information to be provided to the employees of the offeree company and in matters relating to company law, in particular the percentage of voting rights which confers control and any derogation from the obligation to launch a bid, the applicable rules and the competent authority shall be those of the Member State in which the offeree company has its registered office. Luxembourg regulations Luxembourg Mandatory Takeover Bids The Luxembourg law on public takeovers dated May 19, 2006 (the Public Takeover Law ) applies to takeover bids in relation to the securities of companies governed by the law of a Member State of the European Union or the European Economic Area, when all or some of those securities are admitted to trading on a regulated market in one or more Member States of the European Union or the European Economic Area. The term securities refers to shares and global depository receipts. As far as the competent authority is concerned, the Public Takeover Law states that if the offeree company s securities are not admitted to trading on a regulated market in the Member State in which such oferee company has its registered office, the competent authority to supervise the bid shall be the authority of the Member State of the regulated market on which the oferee company s securities are admitted to trading, i.e. in the present case the competent financial authority in Poland. In relation to matters concerning the information to be provided to the employees of the offeree company and in relation to matters concerning the applicable company law, in particular the percentage of voting rights which confers control (in Luxembourg the treshold is fixed at 33 1/3 per cent. of the voting rights) and any derogation from the obligation to launch a bid, as well as the conditions under which the board of the offeree company may undertake any action which might result in the frustration of the bid, the applicable rules and the competent authority shall be those of the Member State where the offeree company has its registered office, i.e. the CSSF which is the competent financial authority in Luxembourg. 105

107 KSG Agro S.A. Squeeze-out Rules Under the Public Takeover Law if any natural or legal person holds a total of at least 95 per cent. of a company s share capital carrying voting rights and 95 per cent. of such company s voting rights as a result of a public takeover bid within the meaning of Article 2 (1) a) of the Public Takeover Law regarding the shares of a target company, such person may acquire the remaining shares in the target company by exercising a squeeze-out against the holders of the remaining shares pursuant to Article 15 of the Public Takeover Law. Sell-out Rules According to Article 16(1) of the Public Takeover Law, if any natural or legal person, alone or together with persons acting in concert with it, hold(s) a total of at least 90 per cent. of a company s share capital carrying voting rights and 90 per cent. of such company s voting rights as a result of a public takeover bid regarding the shares of a target company, any shareholder may exercise a sell-out with respect to his/her shares. Polish regulations The Takeover Directive allows the Member States to introduce, next to the mandatory takeover bids, additional protection of the interests of the minority shareholders, such as the obligation to make a partial bid where the offeror does not acquire control of the company. Poland introduced such additional instruments. Pursuant to Article 72 of the Polish Public Offerings Act, any acquisition of shares in a public company in secondary trading and within a period of less than 60 days by a shareholder who holds shares entitling it to less than 33 per cent. of votes at a general shareholders meeting, leading to the increase of its share in the total number of voting rights by more than 10 per cent., shall be effected exclusively through a public tender offer. Furthermore, any acquisition of shares in a public company by a shareholder who holds shares entitling it to at least 33 per cent. of votes at a general shareholders meeting, in secondary trading and within a period of less than twelve months, leading to the increase of its share in the total number of voting rights by more than 5 per cent., shall be effected exclusively through a public tender offer. Additionally a shareholder that wishes to cross the 33 per cent. voting rights threshold is obliged to launch a public tender for shares that will entitle it to hold 66 per cent. of votes. However, if the indicated thresholds are exceeded due to the acquisition of shares in a public offering, in-kind contribution, merger or division of a company, amendments to the articles of incorporation of the company or occurrence of certain other events, the shareholder must either launch a public tender as described above within three months, or sell the appropriate amount of shares so that the number of votes to which the shareholder is entitled is no more than 33 per cent. of votes. It should be noted that Polish law explicitly excludes application of Polish regulations concerning thresholds only with respect to 66 per cent. threshold as the mandatory threshold under the Takeover Directive. In such case, Luxembourg threshold of 33 1/3 per cent. should apply. On the other hand, the additional threshold of 33 per cent. stipulated in Polish law is a separate obligation imposed by Poland irrespective of the Takeover Directive. Therefore, the announcement of a take-over bid when exceeding 33 1/3 per cent. of votes to satisfy the obligations imposed by the Takeover Directive should be deemed a different obligation from the obligation to announce a bid for 66 per cent. of votes when exceeding 33 per cent. of votes to satisfy additional Polish requirements. The regulations set a number of detailed conditions to be followed in connection with a public tender offer, including without limitation the rules of determining the tender price, required security and settlement. The Warsaw Stock Exchange The WSE operates one of the two regulated markets in Poland within the meaning of the MiFID. The other regulated market (BondSpot, the subsidiary of the WSE) concentrates mainly on bond trading and OTC transactions. The WSE is a private joint-stock company and is controlled by the Polish State. Members of the WSE include banks and Polish and international brokers. Shares listed on the WSE may be traded in a continuous price-setting system or in the single-price auction system, depending on capitalisation and intensity of trading. In addition, there are two markets for shares: Basic and parallel, the latter being for smaller, less liquid issuers. Listed companies are classified into four segments according to their capitalisation: MINUS 5, 5 PLUS, 50 PLUS or 250 PLUS. To be traded in a specific market and segment, certain non-statutory criteria must be met by the securities in addition to the statutory listing criteria. Shares of companies which have high price volatility, or which are under bankruptcy proceedings may be classified into the Alert List segment and then moved to listing under the single-price auction system. 106

108 KSG Agro S.A. Settlement of all transactions executed on the WSE is handled by the NDS, a joint-stock company in which the WSE has a 33.3 per cent. stake (with the remaining shares held by the National Bank of Poland and the State Treasury of the Republic of Poland). The electronic trading system used by the WSE is WARSET, a trading system similar to the system used in Paris, Brussels, Amsterdam, Chicago, and Singapore. As of March 29, 2011, shares of 401 companies were listed on the WSE. 107

109 HE OFFERING AND PLAN OF DISTRIBUTION KSG Agro S.A. THE OFFERING AND PLAN OF DISTRIBUTION General Information The Issuer is offering for subscription up to 4,925,500 newly issued ordinary bearer Shares of the Issuer (the Offer Shares ). The Offer Shares are being offered at the Offer Price, which shall be determined through a book-building process and after taking into account other conditions. All of the Shares have been assigned ISIN code LU The final number of the Offer Shares in the Offering will not be higher than 4,925,500 Offer Shares and the final price per Offer Share will not be higher than PLN 26. The Issuer reserves the right to allocate in total a smaller number of Offer Shares than the total maximum number. This may happen, for instance, as a result of insufficient demand at a price level satisfactory to the Issuer. This Offering consists of a public offering in Poland to: (i) retail investors, which term includes both natural and legal persons (the Retail Investors ), (ii) legal persons who are institutional investors (which term includes entities managing portfolios of securities for their clients and unincorporated organizations) (the Institutional Investors, and together with Retail Investors, the Investors ). Only such prospective Investors will be eligible to participate in the Offering who at or by the time of placing their orders (before the end of the Subscription Period) have opened securities accounts with entities of their choice which are licensed to provide such services within the territory of the Republic of Poland. The Offering will be only conducted in Poland, in the following tranches: retail tranche, and institutional tranche. The Issuer reserves the right to shift the Offer Shares between tranches; provided that only those Offer Shares, which have not been duly subscribed and paid for in each of the tranches and Shares which have not been taken by Investors as a result of Investors avoiding the legal consequences of their subscriptions, can be transferred to another tranche. This will not have any impact on a change of the final number of the Offer Shares. The information about the final number of the Offer Shares allocated to each tranche will be published in the same manner as the Prospectus, after the end of the book-building process for Institutional Investors. No public offering in Luxembourg will take place, although for the purpose of the public offering in Poland the Issuer has taken and will take certain actions in Luxembourg as its home Member State. Notices Any notices relating to the Offering and in particular the final Offer Price, and final results of the Offering will be filed with the CSSF and will be published on the website of the Issuer and of the Offering Broker ( In addition, any notices relating to the Offering which should be published in Luxembourg in accordance with Luxembourg law, shall be published on the website of the Luxembourg Stock Exchange ( or otherwise as required by Luxembourg law. Corporate Resolutions By virtue of resolution certified by Maitre Francis Kesseler, a notary residing at Esch-sur-Alzette, Grand Duchy of Luxemburg, dated March 8, 2011 the General Meeting of shareholders resolved to create an authorized capital. During a period of time of five (5) years from the date of publication of the resolution to create the authorised capital or, as the case may be, a resolution renewing such authorisation in the Official Gazette of the Grand Duchy of Luxembourg, the Memorial C, Recueil des Societes et Associations, the Board of Directors is authorised to issue shares within the limit of the authorized shares capital, to such persons and on such terms as it shall see fit, and specifically to proceed to such issue without reserving a preferential subscription right for the existing shareholders. The authorised capital, including the share capital, amounts to USD 200,000. The issuance of the Offer Shares is scheduled to occur upon the Board of Director s execution of a resolution to that effect shortly prior to delivery and listing of the Offer Shares, as outlined below. The Issuer, upon agreement with the Offering Broker, will determine the final terms on which the Offer Shares will be offered, including: (i) the final number of Offer Shares offered and, (ii) the final Offer Price. Upon the decision hereon, the Board of Directors will issue the Offer Shares. 108

110 KSG Agro S.A. For information on applicable selling restrictions in respect of the Offer Shares, please refer to Selling Restrictions and for information regarding the rights pertaining to the Shares, please refer to Description of the shares and corporate rights and obligations. Place of Subscription Subscriptions will be accepted at the offices of the Offering Broker and at the certain offices of Capital Advisor, who operates as an agent of the Offering Broker. A detailed list of places where subscriptions are accepted is attached as Annex II to this Prospectus. The list, as well as any amendments to the list, will be published at the website of the Offering Broker ( Investors should verify with the entity offering the Offer Shares whether or not the entity is acting in association with the Issuer. For information on detailed rules governing the placement of subscription orders, in particular: the documents required if an order is placed by a statutory representative, proxy or any other person acting on behalf of an Investor the Investors should contact the Offering Broker. The Offering Broker reserves the right to establish a distribution consortium and authorize other investment firms and other licenced entities to accept subscriptions for Offer Shares. If such a consortium is created, it will be publicly announced in compliance with applicable regulations. In such a case, an updated list of points accepting subscriptions will be published on the Issuer s website ( and the website of the Offering Broker ( Subscriptions via Internet and by phone will be accepted from investors who have a brokerage account agreement with the Offering Broker and the agreement provides for placing subscriptions via Internet or by phone. Such subscriptions will be accepted in accordance with such agreement, internal regulations of the Offering Broker accepted by the investor when entering into such agreement and technical requirements of using the Internet application made available by the Offering Broker for placing subscriptions. If the Offering Broker establishes a selling syndicate and subscription orders are accepted by other investment firms or other licensed entities, such entities may agree with particular investors to accept subscriptions via Internet or by phone. Expected timetable of the Offering April 2011 (till 2.00 pm CET) Book-building 15 April 2011 (not later than 9:00 am) Announcement of the Offer Price and the final number of Offer Shares in each tranche April 2011 Accepting subscriptions in the Institutional Tranche April 2011 Accepting subscriptions in the Retail Tranche to 22 April 2011 Allotment Date 28 April 2011 Settlement Date on or around 5 May 2011 Listing Date The Issuer in consultation with the Offering Broker and Advisors may decide to change the above dates if it deems so necessary for the successful completion of the Offering and Admission. Information on any changes in the above dates shall be announced on the websites of the Issuer ( and the Offering Broker ( Where required by law, any changes in the Offering dates shall be published in the form of a supplement to the Prospectus. Information on any change of the dates shall be published no later than on the originally set date, provided that if the period of acceptance of subscription orders or the book-building period is shortened, relevant information shall be published no later than on the date preceding the last day (according to the new schedule) of acceptance of subscription orders or of the book-building process. Book-building Before the start of subscriptions, the book-building process will be conducted, during which selected Institutional Investors, who have been invited by the Issuer through the Offering Broker, will make declarations as to the acquisition of the Offer Shares. In their declarations, the Investors will determine the total number of the Offer Shares they would like to buy and the price they are willing to pay for the Offer Shares. Invitations can be made in any form. In order to obtain more detailed information as to the participation in the book-building process, Investors interested should contact the Offering Broker. 109

111 KSG Agro S.A. On the basis of declarations as to the acquisition of the Offer Shares, the Issuer, following the Offering Broker s recommendations, will determine the Offer Price and will preliminarily allot the Offer Shares to selected Institutional Investors who during the book-building process have offered a price for Offer Shares not less than the Offer Price. The book-building results will not be made public. Subscription Procedure In the retail tranche, an investor may subscribe for the minimum of 20 Offer Shares. The Investor may make any number of subscriptions; provided that the total number of the Offer Shares subscribed for by him in the retail tranche cannot exceed the total amount of offered Offer Shares in the retail tranche. Any subscriptions resulting in the permitted limit per one Investor being exceeded will be rejected. In the institutional tranche: in the case of Institutional Investors who have been invited to subscribe, they are required to place a subscription order or orders for a number of the Offer Shares no less than the number of the Offer Shares given in the invitation. However, the Offering Broker may at its own discretion deem valid also those subscriptions, which do not comply with the aforementioned requirement; other Institutional Investors may place a subscription order or orders for the minimum of Offer Shares per one subscription order. Subscriptions will be accepted on a subscription form in Polish or in English (for persons who are not Polish residents). At the time of placing a subscription order, Investors are required to make an irrevocable instruction for depositing the Offer Shares in a securities account maintained in their name. By placing a subscription order, each Investor is deemed to have read this Prospectus and the Company s Articles of Association and accepted their content, as well as has read the terms of the Offering, consented to being allotted a lower number of Offer Shares than the number specified in such Investor s subscription orders, or to not being allotted any Offer Shares at all, pursuant to the terms and conditions set forth in the Prospectus. More detailed information concerning the identification of Investors, including requirements concerning documents submitted and the rules for acting through authorized representatives, can be obtained by Investors from the entities accepting subscription orders. Any consequences of a form of subscription for the Offer Shares being incorrectly filled out will be borne by the Investor. Cancellation or postponement of the Offering The Issuer may cancel the Offering, upon recommendation of the Offering Broker and Capital Advisor or at its own initiative, at any time prior to the Settlement Date. The Issuer may also change the dates of opening and closing of the book-building and subscription periods for the Retail Investors, or decide that the Offering will be postponed and that new dates of the Offering will be provided by the Issuer later. The Issuer may cancel the Offering, upon recommendation of the Offering Broker and the Capital Advisor if the Issuer considers it impracticable or inadvisable to proceed with the Offering. Such reasons include, but are not limited to: (i) suspension or material limitation in trading in securities generally on the WSE, as well as any other official stock exchange in the EU and the United States; (ii) sudden and material adverse change in the economic or political situation in Ukraine, Poland, Luxembourg or worldwide; (iii) a material loss or interference with the Issuer s business; (iv) any material change or development in or affecting the general affairs, management, financial position, shareholders equity or results of the Issuer s operations or the operations of the Group, or (v) an insufficient, in the Issuer s opinion or that of the Offering Broker and Capital Advisors, expected free float of the Issuer s shares on the WSE talking into account preliminary results of the book-building or of the subscriptions. In such event, subscriptions for the Offer Shares that have been made will be disregarded, and any subscription payments made will be returned without interest or any other compensation. Any decision on cancellation, suspension, postponement or changes of dates of the Offering will be published by way of an update report and a press release in Poland and in a manner compliant with applicable regulations, as well as market practices in Luxembourg and Poland. The Offering may not be cancelled or suspended after the official trading in the Offer Shares on the WSE has begun. If the Offering is suspended, the Issuer may decide that subscriptions made, book-building declarations submitted and payments made will be deemed to remain valid, however for not longer than 60 days. In such case, Investors may withdraw subscriptions and declarations made by submitting a relevant statement to that effect within two business days after report on the suspension if announced. 110

112 KSG Agro S.A. All dealings in the Offer Shares prior to the commencement of the official trading on the WSE will be at the sole risk of the investor concerned, irrespective of whether or not the investor concerned has been notified of the number of Shares allocated to him. Settlement of Payments If the total number of shares subscribed for in the retail tranche exceeds the number of shares offered in that tranche, then the subscriptions will be subject to proportionate reduction. If the total number of shares subscribed for in the institutional tranche exceeds the number of shares offered in that tranche, then the reduction of subscriptions is possible in the case of: subscription orders placed by Institutional Investors who have been invited to subscribe, but only with respect to the number of the Offer Shares in the subscription which exceeds the number specified in the invitation; subscription orders made by Institutional Investors who have not been invited to subscribe. The return of payments in connection with the allotment of a lower number of the Offer Shares than subscribed for, non-allotment of any Offer Shares at all or potential overpayments will start no later than within seven business days after the date of the Offer Shares allotment. The return of payments will be made in accordance with the subscription order. If the Offering is cancelled or suspended, the Investors who have placed subscription orders and paid for the subscription, will get their payments back: if the Offering is cancelled within three business days after the public announcement by the Company of the Offering cancellation; if the Offering is suspended within three business days after the date on which the Investor has made a statement cancelling his subscription or three business days after the date that Issuer announce in the supplement to the Prospectus that the orders placed are not valid. The timely repayment of money paid will be without any interest or compensation. Procedure and Dates for Payment for the Offer Shares Subscriptions for the Offer Shares in the retail tranche should be fully paid for no later than on the day on which they are made. Subscription in the institutional tranche should be fully paid for no later than on the last day of accepting subscriptions in that tranche. Full payment means payment equal to the number of the Offer Shares indicated in the subscription order multiplied by the Offer Price. All monetary amounts used in the Offering will be expressed in PLN. In particular, the Maximum Price and the Offer Price will be set and the book-building process will be carried out in PLN. Payments can be made in cash or by wire transfer and should be made in PLN to the account of the entity accepting the subscription. Payments for the Offer Shares are interest free. A legal consequence of non-payment on time or a partial payment for the Offer Shares will be the invalidity of the entire subscription, provided that in the case of the institutional tranche a partial payment before the deadline results in the subscription being valid only for the number of shares for which the payment has been made, ignoring fractional entitlements. Withdrawal of Subscription A subscription for the Offer Shares is irrevocable except when after the start of the Offering, a supplement is made public concerning an event or circumstances occurring before the allotment of the securities, of which the Issuer became aware before the allotment. In such case, pursuant to article 13.2 of the Prospectus Act 2005 and article 51a of the Public Offering Act, the investor who has made a subscription before the publication of the supplement may withdraw such subscription by submitting a written statement to the institution where the subscription was made, within two working days from the date of the publication of the supplement. Under article 51a of the Public Offering Act, the right to withdraw the subscription will not apply to those cases when a supplement is made available in connection with errors in the prospectus of which the Issuer became aware after the allotment, and in connection with factors which occurred or of which the Issuer became aware after the allotment. In such case, if necessary, the Settlement Date will be adjusted in order to enable the Investors to withdraw their subscriptions. 111

113 KSG Agro S.A. Refund of payment for Offer Shares included in the withdrawn subscription will be made in accordance with instructions included in the subscription form within three business days after withdrawal of the subscription. The refund will be without interest or compensation. Registration and Delivery of the Offer Shares The National Deposit of Securities (Krajowy Depozyt Papierów Wartoœciowych S.A.), with its seat at Ksi¹ êca 4, Warsaw, Poland, the Polish central clearinghouse and securities depository, will act as depositary of the Offer Shares. An application will be made for the Offer Shares to be accepted for delivery through the book-entry facilities of the NDS, either directly as a participant of that system or indirectly through participants of the NDS. Investors should note that in order to trade the Shares on the WSE the Shares must be in book entry form. All of the Offer Shares are bearer shares. All Offer Shares will be registered with the NDS and will be held by shareholders in a book entry form with a custodian bank or an investment firm as a participant of the NDS. Delivery of the Offer Shares will be made in accordance with settlement instructions placed by investors upon subscription, through the facilities of the NDS, by registration of the Offer Shares on the Investors securities accounts indicated by such Investors. Delivery of the Offer Shares is expected to take place on or about April 28, 2011, barring unforeseen circumstances, by appropriate entry on the Investor s securities accounts held through members of the NDS. The exact delivery dates will depend on timing of registration of Offer Shares in the facilities of the NDS. No share certificates or other documents confirming subscription of Offer Shares will be issued by the Issuer to Investors. Investors shall be notified of registration of the Offer Shares on their securities accounts in accordance with the rules applicable at their respective investment firms or banks holding securities accounts. However, the date of delivery of such notifications shall not affect the date of the first listing of the Offer Shares and such notices may be delivered following the first day of listing of Offer Shares on the Warsaw Stock Exchange. Public Announcement of the Offering Results The Issuer will announce the results of the Offering within 14 days from the Settlement Date, by means of a press release in Poland and in a manner compliant with applicable regulations, as well as market practices in Luxembourg and Poland. Results of the Offering will be published on the website of the Issuer ( and on the website of the Offering Broker ( The Offering will close on the Delivery Date, upon subscription, Allotment and payment for the Offer Shares and issuance by the Issuer of the Offer Shares. The Placement Agreement will include conditions to the closing of the Offering. Intentions of the Shareholders and Members of Management, Supervisory and Administrative Bodies of the Issuer as to participation in the Offering According to the information available to the Issuer, obtained after a review carried out with due diligence, none of the present members of the management, supervisory or administrative bodies, including the existing shareholders of the Issuer intend to subscribe for the Offer Shares. Rules of Offer Shares Allocation Allotment in the Retail Tranche If the total number of the Offer Shares subscribed for in the retail tranche is equal to or less than the number of the Offer Shares in that tranche, shares will be allotted based on subscription orders placed. If the total number of the Offer Shares subscribed for in the retail tranche is more than the number of the Offer Shares in that tranche, also after potential shifts between the tranches, the Offer Shares will be allotted in accordance with the proportionate reduction principle. The Issuer will not give preferential treatment or discriminate against and between Retail Investors. There is no target minimum individual allotment within the retail tranche. Allocation in the Institutional Tranche Preliminary Allotment Shares will be preliminarily allotted to selected Investors who in declarations for the acquisition have offered a price no less than the finally determined Offer Price. Making a declaration with a price equal to or higher than the finally determined 112

114 KSG Agro S.A. Offer Price does not guarantee that the investor will be placed on the preliminary allotment list or that the Investor will be allocated all the shares that the investor declared in its declaration. The Offer Shares will be preliminarily allotted in an entirely discretional manner, i.e. the allotment rate can be different for different Investors. After the completion of the book-building, the Offering Broker and the Capital Advisor will advise Investors of the number of the preliminarily allotted Offer Shares and will request them to place a subscription order and make apayment. Final Allocation in the Institutional Tranche If the total number of the Offer Shares subscribed for in the institutional tranche is equal to or less than the number of the Offer Shares in that tranche, the Offer Shares will be allotted based on subscription orders placed. If the total number of the Offer Shares subscribed for in the institutional tranche is more than the number of the Offer Shares in that tranche, also after potential shifts between the tranches, the Offer Shares will be allotted in accordance with the following principles: first, the Offer Shares will be allotted to Institutional Investors, who have participated in the book-building process and who have been invited to subscribe the number of the Offer Shares will be allotted based on subscription orders placed, but no more than the number of the Offer Shares given in the invitation to subscribe; next, the Offer Shares will be allotted to Institutional Investors, referred to above, with respect to subscriptions made by them in excess of the number of the Offer Shares specified in the invitation the allotment will be made in accordance with the proportionate reduction principle; next, the Offer Shares will be allotted to the remaining Institutional Investors the allotment will be made in accordance with the proportionate reduction principle. Overallotment The Issuer has not granted and will not grant any overallotment option. Offer Price The Offer Shares are being offered at the Offer Price, which shall be determined through a book-building process and after taking into account other conditions as specified below. The Offer Price shall not exceed PLN 26. (the Maximum Price ). During a book-building process amongst Institutional Investors invited by the Offering Broker, such Institutional Investors interested in subscribing for the Offer Shares will indicate the number of the Offer Shares they will be willing to acquire and the price, which they will be willing to pay per one Offer Share. The Offer Price will be determined by the Issuer upon agreement with the Offering Broker, based on the following criteria and rules: (i) size and price sensitivity of demand from the Institutional Investors as indicated during the book-building process, (ii) the current and anticipated situation on the Polish and international capital markets and (iii) assessment of the growth prospects, risk factors and other information relating to the Issuer s activities. The Offer Price will be identical for both institutional and retail investors and will not exceed the Maximum Price. The price will be expressed in PLN. The Issuer will announce the Offer Price not later than on or around 15 April 2011 (9:00 am) ( Pricing Date ), prior to commencement of the subscription period in the retail and institutional tranche. The Offer Price will be filed with the CSSF and published in the same manner as the Prospectus including the website of the Luxembourg Stock Exchange ( No expenses or taxes will be charged to the subscribers. Investment firms accepting subscriptions for Offer Shares may charge fees for accepting the subscriptions, in accordance with individual agreements made by the investment firms with particular subscribers and fee schedules of such investment firms. Supplements to the Prospectus In accordance with Article 13.1 of the Prospectus Act 2005 and Article 51.1 of the Public Offering Act, every significant new factor, material mistake or inaccuracy relating to the information included in the Prospectus which is capable of affecting the assessment of the securities and which arises or is noted between the time when the Prospectus is approved and the final closing of the Offer or, as the case may be, the time when trading on a regulated market begins, shall be mentioned in a supplement to the Prospectus. The supplement to the Prospectus will need to be approved by the CSSF, 113

115 KSG Agro S.A. notified the PFSA and published in the same manner as the Prospectus (including on the website of the Luxembourg Stock Exchange at If the supplement is published after approval of the Prospectus by the CSSF and relates to events or circumstances which occurred prior to the Allotment Date and about which the Issuer or the Offering Broker have learnt prior to the allotment, investors who have placed their subscription orders before publication of the supplement will have a right to withdraw their subscriptions within two working days from the date of the publication of the supplement. See: Withdrowal of Subscription above. Listing and Trading The Issuer intends to apply for admission of all the Offer Shares to listing and trading on the main market of the WSE, immediately after the Settlement Date. The main market of the WSE is a regulated market pursuant to MiFID. The Issuer expects that the trading in the Shares on the WSE will commence on 5 May, 2011 or as soon as possible thereafter. In connection with the listing of the Shares on the WSE, all the Offer Shares will be registered with and cleared through the NDS which is the central clearinghouse and depository of securities in Poland, including those listed on the WSE. The NDS will act as paying agent for any distributions payable to holders of the Offer Shares. Investors trading on the WSE should consider that since under the laws of Luxembourg no court registration process is needed in order to validly issue new shares, the Offer Shares will be eligible for the listing application upon payment by investors, together with the Issuer s existing Shares. Consequently, the Issuer will not be seeking to apply for listing on the WSE of any temporary share receipts, such as rights to shares (prawa do akcji) within the meaning of the Act on Trading in Financial Instruments. At present the Issuer does not intend to seek a listing of the Shares at any stock exchange other than the WSE but may consider such listing in the future. Lead Manager and Offering Broker The Company has appointed Dom Maklerski BZ WBK Spó³ka Akcyjna, Pl. Wolnoœci 15, Poznañ, Poland, to act as the lead manager and offering broker in Poland. 114

116 PLACING KSG Agro S.A. PLACING The Issuer intends to enter, prior to the Allotment Date, into a placement agreement (the Placement Agreement ) in respect of the Offering with the Lead Manager and Offering Broker, Lead Arranger and Financial Advisor and Capital Advisor, in which the Lead Manager and Offering Broker, Lead Arranger and Financial Advisor and Capital Advisor will commit to undertake certain actions in connection with organization of the Offering. Dom Maklerski BZ WBK S.A. whose registered office is at Plac Wolnoœci 15, Poznañ, Poland, acts as the Lead Manager and Offering Broker in Poland for the purposes of the Offering in Poland and admission to trading on the WSE. Bank Zachodni WBK S.A., whose registered office is at Rynek 9/11, Wroclaw, Poland, acts as Capital Advisor in the Offering, providing financial advice to the Issuer in connection with preparation of the Offering as well as will act as an agent of the Offering Broker and will accept subscriptions in the Offering. Visum Capital Ltd., whose registered office is at at Walkers Chambers, 171 Main Street, P.O. Box 92, Road Town, Tortola, British Virgin Islands, acts as Lead Arranger and Financial Advisor in the Offering, providing general financial, organizational and management advice to the Issuer in connection with preparation of the Offering. In connection with the Offering, the Issuer has agreed to pay a combined fee of up to 5 per cent. of the gross proceeds from the placement and sale of the Offer Shares. In addition, the Issuer has agreed to indemnify the Offering Broker against certain liabilities and to reimburse the Offering Broker for certain of their expenses in connection with the management of the Offering. The Offering Broker and Advisors are entitled in certain circumstances to be released and discharged from their respective obligations under the Placement Agreement prior to the Listing Date. Such circumstances include the non-satisfaction of certain conditions precedent and the occurrence of certain force majeure events. Underwriting The Issuer does not intend to enter into any underwriting agreements in connection with the Offering. Stabilization The Offering Broker did not undertake to enter into any transactions aiming at stabilization of the price of Offer Shares. Other Relationships The Offering Broker, Advisors and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with the Company and the Principal Shareholder and any of its affiliates. The Offering Broker and Advisors and their affiliates have received and may receive in the future customary fees and commissions for these transactions and service. Expenses of the Offering As of the date of this Prospectus, the Issuer estimates the amount of fixed expenses for preparation of the Offering at approximately USD 2.8 million. These expenses consist of costs of preparation of the Prospectus, advisory services, marketing of the Offering and costs of analyses prepared with respect to the Offering. The final amount of expenses will be calculated after the Offering and will be published within two weeks from the Settlement Date in the same manner as the Prospectus. The Issuer agreed to pay all commissions and expenses in connection with the Offering. However, Investors will bear their own costs connected with the evaluation and participation in the Offering, i.e. standard brokerage fees charged by broker. Lock-up Agreement For description of lock-up agreements, concluded with regard to the Company s Shares please see Section Principal Shareholder, subsection Lock-up agreements above. Interests of Natural and Legal Persons Participating in the Offering Dom Maklerski BZ WBK S.A. has a contractual relationship with the Issuer and the Principal Shareholder in connection with the Offering and the Admission, and has been mandated to act as the Lead Manager and Offering Broker for the Offering and listing of the Issuer s Shares on the WSE. The Advisers and the Offering Broker advise the Issuer and the Principal Shareholders in connection with the Offering and the admission of the Offer Shares to listing and trading on the WSE and coordinate the structuring and execution of 115

117 KSG Agro S.A. the transaction. Furthermore, the Advisers and Offering Broker are involved in certain parts of the Prospectus preparation process. Bank Zachodni WBK S.A. has a contractual relationship with the Issuer and the Principal Shareholder in connection with the Offering and has been mandated to act as Capital Advisor in the Offering. The Capital Advisor provides financial advice to the Issuer in connection with preparation of the Offering as well as will act as an agent (sub-contractor) of the Offering Broker and will accept subscriptions in the Offering. Visum Capital Ltd. has a contractual relationship with the Issuer in connection with the Offering and has been mandated to act as Lead Arranger and Financial Advisor in the Offering. The Lead Arranger and Financial Advisor provides general financial, organizational and management advice to the Issuer in connection with preparation of the Offering. If the transaction is successfully executed, the Offering Broker and the Advisors will receive a combined commission which depends on the actual value of the sold Offer Shares. The Offering Broker or the Advisors or their affiliates may acquire in connection with the Offering the Offer Shares as Investors and hold or sell those Shares for their own account, also outside of the offering period, which shall not constitute a preferential allotment. The Offering Broker and the Advisors do not intend to disclose the extent of such investments or transactions unless required by law. The Offering Broker and the Advisors and their affiliates have engaged in and may in the future engage in, investment banking, advisory services and other commercial dealings in the ordinary course of business with the Company and the Principal Shareholders and any of its affiliates. The Offering Broker and the Advisors and their affiliates have received and may receive in the future receive customary fees and commissions for these transactions and service. 116

118 SELLING RESTRICTIONS KSG Agro S.A. SELLING RESTRICTIONS Important information about this Prospectus This Prospectus constitutes a prospectus within the meaning of the Prospectus Directive and the Prospectus Act 2005 (which implemented the Prospectus Directive into Luxembourg law), for the purpose of giving the information with regard to the Issuer and the Shares it intends to offer pursuant to this Prospectus which is necessary to enable prospective investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the Issuer. This Prospectus constitutes a prospectus in the form of a single document within the meaning of article 5 of Prospectus Directive and article 8.3 of the Prospectus Act This Prospectus has been filed with, and was approved on April 4, 2011 by the CSSF, which is the competent authority in Luxembourg to approve this document as a prospectus. Under the Prospectus Directive and the Prospectus Act 2005, this Prospectus, once approved by the competent authority of one member state of the EU ( Home Member State ) may be used for making a public offering and admission of securities to listing on a regulated market in another Member State of the EU ( Host Member State ), provided that the competent authority of the Home Member State provides the competent authority of the Host Member State with a certificate of approval of the Prospectus (in accordance with article 18 of the Prospectus Directive and article 19 of the Prospectus Act 2005). The Company intends to undertake a public offering of the Offer Shares in Poland. Consequently, the Company will be authorized to carry out the Offering to the public in Poland, once the CSSF has provided the PFSA with (1) a certificate of approval of this Prospectus (in accordance with Art. 19 of the Prospectus Act 2005, Art. 18 of the Prospectus Directive and Art. 37 of the Public Offerings Act) and (2) a copy of the Prospectus together with a summary of the Prospectus in the Polish language and after the Prospectus in the English language and its summary in the Polish language have been made available to the public, which is equivalent to authorizing the Offering to the public in Poland. For the purposes of the public offering in Poland the Issuer will publish a Polish translation of the summary of the Prospectus. The Issuer accepts responsibility for the information contained in this Prospectus. The Issuer declares that, after having taken all reasonable care to ensure that such is the case, the information in this Prospectus is in accordance with the facts and does not omit anything likely to affect the importance of such information. Investors are authorised to use this Prospectuses solely for the purpose of considering the purchase of the Offer Shares in the Offering. You acknowledge and agree that the Offering Broker and the Advisors make no representation or warranty, express or implied, as to the accuracy or completeness of information, and nothing contained in this Prospectus is, or shall be relied upon as, a promise or representation by the Offering Broker or the Advisors. No person is authorised to give information or to make any representation in connection with the Offering other than as contained in this Prospectus. If any such information is given or made, it must not be relied upon as having been authorised by the Issuer, the Offering Broker and the Advisors or any of their affiliates or advisers or selling agents. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances imply that there has been no change in the affairs of the Issuer and its subsidiaries or that theinformationsetforthinthisprospectus is correct as at any date subsequent to the date of this Prospectus. In making an investment decision, prospective investors must rely upon their own examination of the Issuer and the terms of this Prospectus, including the risks involved. The distribution of this Prospectus and the offering of the Offer Shares in certain jurisdictions may be restricted by law. The Company and the Offering Broker and the Advisors require persons into whose possession this Prospectus comes to inform themselves about and to observe any such restrictions. This Prospectus does not constitute an offer of, or an invitation to purchase, any of the ordinary shares in any jurisdiction in which such offer or sale would be unlawful. No one has taken any action that would permit a public offering to occur in any jurisdiction except Poland. No Public Offering outside Poland This Prospectus has been prepared on the basis that there will be no public offers of the Offer Shares, other than the Offering to the public in the territory of Poland in accordance with the Prospectus Directive, as implemented in Luxembourg and Poland, respectively. Accordingly, any person making or intending to make any offering, resale or other transfer within the European Economic Area (the EEA ), other than in Poland, of the Offer Shares may only do so in circumstances under which no obligation arises for the Issuer, the Principal Shareholders or the Offering Broker to produce an approved prospectus or other offering circular for such offering. Neither the Issuer, the Principal Shareholders, nor the Offering Broker have authorized, nor will any of them authorize, the making of any offer of the Offer Shares through any financial intermediary, other than offers made by the Offering Broker under this Prospectus. 117

119 KSG Agro S.A. No action has been or will be taken by the Issuer, the Principal Shareholders or the Offering Broker in any jurisdiction other than Poland that would permit a public offering of the Offer Shares, or the possession or distribution of this Prospectus or any other offering material relating to the Issuer or the Shares in any jurisdiction where action for that purpose is required. Accordingly, the Shares may not be offered or sold, directly or indirectly, and neither this Prospectus nor any other offering material or advertisements in connection with the Shares may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction. The distribution of this Prospectus and the Offering in certain jurisdictions may be restricted by law and therefore persons into whose possession this Prospectus comes should inform themselves about and observe any such restrictions on the distribution of this Prospectus and the Offering, including those in the paragraphs that follow. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdictions. This Prospectus does not constitute an offer to subscribe for or buy any of the Offer Shares offered hereby to any person in any jurisdiction to whom it is unlawful to make such offer or solicitation in such jurisdiction. Notice to Investors Because of the following restrictions, prospective investors are advised to consult legal counsel prior to making any offer, resale, pledge or other transfer of the shares offered hereby. No actions have been taken to register or qualify the Offer Shares or otherwise permit a public offering of the Offer Shares in any jurisdiction other than in Poland. The distribution of this Prospectus and the offer of the the Offer Shares in certain jurisdictions may be restricted by law, and therefore persons into whose possession this Prospectus comes should inform themselves about and observe any such restrictions, including those in the paragraphs that follow. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdictions. Notice to Investors in the European Economic Area In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State ), an offer to the public of any Offer Shares may not be made in that Relevant Member State, other than the offer in Poland after the publication of a Prospectus in relation to the Offer Shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that relevant member state, all in accordance with the Prospectus Directive, except that it may make an offer of the Offer Shares to the public in that Relevant Member State under the following exemptions under the Prospectus Directive, if such exemptions have been implemented in that Relevant Member State: to legal entities which are qualified investors as defined under the Prospectus Directive; by the Offering Broker to fewer than 100, or, if the Relevant Member State has implemented the relevant provisions of the 2010 PD Amending Directive, 150 natural or legal persons, as permitted under the Prospectus Directive; or in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of the Offer Shares shall result in a requirement for the Issuer and the Offering Broker to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive. Each person in a Relevant Member State (other than, in the case of paragraph (a) below, persons in Poland receiving the offer in Poland contemplated in the Prospectuses) who receives any communication in respect of, or who acquires any the Offer Shares under, the offer contemplated in the Prospectuses will be deemed to have represented, warranted and agreed to and with each of the Issuer and the Offering Broker limited that: (a) it is a qualified investor as defined under the Prospectus Directive; and (b) in the case of any the Offer Shares acquired by it as a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive, the Offer Shares acquired by it in the offer have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than qualified investors, as that term is defined in the Prospectus Directive, or in circumstances in which the prior consent of the Offering Broker has been given to the offer or resale. For the purposes of the provisions and representations above, the expression an offer to the public in relation to any the Offer Shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the Offering so as to enable an investor to decide to purchase any the Offer Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including 118

120 KSG Agro S.A. the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression 2010 PD Amending Directive means Directive 2010/73/EU. Notice to investors in the United Kingdom This Prospectus and any other material in relation to the securities described herein may only be distributed to and may only be directed at persons in the United Kingdom (the UK ) that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive ( Qualified Investors ) that are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ) or (ii) high net worth entities, and other persons to whom the Prospectus may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order and (iii) to whom it may otherwise lawfully be distributed (all such persons together being referred to as Relevant Persons ). The Offer Shares are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such the Offer Shares will be engaged in only with, Relevant Persons. This document and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) by recipients to any other person in the UK. Any person who is not a Relevant Person should not act or rely on this document or any of its contents. No prospective investor should consider any information in this Prospectus to be investment, legal, tax or other advice. Each prospective investor should consult its own counsel, accountant and other advisers for such advice. None of the Issuer and the Offering Broker or Advisors makes any representation to any offeree or purchaser of the Offer Shares regarding the legality of an investment in such shares by such offeree or purchaser. The Offering Broker is acting solely for the Issuer and no one else in connection with this offering and is not, and will not be, responsible to any other person for providing advice in respect of this offering or for providing the protections afforded to their respective clients. The Offering Broker and certain related entities may acquire a portion of the Offer Shares for their own accounts. In connection with this offerings, the Offering Broker and Advisors and any affiliate acting as an investor for its own account may aquier the Offer Shares and in that capacity may retain, purchase or sell for its own account the Offer Shares and any of the Issuer s other securities or related investments and may offer or sell the Offer Shares or other investments otherwise than in connection with this offerings. Accordingly, references in this document to the Offer Shares being offered should be read as including any offering of securities to the Offering Broker and any affiliate acting in such capacity. The Offering Broker and Advisors do not intend to disclose the extent of any such investment or transaction otherwise than in accordance with any legal or regulatory obligation to do so. In relation to member states of the EEA other than the United Kingdom, there may be further rules and regulations of such country or jurisdiction within the EEA relating to the offering of the Offer Shares or distribution or publication of this Prospectus or any other offering material or advertisement; persons into whose possession this Prospectus comes should inform themselves about and observe any restrictions on the distribution of the Prospectus and the offer of Offer Shares applicable in such EEA member state. United States The Offer Shares have not been, and will not be, registered under the US Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, US persons except in certain transactions in reliance on Regulation S under the US Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S under the US Securities Act. In addition, until 40 days after the commencement of the Offering, an offer or sale of Offer Shares within the United States by any dealer (whether or not participating in the Offering) may violate the registration requirements of the US Securities Act if such offer or sale is made otherwise than in accordance with an available exemption from registration under the US Securities Act. Offering Broker has agreed that, except as permitted by the Placement Agreement, it will not offer, sell or deliver the Offer Shares within the United States or to, or for the account or benefit of, US persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the Offering and the closing date, and that it will have sent to each dealer to which it sells Offer Shares during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Offer Shares within the United States or to, or for the account or benefit of, US persons. This Prospectus has been prepared by the Company for use in connection with the offer and sale of the Offer Shares outside the United States and for the listing of the Offer Shares on the main market of the Warsaw Stock Exchange. 119

121 KSG Agro S.A. The Company and the Offering Broker reserve the right to reject any offer to purchase the Offer Shares, in whole or in part, for any reason. Canada This Prospectus is not, and under no circumstances is to be construed as, a Prospectus, an advertisement or a public offering of the securities described herein in any province or territory of Canada. No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the securities described herein, and any representation to the contrary is an offence. Japan The Shares have not been and will not be registered under the Securities and Exchange Law of Japan (Law No. 25 of 1948, as amended), and are not being offered or sold and may not be offered or sold, directly or indirectly, in Japan or to or for the account of any resident of Japan (which term as used herein includes any corporation or other entity organized under the laws of Japan), or to others for offering or sale, directly or indirectly, in Japan or to, or for the account of, any resident of Japan, except (i) pursuant to an exemption from the registration requirements of the Securities and Exchange Law of Japan and (ii) in compliance with any other applicable requirements of Japanese law. 120

122 INDEPENDENT AUDITORS KSG Agro S.A. INDEPENDENT AUDITORS BDO Audit, Societe Anonyme, independent auditors, with their address at 2 Avenue Charles de Gaulle, Boite Postale 351, L-2013 Luxembourg, have audited financial statements of the Issuer for the period from 16 November 2010 (date of incorporation) to 31 December BDO Audit, Societe Anonyme, is a member of the Institut des Reviseurs d Entreprises (IRE) and the Ordre des Experts-comptables (OEC) in Luxembourg. BDO Audit, Societe Anonyme incorporated in Luxembourg, has given, and has not withdrawn, their written consent to the inclusion of their report and the reference to themselves herein in the form and context in which they are included. The signatory of the independent auditors report on audited financial statement of the Issuer for the period from 16 November 2010 to 31 December 2010 was Daniel Crose. BDO LLC, Ukraine, independent auditors, with their registered address at 4, Serova Street, Dniepropetrovsk, 49000, Ukraine, have audited combined financial statements of KSG Agricultural and Industrial Holding Limited (Cyprus) and the following its subsidiaries (PUAIH-2 LLC, UAIH LLC, Scorpio Agro LLC, Souz-3 LLC, Goncharovo Agricultural LLC, Agro-Dnister LLC, TH UAIH LLC, Pivdenne Agricultural LLC, ATD Dneprovsky LLC) for the years ended 31 December, 2010, 2009 and BDO LLC, Ukraine, independent auditors, have also reviewed the consolidated pro-forma financial information. BDO Ukraine has given, and has not withdrawn, their written consent to the inclusion of their report and the reference to themselves herein in the form and context in which they are included. The signatory of the independent auditors report on audited combined financial statements of KSG Agricultural and Industrial Holding Limited (Cyprus) and its subsidiaries for the years ended 31 December, 2010, 2009 and 2008 are members of the Ukrainian Chamber of Audit the proffesional organisation of auditors in Ukraine and ACCA (Association of Chartered Certified Accountants). Upon a notarial deed certified by Maitre Edouard Delosh, a notary residing at Rambrouch, Grand Duchy of Luxemburg, on November 16, 2010, under which the Issuer was incorporated as a public limited holding company, EQ Audit Sarl, having its registered office at 2, rue J. Hackin, L-1746 Luxembourg, RCS Luxembourg B number , was elected as the statutory auditor of the Issuer. However by virtue of resolution certified by Maitre Francis Kesseler, a notary residing at Esch-sur-Alzette, Grand Duchy of Luxemburg, dated March 8, 2011 the General Meeting of shareholders resolved to appoint BDO Audit, a public company limited by shares ( société anonyme ), governed by the laws of the Grand-Duchy of Luxembourg, having its registered office at 2, avenue Charles de Gaulle, L-1653 Luxembourg, Grand-Duchy of Luxembourg and registered with the Luxembourg Trade and Companies Register under the number B , as statutory auditors of the Issuer with effect as from 16 November 2010 and for a period not exceeding six years. 121

123 AXATION KSG Agro S.A. TAXATION The information set out below describes the principal Luxembourg and Polish tax consequences of the acquisition, holding and disposal of the Shares and is included for general information only. This summary does not purport to be a comprehensive description of all Luxembourg and Polish tax considerations that may be relevant to a decision to acquire, hold or dispose of the Company s Shares. Each prospective investor should consult a professional tax adviser regarding tax consequences of acquiring, holding and disposing of the Company s Shares under the laws of their country and/or state of citizenship, domicile or residence. Should any withholding taxes be payable on amounts payable by the Company, the Company assumes responsibility for withholding of such taxes at the source. This summary is based on tax legislation, published case law, treaties, rules, regulations and similar documentation, in force as at the date of this Prospectus, without prejudice to any amendments introduced at a later date and implemented with retroactive effect. Taxation in Luxembourg Please be aware that the residence concept used under the respective headings applies for Luxembourg income tax assessment purposes only. Any reference in the present section to a tax, duty, levy impost or other charge or withholding of a similar nature refers to Luxembourg tax law and/or concepts only. Also, please note that a reference to Luxembourg income tax encompasses corporate income tax (impôt sur le revenu des collectivités), municipal business tax (impôt commercial communal), a solidarity surcharge (contribution au fonds pour l emploi), as well as personal income tax (impôt sur le revenu) generally. Corporate shareholders may further be subject to net wealth tax (impôt sur la fortune) aswell as other duties, levies or taxes. Corporate income tax, municipal business tax as well as the solidarity surcharge, invariably apply to most corporate taxpayers resident in Luxembourg for tax purposes. Individual taxpayers are generally subject to personal income tax and the solidarity surcharge. Under certain circumstances, where an individual taxpayer acts in the course of the management of a professional or business undertaking, municipal business tax may apply as well. Taxation of the Company Withholding Tax Dividends paid by the Company to the shareholders are as a rule subject to a 15 per cent. withholding tax in Luxembourg. However, subject to the provisions of an applicable double tax treaty, the rate of withholding tax may be reduced. Dividends paid by a company which is a resident of a Contracting State (Luxembourg) to a resident of the other Contracting State (Poland) may be taxed in that other State (Poland). However, such dividends may also be taxed in the Contracting State of which the Company paying is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: 5% of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividends; 15% of the gross amount of the dividends in all other cases. Furthermore, a withholding exemption may apply if at the time the income is made available, (i) the receiving entity is an eligible parent and (ii) has held or commits itself to hold for an uninterrupted period of at least 12 months a participation of at least 10 per cent. of the share capital of the Company or a participation of an acquisition price of at least EUR 1.2 million. Eligible parents include either (a) another company covered by Article 2 of the amended EU Parent-Subsidiary Directive, or a Luxembourg permanent establishment thereof, or (b) a company resident in a State having a double tax treaty with Luxembourg and subject to a tax corresponding to Luxembourg corporate income tax or a Luxembourg permanent establishment thereof, or (c) a company limited by share capital (société de capitaux) or a cooperative society (société coopérative) resident in the European Economic Area other than an EU Member State and liable to a tax corresponding to Luxembourg corporate income tax, or a Luxembourg permanent establishment thereof, or (d) a Swiss company limited by share capital (société de capitaux) which is effectively subject to corporate income tax in Switzerland without benefiting from an exemption. No withholding tax is levied on capital gains and liquidation proceeds. Income tax The Company is a fully-taxable Luxembourg company. The net taxable profit of the Company is subject to Luxembourg corporate income tax and municipal business tax. 122

124 KSG Agro S.A. The taxable profit as determined for corporate income tax purposes is applicable, with minor adjustments, for municipal business tax purposes. Corporate income tax was levied at an effective maximum rate of per cent. in 2010 (inclusive of the 4 per cent. surcharge for the employment fund) and per cent. in 2011 (inclusive of the 5 per cent. surcharge for the employment fund). Municipal business tax is levied at a variable rate according to the municipality in which the company is located (6.75 per cent. in Luxembourg-city). The maximum aggregate corporate income tax and municipal business tax rate consequently amounts to per cent. for companies located in Luxembourg-city in 2010 and 28,8 per cent. in Under the participation exemption regime, dividends derived from shares may be exempt from income tax if (i) the distributing company is a qualified subsidiary ( Qualified Subsidiary ) and (ii) at the time the dividend is put at the Company s disposal, the Company has held or commits itself to hold for an uninterrupted period of at least 12 months a qualified shareholding ( Qualified Shareholding ). A Qualified Subsidiary means (a) a company covered by Article 2 of the amended EU Parent-Subsidiary Directive or (b) a non-resident company limited by share capital (société de capitaux) liable to a tax corresponding to Luxembourg corporate income tax. A Qualified Shareholding means shares representing a direct participation of at least 10 per cent. in the share capital of the Qualified Subsidiary or a direct participation in the Qualified Subsidiary of an acquisition price of at least EUR 1.2 million. Liquidation proceeds are assimilated to a received dividend and may be exempt under the same conditions. Shares held through a tax transparent entity are considered as being a direct participation proportionally to the percentage held in the net assets of the transparent entity. Capital gains realized by the Company on shares are subject to income tax at ordinary rates, unless the conditions of the participation exemption regime, as described below, are satisfied. Under the participation exemption regime, capital gains realized on shares may be exempt from income tax at the level of the Company if at the time the capital gain is realized, the Company has held or commits itself to hold for an uninterrupted period of at least 12 months shares representing a direct participation in the share capital of the Qualified Subsidiary (i) of at least 10 per cent. or of (ii) an acquisition price of at least EUR 6 million. Shares held through a tax transparent entity are considered as being a direct participation proportionally to the percentage held in the net assets of the transparent entity. Taxable gains are determined as being the difference between the price for which shares have been disposed of and the lower of their cost or book value. Net Worth Tax The Company is as a rule subject to Luxembourg net worth tax at the rate of 0.5 per cent. applied on net assets as determined for net worth tax purposes. Net worth is referred to as the unitary value (valeur unitaire), as determined at 1 January of each year. The unitary value is in principle calculated as the difference between (i) assets estimated at their fair market value (valeur estimée de réalisation), and (ii) liabilities vis-à-vis third parties. Under the participation exemption, a Qualified Shareholding held in a Qualified Subsidiary by the Company is exempt. Other taxes The issuance of the Shares against contributions in cash as well as other amendments to its articles of incorporation are currently subject to a EUR 75 fixed duty. The disposal of the Shares is not subject to a Luxembourg registration tax or stamp duty, unless recorded in a Luxembourg notarial deed or otherwise registered in Luxembourg. Taxation of the shareholders Taxation of Luxembourg resident shareholders Individual shareholders Dividends and other payments derived from the Shares by resident individuals shareholders, who act in the course of the management of either their private wealth or their professional/business activity, are subject to income tax at the progressive ordinary rate (with a top effective marginal rate of currently per cent. including solidarity surcharge). Under current Luxembourg tax laws, 50 per cent. of the gross amount of dividends received by resident individuals from (i) a fully-taxable Luxembourg resident company limited by share capital (société de capitaux), (ii) a company limited by share capital (société de capitaux) resident in a State with which Luxembourg has concluded a double tax treaty and liable to a tax corresponding to Luxembourg corporate income tax or (iii) a company resident in a EU Member State and covered by Article 2 of the EU Parent-Subsidiary Directive is exempt from income tax. A tax credit is as a rule granted for the 15 per cent. withholding tax. Capital gains realized on the disposal of the Shares by resident individual shareholders, who act in the course of the management of their private wealth, are not subject to income tax, unless said capital gains qualify either as speculative gains or as gains on a substantial participation. Capital gains are deemed to be speculative gains and are subject to income tax at ordinary rates if the Shares are disposed of within 6 months after their acquisition or if their disposal precedes their 123

125 KSG Agro S.A. acquisition. A participation is deemed to be substantial where a resident individual shareholder holds, either alone or together with his spouse/partner and/or minor children, directly or indirectly at any time within the 5 years preceding the disposal, more than 10 per cent. of the share capital of the Company. Capital gains realized on a substantial participation more than 6 months after the acquisition thereof are subject to income tax according to the half-global rate method, (i.e. the average rate applicable to the total income is calculated according to progressive income tax rates and half of the average rate is applied to the capital gains realized on the substantial participation). A shareholder is also deemed to alienate a substantial participation if he acquired free of charge, within 5 years preceding the transfer, a participation that was constituting a substantial participation in the hands of the alienator (or the alienators in case of successive transfers free of charge within the same 5-year period). A disposal may include a sale, an exchange, a contribution or any other kind of alienation of the Shares. Capital gains realized on the disposal of the Shares by resident individual shareholders, who act in the course of their professional/business activity, are subject to income tax at ordinary rates. Taxable gains are determined as being the difference between the price for which the Shares have been disposed of and the lower of their cost or book value. Luxembourg resident corporate shareholders Dividends and other payments derived from the Shares by a Luxembourg fully-taxable resident company are subject to corporate income tax and municipal business tax, unless the conditions of the participation exemption regime, as described below, are satisfied. Should the conditions of the participation exemption not be fulfilled, 50 per cent. of the dividends received by a Luxembourg fully-taxable resident company from the Company are exempt from corporate income tax and municipal business tax. A tax credit is as a rule granted for the 15 per cent. withholding tax and any excess may be refundable. Under the participation exemption regime, dividends derived from the Shares by a Luxembourg fully-taxable resident company may be exempt from income tax if cumulatively (i) the shareholder is a Luxembourg resident fully-taxable company and (ii) at the time the dividend is put at the shareholder s disposal, the shareholder has held or commits itself to hold for an uninterrupted period of at least 12 months a Qualified Shareholding in the Company. Liquidation proceeds are assimilated to receive dividends for the purpose of the participation exemption and may be exempt under the same conditions. Shares held through a fiscally transparent entity are considered as being a direct participation proportionally to the percentage held in the net assets of the transparent entity. Capital gains realized by a Luxembourg fully-taxable resident company on the Shares are subject to income tax at ordinary rates, unless the conditions of the participation exemption regime, as described below, are satisfied. Taxable gains are determined as being the difference between the price for which the Shares have been disposed of and the lower of their cost or book value. Under the participation exemption regime, capital gains realized on the Shares by a Luxembourg fully-taxable resident company may be exempt from income tax at the level of the shareholder if cumulatively (i) the shareholder is a Luxembourg resident fully-taxable company and (ii) at the time the capital gain is realized, the shareholder has held or commits itself to hold for an uninterrupted period of at least 12 months Shares representing a direct participation (a) in the share capital of the Company of at least 10 per cent. or (b) of an acquisition price of at least EUR 6 million. Shares held through a fiscally transparent entity are considered as being a direct participation proportionally to the percentage held in the net assets of the transparent entity. Tax exempt shareholders A shareholder who is either (i) an undertaking for collective investment subject to the amended law of December 20, 2002 or the law of December 17, 2010, (ii) a specialized investment fund governed by the law of February 13, 2007, or (iii) a family wealth management company governed by the law of May 11, 2007, is exempt from income tax in Luxembourg. Dividends derived from and capital gains realized on the Shares are thus not subject to income tax in their hands. Taxation of Luxembourg non-residents shareholders Non-resident shareholders who have neither a permanent establishment nor a permanent representative in Luxembourg to which or whom the Shares are attributable are generally not liable to any Luxembourg income tax, whether they receive payments of dividends or realize capital gains upon sale of Shares, except for a potential withholding tax (see above) and capital gains realised on a substantial participation (see above) before the acquisition or within the first 6 months of the acquisition thereof that are subject to income tax in Luxembourg at ordinary rates (subject to the provisions of an applicable double tax treaty). Dividends received by a Luxembourg permanent establishment or permanent representative, as well as capital gains realised on the Shares, are subject to Luxembourg income tax, unless the conditions of the participation exemption regime 124

126 KSG Agro S.A. are satisfied i.e. if cumulatively (i) the Shares are attributable to a qualified permanent establishment ( Qualified Permanent Establishment ) and (ii) at the time the dividend is put at the disposal of the Qualified Permanent Establishment, it has held or commits itself to hold for an uninterrupted period of at least 12 months a Qualified Shareholding. A Qualified Permanent Establishment means (a) a Luxembourg permanent establishment of a company covered by Article 2 of the EU Parent-Subsidiary Directive, (b) a Luxembourg permanent establishment of a company limited by share capital (société de capitaux) resident in a State having a tax treaty with Luxembourg and (c) a Luxembourg permanent establishment of a company limited by share capital (société de capitaux) or a cooperative society (société coopérative) resident in the European Economic Area other than a EU Member State. If the conditions of the participation exemption are not fulfilled, 50 per cent. of the gross amount of dividends received by a Luxembourg permanent establishment or permanent representative is exempt from income tax. A tax credit is further granted for the 15 per cent. withholding tax. Under the participation exemption regime, capital gains realized on the Shares may be exempt from income tax if cumulatively (i) the Shares are attributable to a Qualified Permanent Establishment and (ii) at the time the capital gain is realized, the Qualified Permanent Establishment has held or commits itself to hold for an uninterrupted period of at least 12 months Shares representing a direct participation in the share capital of the Company (a) of at least 10 per cent. or (b) of an acquisition price of at least EUR 6 million. Other taxes Net Wealth Tax Luxembourg net wealth tax will not be levied on the Shares in the hands of a shareholder unless (i) such shareholder is a corporate entity resident in Luxembourg other than (a) an undertaking for collective investment governed by the amended law of December 20, 2002, or the law of December 17, 2010 (b) a securitization company governed by the law of March 22, 2004, (c) a company subject to the law of June 15, 2004 on venture capital vehicles, (d) a specialized investment fund governed by the law of February 13, 2007, or (e) a family wealth management company governed by the law of May 11, 2007, or (ii) the Shares are attributable to an enterprise or part thereof which is carried on through a permanent establishment or a permanent representative in Luxembourg of a corporate entity. Further, Qualified Shareholding held in the Company by a Luxembourg resident fully-taxable company or attributable to a Qualified Permanent Establishment may be exempt from net wealth tax. Inheritance tax and gift tax Under Luxembourg tax law, where an individual shareholder is a resident of Luxembourg for inheritance tax purposes at the time of his/her death, the Shares are included in his or her taxable basis for inheritance tax purposes. On the contrary, no inheritance tax is levied on the transfer of the Shares upon death of a shareholder in cases where the deceased was not a resident of Luxembourg for inheritance purposes. Gift tax may be due on a gift or donation of the Shares, if the gift is embodied in a Luxembourg notarial deed or otherwise registered. Taxation in Poland This section provides information regarding the taxation of income related to holding and trading in shares admitted to trading on the regulated market. For the avoidance of doubt, all references to shares presented in this section also pertain to the Shares. The information presented below is of a general nature and should not constitute the sole basis for evaluating the tax consequences of making any investment decisions. Potential investors are urged to consult their tax advisors. Please note that the information presented below has been prepared based on the legal statutes as at the date of the Prospectus. Polish Corporate Investors Taxation of Income Relating to Holding Shares Dividends and other income (revenue) actually earned on holding shares (such as e.g. remuneration for redeemed shares excluding buy-back of shares, liquidation proceeds) actually earned by legal persons and capital companies in organization, as well as other unincorporated entities (except civil, general, limited partnerships, professional partnerships, and limited joint-stock partnerships) with their registered office or place of management in Poland (the Polish Corporate Shareholders ), shall be subject to taxation on the general rules under the Corporate Income Tax ( CIT ) Act. They are taxed at the basic 19 per cent. rate. Pursuant to Art. 20 section 3 of the CIT Act, an income tax exemption applies to dividends and other revenue earned on the holding of shares in companies whose seat or management office is outside Poland by Polish companies whose 125

127 KSG Agro S.A. worldwide income is subject to CIT in Poland, regardless of where the source of income is located, if all of the following conditions are met: the entity which distributes the dividends and other revenue earned on shares is a company whose worldwide income (regardless of where the source of income is located) is subject to income tax in a European Union Member State other than Poland, or in a other Member State of the European Economic Area; Polish company holds directly not less than 10 per cent. of shares in the capital of the company referred to in item (a) above for an uninterrupted period of at least 2 years; the company which distributes the dividends and other revenue earned on shares does not benefit from the exemption from corporate income tax with respect to its all income, regardless of where the source of income is located. CIT Act expressly provides that in order to benefit from the above exemption, the 2-year holding period requirement may be also met after the dividend is paid, provided that a given taxpayer would actually satisfy that requirement afterwards. Otherwise, a taxpayer who did not meet the 2-year holding period requirement would be obliged to pay the due income tax along with penalty interests. The above exemption will not apply, however, if distributions are made upon liquidation of a company or upon buy-back of shares. Moreover, dividends paid out by a Luxembourg company to Polish Corporate Shareholders may be exempt from Luxembourg withholding tax under Council Directive of July 23, 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, provided that the conditions specified by the Luxembourgian tax laws are satisfied. The Double Tax Treaty concluded by the Republic of Poland and Grand Duchy of Luxembourg ( Double Tax Treaty ) provides that dividends paid by a company with its registered office in Luxembourg to Polish Corporate Shareholders may be taxed both in Poland and Luxembourg, although such Luxembourg tax cannot exceed 5 per cent. of the gross amount of the dividend if the recipient of the dividend is a company (other than a partnership) holding at least 25 per cent. of the capital of the Luxembourg company distributing the dividend, or 15 per cent. of the gross amount of the dividend in all other situations. It should be noted that in relation to the dividends which may be subject to taxation in Luxembourg, pursuant to Art. 24 sec. 1(a) of the Double Tax Treaty, an exemption from income tax applies in Poland. Please note that the method of avoidance of double taxation (i.e. the exemption method) provided by the Double Tax Treaty with reference to dividends which are subject to withholding tax in Luxembourg, is unique compared with other double tax treaties entered into by Poland. Therefore, a tax advisor should be consulted regarding the possibility of applying this method in practice. Pursuant to the provisions of the Double Tax Treaty, if Polish Corporate Shareholder carries on business in Luxembourg through a permanent establishment situated in Luxembourg (i.e. a fixed place of business through which the business of an enterprise is wholly or partly carried on), and the shares in respect of which the dividends are paid are effectively connected with such permanent establishment, dividends will be taxed in Luxembourg as business profits earned by that permanent establishment. Taxation of Income from Disposal of Shares Income earned by Polish Corporate Shareholders on disposal of shares of a Luxembourg company (including buy-back of shares) is subject to corporate income tax in Poland in accordance with the general rules. This income is aggregated with the business incomes of the given fiscal year, and subject to the general 19 per cent. CIT rate. The income is computed as the difference between the revenue (in principle, the price agreed for the shares) and tax deductible costs (in principle, the costs of acquisition of the shares and costs related to the sale). However, it should be noted that if the value of shares expressed in the price specified in the agreement on the disposal of shares differs materially, without a legitimate reason, from the market value of the shares, such agreed price may be challenged by the tax authorities. Polish Individual Investors Taxation of Income Relating to Holding Shares Income earned by an individuals domiciled in Poland (the Polish Individual Shareholders ) on dividends and other income (revenue) actually earned on holding shares (such as e.g. remuneration for redeemed shares excluding buy-back of shares, liquidation proceeds) in a Luxembourg company is considered to be income from capital and it is not aggregated with incomes from other sources. Such income is subject to the 19 per cent. flat rate Personal Income Tax ( PIT ). The tax 126

128 KSG Agro S.A. is settled on annual basis. Annual tax returns should be filed by April 30 of the calendar year following the year in which income was earned. It is not absolutely clear whether the tax due on dividend income earned by a Polish Individual Investor from a Luxembourg company shall be withheld by a Polish brokerage house assisting in the payment or not. On the one hand, there is a regulation (Art. 41 sec. 4 of the PIT Act) that clearly imposes on brokerage houses the obligation to withhold the tax. On the other hand, there is a regulation which provides that amounts of tax due on dividends earned outside Poland and the amounts of tax paid outside Poland on such dividends should be reported by a taxpayer (i.e. Polish Individual Investor) in his annual tax return (Art. 30a sec. 11). Most tax advisers seem to regard the latter provision as overruling the first one, and are thus of the opinion that a Polish brokerage house should not withhold any tax. However, in case of any doubts tax adviser should be consulted by a taxpayer. The Double Tax Treaty provides that dividends paid by a company with its registered office in Luxembourg to Polish Individual Shareholders may be taxed both in Poland and Luxembourg, but such Luxembourg tax cannot exceed 15 per cent. of the gross amount of the dividend. It should be noted that in relation to dividends which may be subject to tax in Luxembourg, the exemption with the progression method of avoidance of double taxation shall apply in Poland, pursuant to Art. 24 sec. 1(a) of the Double Tax Treaty. In accordance with these provisions, where a Polish Individual Shareholder receives dividends which may be taxed in Luxembourg, the Polish tax authorities shall exempt such income from tax. Nevertheless, when calculating the amount of tax on the remaining income such natural person, should take into account the exempted income from dividends. Please note that the method of avoidance of double taxation (i.e. the exemption method) provided by the Double Tax Treaty with reference to dividends which are subject to withholding tax in Luxembourg, is unique compared with other double tax treaties entered into by Poland. Therefore, a tax advisor should be consulted regarding the possibility of applying this method in practice. Pursuant to the provisions of the Double Tax Treaty, if the Polish Individual Shareholder carries on business in Luxembourg through a permanent establishment situated in Luxembourg (i.e. a fixed place of business through which the business of an enterprise is wholly or partly carried on) or performs in Luxembourg independent personal services from a fixed base situated in Luxembourg, and the shares in respect of which the dividends are paid are effectively connected with such permanent establishment or fixed base, dividends will be taxed in Luxembourg as business profits or as income from independent personal services earned by that permanent establishment or fixed base. Taxation of Income from a Disposal of Shares Income earned by a Polish Individual Shareholders on sale of shares (including buy-back of shares) should be classified as income from capital gains and as such it should not be combined with incomes from other sources but should be subject to the 19 per cent. flat PIT rate. The income is computed as the difference between the revenue earned on disposal of shares (in principle, the price for the shares) and the related costs (in principle, the costs of acquisition of the shares and costs related to the sale). The tax is settled on annual basis. Annual tax returns should be filed by April 30 of the calendar year following the year in which income was earned (this also being the deadline for paying the tax). No obligation exists to pay tax advances during the tax year. The above is not applicable if a Polish Individual Shareholder holds the shares within the scope of its business activity. If this is the case, the income should be classified as a business income. In such case, income tax shall be paid at the progressive tax rates, which varies from 18 per cent. to 32 per cent., or at the 19 per cent. flat rate (depending on the form of taxation chosen by the given individual). It should be noted that if the value of shares expressed in the price specified in the agreement on the disposal of shares differs materially, without a legitimate reason, from the market value of the shares, this may be challenged by the tax authorities. It should also be noted that pursuant to Art. 9 section 6 of the Polish PIT Act, losses incurred during a fiscal year on account of the disposal of shares may be deducted from the income received from that source over five consecutive fiscal years, provided that the amount of the deduction does not exceed 50 per cent. of the amount of the loss in any single fiscal year of the five-year period. Foreign Investors Individuals who do not have their place of residence in Poland and legal entities, companies in organization and other entities with no legal personality, if they are treated as tax residents under tax law of a given state, that have their registered 127

129 KSG Agro S.A. office and place of management outside Poland are subject to PIT and CIT respectively, only with respect to the profits that are derive sources of income located on the territory of Poland. Although this is not expressly provided for in Polish tax law, it should be noted that dividends from a Luxembourg company should not be treated as income derived from Poland, even if the company is listed on the Warsaw Stock Exchange. Consequently, it should be noted that dividends paid by a Luxembourg company to a foreign investor should not be subject to Polish income tax. Polish tax law does not give clear direction on whether income from a sale of shares of a Luxembourg company should be treated as income derived from Poland if the shares are traded on the Warsaw Stock Exchange. It seems that the prevailing approach of the tax authorities is that trades on the Warsaw Stock Exchange shall be treated as, Polish source income. Consequently, as a rule, such income would be subject to Polish income tax and settled on general rules. In practice, however, most of the tax treaties would exempt such income from taxation in Poland. This should be verified on a case-by-case basis. Tax on Civil Law Transactions The tax on civil law transactions ( TCLT ) is levied on agreements providing for a sale or exchange of rights, provided that these rights are executed in Poland or, if executed abroad, that the purchaser is a Polish tax resident and the transaction is effected in Poland. The tax rate on the sale of shares and the exchange of shares is 1 per cent. at their market value and should be paid within fourteen days of the date on which the tax obligation arose (that is, the date the share or exchange agreement was concluded), unless the sale of shares and the exchange of shares agreements are concluded in a form of a notary deed. In that case the due tax should be collected by the notary public acting as a tax remitter. The purchaser of shares is liable for paying the due tax on civil law transactions. In the case of an exchange of shares, the liability for paying the due tax is borne jointly and severally by the parties to the exchange of shares transaction. Exemptions from the tax on civil law transactions apply, without limitation, to transactions concerning the sale of financial instruments (including shares) to investment companies or to foreign investment companies or, through them, the sale of such instruments within the boundaries of a regulated market, and the sale of such instruments made by investment companies or foreign investment companies outside the boundaries of a regulated market, provided that such instruments were acquired by those companies within the boundaries of a regulated market, as defined in the Polish Act on Trading in Financial Instruments. Additionally, civil law transactions are not subject to TCLT if at least one party of a given transaction is subject to VAT or is exempted from VAT with respect to such transaction, however, with exception of sale of shares agreement. 128

130 ADDITIONAL INFORMATION KSG Agro S.A. ADDITIONAL INFORMATION Capitalized terms used in this Prospectus and not otherwise defined herein have the meaning ascribed to such terms in Annex I Defined Terms. This Prospectus has been prepared by the Issuer in connection with the Offering and Admission solely for the purpose of enabling a prospective investor to consider an investment in the Offer Shares. The information contained in this Prospectus has been provided by the Issuer and other sources identified herein. Prospective investors are expressly advised that an investment in the Offer Shares entails financial risk and that they should, therefore, read this Prospectus in its entirety, and in particular, a section Risk Factors, when considering an investment in the Offer Shares. The contents of this Prospectus are not to be construed as legal, financial or tax advice. Each prospective investor should consult his, her or its own legal adviser, independent financial adviser or tax adviser for legal, financial or tax advice and not rely exclusively on the legal, financial or tax information contained in this Prospectus. Save for the provisions of mandatory laws, no person is or has been authorized to give any information or to make any representation in connection with the Offering and/or Admission, other than as contained in this Prospectus, and if given or made, any other information or representation must not be relied upon as having been authorized by the Issuer, or by the Offering Broker. The corporate governance structure of the Issuer is set out in its Articles of Association which are available on the Issuer s website: Responsibility for this Prospectus The Issuer accepts responsibility for the information contained in this Prospectus. To the best of the knowledge and belief of the Issuer, which has taken all reasonable care to ensure that such is the case, the information contained in this Prospectus is in accordance with the facts and contains no omission likely to affect its import. Neither the delivery of this Prospectus nor any sale made hereby at any time after the date hereof shall, under any circumstances, create any implication that there has been no change in the affairs of the Issuer or any of its subsidiaries or the Issuer and its subsidiaries taken as a whole (the KSG Group, the Group ) since the date hereof or that the information contained herein is correct as of any date subsequent to the earlier of the date hereof or any date specified with respect to such information. Neither the Advisors nor the legal advisers to the Issuer accept any responsibility whatsoever for the contents of this Prospectus, or for its transaction, or for any other statement made or purported to be made by any of them or on their behalf in connection with the Issuer or the Offering. The Advisors and the legal advisers to the Issuer accordingly disclaim all and any liability whether arising in tort or contract which they might otherwise have in respect of this Prospectus or any such statement. No representation or warranty, express or implied, is made by the Advisors as to the accuracy or completeness of the information set forth herein and nothing contained in this Prospectus is, or shall be relied upon as a promise or representation, whether as to the past or the future. Notice to Prospective Investors The distribution of this Prospectus and the Offering of the Offer Shares in certain jurisdictions may be restricted by law. This Prospectus may not be used for, or in connection with, and does not constitute, any offer to sell, or any solicitation or invitation to purchase, any of the Offer Shares offered hereby in any jurisdiction in which such an offer or solicitation or invitation would be unlawful. Persons in possession of this Prospectus are required to inform themselves about and to observe any such restrictions, including those set out under Selling Restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. As a condition to the purchase of any Offer Shares in the Offering, each purchaser will be deemed to have made, or in some cases be required to make, certain representations and warranties and will be required to take certain actions described in particular in The Offering and Plan of Distribution, which will be relied upon by the Issuer, the Offering Broker and others. The Issuer and the Principal Shareholder reserve the right, in its sole and absolute discretion, to reject any purchase of Offer Shares that the Issuer, the Principal Shareholder, the Offering Broker or any agents believe may give rise to a breach or a violation of any law, rule or regulation. See, in particular: Selling Restrictions. The Offer Shares have not been approved or disapproved by the United States Securities and Exchange Commission, any State securities commission in the United States or any other Unites States regulatory authority, nor have any of the foregoing passed upon or endorsed the merits of the Offering or the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offence in the United States. 129

131 KSG Agro S.A. Presentation of Financial and Other Information In this Prospectus, the terms Issuer, Company KSG Group, the Group, KSG and similar terms refer to KSG Agro S.A. and its direct and indirect consolidated subsidiaries, unless the context requires otherwise. Unless otherwise noted, references to management are to the members of the Board of Directors and the Senior Management, and statements as to the Company s beliefs, expectations, estimates and opinions are to those of the Company s management. The term Operating Companies, refers to Ukrainian companies PUAIH-2 LLC, UAIH LLC, Scorpio LLC, Soyuz-3 LLC, Goncharovo LLC, Agro-Dnister LLC, TH UAIH LLC, Pivdenne LLC, ATD Dneprovsky LLC, Unirem-Agro Plus LLC, Askoninteks LLC, Agro-Golden LLC and term Group Subsidiaries or Subsidiaries refers to any direct or indirect subsidiary of the Issuer (including KSG Agricultural and Industrial Holding Limited (Cyprus)), if the context indicates. The Company maintains its financial statements (the IFRS Financial Statements ) in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the International Accounting Standards Board ( IASB ), and interpretations, issued by the International Financial Reporting Interpretations Committee ( IFRIC ) and as applicable in the respective years. The IFRS Financial Statements included in this Prospectus comprise (i) the audited financial statements of the Issuer for the period from November 16, 2010 to December 31, 2010; (ii) the audited Combined Financial Statements of the KSG Agricultural and Industrial Holding Limited and its certain subsidiaries PUAIH-2 LLC, UAIH LLC, Scorpio Agro LLC, Souz-3 LLC, Goncharovo Agricultural LLC, Agro-Dnister LLC, TH UAIH LLC, Pivdenne Agricultural LLC, ATD Dneprovsky LLC, for the past three financial years ending December 31, 2008, 2009 and 2010, and (iii) unaudited pro forma financial information to show the effect of acquisition by the Issuer control over the Group Subsidiaries (excluding Unirem-Agro Plus LLC, Askoninteks LLC and Agro-Golden LLC). Combined Financial Statements included in the Prospectus are presented in USD which is the accounting currency of the Group and of the Company. The Operating Subsidiaries maintain their accounting records in local currencies in accordance with the accounting and reporting regulations of the countries of their incorporation. Local statutory accounting principles and procedures may differ from those generally accepted under IFRS. Accordingly, the Combined Financial Statements which have been prepared based on the Group Subsidiaries local statutory accounting records, reflect adjustments necessary for such financial statements to be presented in accordance with IFRS. Certain figures contained in this Prospectus, including financial information, have been subject to rounding adjustments. Accordingly, in certain instances the sum of the numbers in a column or a row in tables contained in this Prospectus may not conform exactly to the total figure given for that column or row. Some percentages in tables in this Prospectus have also been rounded and accordingly the totals in these tables may not add up to 100 per cent. Unless otherwise indicated, all references in this Prospectus to US$ or USD are to the lawful currency of the United States and all references to EUR, Euro or are to the lawful currency of the European Economic and Monetary Union, of which Luxembourg is a member. References to UAH or Hryvnia are to the lawful currency of Ukraine, whereas all references to PLN and Polish zloty are to the lawful currency of Poland, and all references to RUR are to the lawful currency of the Russian Federation. Potential investors should consult their own professional advisers to gain an understanding of the financial information contained herein. Market, Economic and Industry Data All references to market, economic or industry data, statistics and forecasts in this Prospectus consist of estimates compiled by professionals, state agencies, market and other organisations, researchers or analysts, publicly available information from other external sources as well as our knowledge of our sales and markets and assessments made by our management. Certain statistical data and market, economic or industry information and forecasts relating to the world and Ukrainian farming industry and grain trade have been extracted and derived by us from reports and analysis produced by, inter alia, the following sources: information available on website owned and operated by the State Statistics Committee of Ukraine ( statistical data of National Bank of Ukraine ( statistical data of National Bank of Poland ( information, reports and analysis available on website owned and operated by the United States Department of Agriculture, and its Foreign Agricultural Service ( 130

132 KSG Agro S.A. information available on website of APK Inform Agency ( information available on website of the Food and Agriculture Organisation of the United Nations ( information published by the Food and Agriculture Policy Research Institute (FAPRI) ( market researches provided by GFK Group; market researches provided by UkrAgroConsult. While the Issuer has compiled, extracted and reproduced market or other industry data from external sources, including third parties or industry or general publications, neither the Issuer or the Offering Broker have independently verified that data. The information in this Prospectus that has been sourced from third parties has been accurately reproduced and, as far as we are aware and able to ascertain from the information published by the cited sources, no facts have been omitted that would render the reproduced information inaccurate or misleading. Subject to the foregoing, none of the Issuer or the Offering Broker can assure investors of the accuracy or completeness of, or take any responsibility for, such data. The source for such third party information is cited whenever such information is used in this Prospectus. With respect to industries in which the Group operates, some of estimates and assessments could not be substantiated by reliable external market and/or industry information as such information is not often available or may be incomplete. While the Company has taken every reasonable care to provide the best possible assessments of the relevant market situation and the information about the relevant industry, such information may not be relied upon as final and conclusive. Investors are encouraged to conduct their own investigations of the relevant markets or employ a professional consultant. Industry publications generally state that their information is obtained from sources they believe reliable, but that the accuracy and completeness of such information is not guaranteed and that the projections they contain are based on a number of significant assumptions. The issuer has relied on the accuracy of such data and statements without carrying out an independent verification thereof, and therefore cannot guarantee their accuracy and completeness. Furthermore, Issuer believes that its management s estimates and assessments are accurate and reliable, however, they have not been verified by independent external professionals. Consequently, the Issuer can guarantee neither their accuracy and completeness nor that estimates or projections made by another entity relying on other methods of collecting, analysing and assessing market data would be the same as the Issuer s. Save where required by mandatory provisions of laws, the Issuer does not intend and do not undertake to update market, economic or industry data, statistics and forecasts contained in this Prospectus. Industry trends may change or significantly differ from the one projected in this Prospectus. Therefore investors should be aware that estimates made in this Prospectus may not be relied upon as indicatives of our future performances and actual trends. In this Prospectus, the Issuer makes certain statements regarding its competitive position, growth and market leadership. The Issuer believes these statements to be true based on market data and industry statistics regarding the competitive position of certain of the Group s competitors. In presenting the overview of the Issuuer s competitive position in the relevant markets, the Issuer also relied on management s assessments and analysis of such competitive position. In making such assessments and analysis the management has used market information collected by its own employees and advisors for such purpose, either available on the basis of public information or derivable from the same. Documents Incorporated by Reference No documents or content of any website are incorporated by reference in this Prospectus. Forward-looking Statements Some of the statements in some of the sections in this Prospectus include forward-looking statements which reflect the Issuer s current views with respect to future events and financial performance of its Group. Such forward-looking statements can be identified by the use of forward-looking terminology, including the terms such as believes, expects, estimates, anticipates, intends, plans, may, will, should, would, could or, in each case, their negatives or other variations or comparable terms. All statements other than statements of historical facts included in this Prospectus are forward-looking statements. Such items in this Prospectus include, but are not limited to, statements under Risk Factors, Business, Industry Overview and Operating and Financial Review. By their nature, forward-looking statements involve known and unknown risk and uncertainty, and other factors that may cause the Group s actual results, performances and achievements to differ materially from any future results, performances, achievements or developments expressed in or implied by such forward-looking statements. The Issuer has based these forward-looking statements on numerous assumptions regarding the Group s present and future business strategies, the Group s current expectations and projections about future events and the environment in which the Group will operate in the future. These forward-looking statements are subject to risks, uncertainties and assumptions about the KSG Group, including, among other things: 131

133 KSG Agro S.A. the Group s ability to develop and expand its business; the Group s ability to keep up with new technologies and expand into new markets; the Group s and the Group Subsidiaries ability to control their costs; the Group s future capital spending and availability of financial resources to finance capital spending; political and economic conditions in the countries in which the Group Subsidiaries operate; volatility in the world s securities markets; the effects of regulation (including tax regulations) in Luxembourg and other countries in which the Group Subsidiaries operate. The forward-looking statements speak only as at the date of this Prospectus. The Issuer expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, whether to reflect any new information, future events, any change in expectations with regard thereto or any change in events, conditions or circumstances on which any such statements is based, except as required by law, including under the Prospectus Act 2005 and the Polish Public Offerings Act. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Prospectus might not occur. Any statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Prospective investors are cautioned not to place undue reliance on such forward-looking statements, which are based on facts known to the Issuer only as at the date of this Prospectus. Documents Available for Inspection Copies of the following documents will, when published, be available for inspection free of charge during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) at the registered office of the Company from the date of this Prospectus throughout its validity period: the most recent version of the Articles of Association; the unaudited pro forma consolidated financial information for the year ended 31 December 2010; the audited Financial Statements of the Issuer for the period from November 16, 2010 to December 31, 2010; the audited Combined Financial Statements for the years ended December 31, 2010, 2009 and 2008; this Prospectus (including a summary translated into the Polish language) and supplements thereto, if any; copies of all corporate resolutions mentioned in this Prospectus. Moreover, the following documents will be available through the Company s website this Prospectus, together with a summary translated into the Polish language; the most recent version of the Articles of Association. 132

134 Informacje finansowe KSG Agro S.A. INDEX TO FINANCIAL STATEMENTS Unaudited Pro Forma Consolidated Financial Information for the year ended December 31, F-2 Audited Financial Statements of the Issuer for the period from November 16, 2010 to December 31, F-10 Audited Combined Financial Statements for the year ended December 31, F-24 Audited Combined Financial Statements for the years ended December 31, 2009 and F-60 F-1

135 GROUP OF COMPANIES KSG AGRO S.A. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION For the year ended 31 December 2010 F-2

136 KSG Agro S.A. Contents: IndependentAuditor sreport... F-4 Unaudited Pro forma consolidated statement of financial position...f-6 UnauditedProFormaconsolidatedstatementofcomprehensiveincome...F-7 1. Background... F-8 2.Basisofpreparationoftheproformaconsolidatedfinancialinformation...F-8 3.Explanatorynotestotheproformaconsolidatedfinancialinformation...F-9 F-3

137 F-4

138 F-5

139 KSG Agro S.A. Unaudited Pro forma consolidated statement of financial position As at 31 December 2010 (in thousand USD) Historical unadjusted information Pro forma adjustments Resulting pro forma financial information KSG Agro S.A. KSG Agricultural and Industrial Holding Limited Notes KSG Agro S.A. (audited) (audited) (audited) Assets Non-current assets Property, plant and equipment (a) Long-term biological assets (a) 247 Goodwill (a) Total non-current assets Current assets Current biological assets (a) Inventories (a) 5149 Trade and other accounts receivable (a) Taxes prepaid (a) Cash and cash equivalents 71 2 (a) 71 Total current assets TOTAL ASSETS LIABILITIES AND EQUITY EQUITY: Share capital Retained earnings (7) (b) Total equity Non-controlling interest Total equity Non-current liabilities Loans and borrowings (a) Total non-current liabilities, less net assets attributable to participants Current liabilities Loans and borrowings (a) Trade and other accounts payable (a) Promissory notes issued (a) 188 Tax liabilities 18 2(a) 18 Total current liabilities TOTAL LIABILITIES F-6

140 KSG Agro S.A. Unaudited Pro forma consolidated statement of comprehensive income For the year ended 31 December 2010 (in thousand USD) Historical unadjusted information Pro forma adjustments Resulting pro forma financial information KSG Agro S.A. KSG Agricultural and Industrial Holding Limited Notes KSG Agro S.A. (audited) (audited) (audited) Income (a) Change of fair value of biological assets (a) Cost of sales (20 456) 3(a) (20 456) Gross profit General and administrative expenses (7) (787) 3 (a) (794) Other assets, net 303 3(a) 303 Result from operating activities (7) Finance income (expenses), net (1 558) 3(a) (1 558) Profit before income tax (7) Income tax expenses (2) 3(a) (2) Profit for the year (7) Profit attributable to Participants (b) 9379 Non-controlling interest 661 2(b) 661 Profit for the period Other comprehensive income Foreign currency translation differences for foreign operations (12) 3(a) (12) Other comprehensive income for the period, netofincometax (12) (12) Total comprehensive income for the period Total comprehensive income attributable to Participants (b) 9379 Non-controlling interest 661 2(b) 661 Total comprehensive income for the period F-7

141 KSG Agro S.A. Notes to the unaudited pro forma consolidated financial information As at 31 December 2010 and for the year then ended (in thousand USD) 1. Background Given pro forma consolidated financial information (the Pro Forma Financial Information ) has been prepared to provide information about how the Operations (as defined below) might have affected the financial information of the Group KSG Agro S.A. (further the Group), if these Operations had been completed by 31 December This Pro Forma Financial Information was prepared based on the audited combined financial statements of KSG Agricultural and Industrial Holding Limited as at 31 December 2010, as well as the audited financial statements of KSG Agro S.A. for the period from 16 November 2010 (date of incorporation) to 31 December The Group KSG Agro S.A. includes the following companies: Company Activity Basis to be included into Group KSG Agro S.A. (Luxemburg) Parent company Parent company to the Group KSG Agricultural and Industrial Holding Limited (Cyprus) Intermediate holding company Parent company to Ukrainian subsidiaries Enterprise No2 of Ukrainian agricultural and industrial holding LLC Agriculture Subsidiary (Ukraine) (PUAIH-2 LLC) Scorpio Agro LLC (Ukraine) Agriculture Subsidiary Souz-3 LLC (Ukraine) Agriculture Subsidiary Goncharovo Agricultural LLC (Ukraine) Agriculture Subsidiary Agro-Trade House Dniprovsky LLC (Ukraine) (ATD Dniprovsky LLC) Agriculture Subsidiary Ukrainian agricultural and industrial holding LLC (Ukraine) (UAIH LLC) Trade of agricultural products Parent company Agro-Dnister LLC (Ukraine) Agriculture Subsidiary Trade House of the Ukrainian Agroindustrial Holding LLC (Ukraine) Agriculture Subsidiary (TH UAIH LLC) Pivdenne Agricultural LLC (Ukraine) Agriculture Subsidiary The Pro Forma Financial Information reflects the financial information on the Group as of 31 December 2010 in a hypothetical situation that the Operations had been completed before 31 December 2010 and KSG Agro S.A. had been a parent company of the Group on 31 December Exchange rates for the basic currencies are presented below: 31 December 2010 Average weighted rate for the year 2010 EURO EUR/USD Basis of preparation of the pro forma consolidated financial information Pro Forma Financial Information has been prepared to provide information about how the Operations (as defined below) might have affected the financial information of the Group, if these Operations had been completed by 31 December This Pro Forma Financial Information has been prepared for illustrative purposes, it addresses a hypothetical situation and does not represent the actual financial position of the Group as of 31 December The Pro Forma Financial Information has been prepared in accordance with the accounting policies adopted by the Group and the Prospectus Regulation. F-8

142 KSG Agro S.A. Notes to the unaudited pro forma consolidated financial information As at 31 December 2010 and for the year then ended (in thousand USD) 3. Explanatory Notes to the pro forma consolidated financial information 1. The combined statement of financial position of the Group as at and the combined statement of comprehensive income of the Group have been extracted without material adjustments from the historical financial information. 2. Adjustments to the pro forma consolidated statement of financial position of the Group are as follows: a) Items are extracted from the accounts of the entities without material adjustments; b) The share in net assets of KSG Agricultural and Industrial Holding Limited (Cyprus) and UAIH LLC, which are the parent companies in the combined financial statements were recognized as part of retained earnings, as if, KSG Agro S.A. purchased shares in KSG Agricultural and Industrial Holding Limited (Cyprus) and UAIH LLC on ; 3. Adjustments to the pro forma consolidated statement of comprehensive income of the Group are as follows: a) Items are extracted from the accounts of the entities without material adjustments; b) Total comprehensive income for the period has been allocated between equity holders and non-controlling interest because 10% in Agro-Trade House Dniprovsky LLC were left in the possession of beneficial minority owners; F-9

143 KSG Agro S.A. (formerly «Borquest S.A.») Société Anonyme Financial statements with Auditor s report #VPC:REPLUX122802# For the period from 16 November 2010 (date of incorporation) to 31 December A, Avenue J.F. Kennedy L-1855 Luxembourg R.C.S. Luxembourg: B F-10

144 KSG Agro S.A. (formerly Borquest S.A. ) 31 December 2010 Table of contents Auditor sreport... F-12 Statementoffinancialposition... F-14 Statementofcomprehensiveincome... F-15 Statementofchangesinequity... F-16 Statementofcashflows... F-17 Notestothefinancialstatements:... F-18 1.Generalinformation... F-18 2.Summaryofsignificantaccountingpolicies... F-18 3.Financialriskmanagement... F Critical accounting estimates and judgements... F-21 5.Cashandcashequivalents... F-22 6.Sharecapital... F Other payables and accrued expenses... F-22 8.Taxation... F-22 9.Legalandprofessionalexpenses... F Eventsafterthebalancesheetdate... F-23 F-11

145 F-12

146 F-13

147 KSG Agro S.A. (formerly Borquest S.A. ) Statement of financial position as at 31 December 2010 (All amounts in Euro unless otherwise stated) Note 2010 ASSETS Current assets Cash and cash equivalents 5 30, Total current assets 30, Total assets 30, EQUITY Equity attributable to the company s owners Share capital 6 31, Retained earnings Result for the year (5,041.75) Total equity 25, LIABILITIES Current liabilities Other payables and accrued expenses 7 5, Total current liabilities 5, Total liabilities 5, Total equity and liabilities 30, The accompanying notes are an integral part of these financial statements. F-14

148 KSG Agro S.A. (formerly Borquest S.A. ) Statement of comprehensive income from 16 November 2010 to 31 December 2010 (All amounts in Euro otherwise stated) Note 2010 Expenses Legal and professional expenses 9 (5,000.00) Transactions costs (41.75) Total operating expenses (5,000.00) Operating loss (5,041.75) Loss before tax (5,041.75) Taxation Net loss (5,041.75) The accompanying notes are an integral part of these financial statements. F-15

149 KSG Agro S.A. (formerly Borquest S.A. ) Statement of changes in equity from 16 November 2010 to 31 December 2010 (All amounts in Euro unless otherwise stated) Attributable to company s owners Note Share capital Retained earnings Total equity Balance at 16 November 2010 Comprehensive income Profit or loss (5,041.75) (5,041.75) Total comprehensive income (5,041.75) (5,041.75) Transactions with owners Issue of ordinary shares 6 31, , Total transactions with owners 31, , Balance at 31 December , (5,041.75) 25, The accompanying notes are an integral part of these financial statements. F-16

150 KSG Agro S.A. (formerly Borquest S.A. ) Statement of cash flows from 16 November 2010 to 31 December 2010 (All amounts in Euro unless otherwise stated) Note 2009 Cash flows from operating activities Loss before tax (5,041.75) Net increase in other receivables and payables 5, Netcashusedinoperatingactivities (41.75) Cash flows from financing activities Proceeds from issuance of ordinary shares 6 31, Net cash from financing activities 31, Net (decrease)/increase in cash and cash equivalents 30, Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period 5 30, The accompanying notes are an integral part of these financial statements. F-17

151 KSG Agro S.A. (formerly Borquest S.A. ) 31 December 2010 Notes to the financial statements (continued) (All amounts in Euro unless otherwise stated) 1. General information KSG Agro S.A. (the Company ) was incorporated under the name Borquest S.A. on 16 November 2010 (date of incorporation) as a Société Anonyme under Luxembourg company law and for an unlimited period. On 08 March 2011 the Company s name was changed into the current denomination. The registered office of the Company is established in Luxembourg, 46A avenue J.F. Kennedy, L-1855 Luxembourg and the Company number with the Registre de Commerce is B The Company s financial year begins on 1st January and closes on 31st December, except for the first year, which begins on the incorporation date and ends on 31 December The purpose of the Company shall be the acquisition of ownership interests, in Luxembourg or abroad, in any companies or enterprises in any form whatsoever and the management of such ownership interests. The Company may in particular acquire by way of subscription, purchase and exchange or in any other manner any stock, shares and securities of whatever nature, including bonds, debentures, certificates of deposit and other debt instruments and more generally any securities and financial instruments issued by any public or private entity whatsoever. It may participate in the creation, development and control of any company or enterprise. It may further invest in the acquisition and management of a portfolio of patents and other intellectual property rights. The Company may borrow in any way form, except by way of public offer. It may issue, by way of private placement only, notes, bonds and debentures and any kind of debt or other equity securities. The Company may lend funds, including the proceeds of any borrowings and/or issues of debt securities to its subsidiaries, affiliated companies or to any other companies which form part of the same group of companies as the Company. It may also give guarantees and grant security interests in favour of third parties to secure its obligations or the obligations of its subsidiaries, affiliated companies or any other companies, which form part of the same group of companies as the Company. The Company may further mortgage, pledge, hypothecate, transfer or otherwise encumber all or some of its assets. The Company may generally employ any techniques and utilise any instruments relating to its investments for the purpose of their efficient management, including techniques and instruments designed to protect the Company against credit risk, currency fluctuations risk, interest rate fluctuation risk and other risks. The Company may carry out any commercial, financial or industrial operations and any transactions with respect to real estate or movable property. The Company may carry out any commercial, financial or industrial operations and any transactions, which may be or are conducive to the above-mentioned paragraphs of this Article. The financial statements were authorised for issue by the Board of Directors on 08 March Summary of significant accounting policies 2.1 Basis of presentation The financial statements of the Company have been prepared in accordance with the International Financial Reporting Standards ( IFRS ) and under the provision of the Luxembourg law of 10 December The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4. (a) he following standards and amendments to existing standards are effective for financial years beginning on 1 January 2010 and are relevant to the Company: International Accounting Standards ( IAS ) 1, Presentation of Financial Statements Statement of Changes in Equity, as issued by the International Accounting Standards Board in May 2010 under Improvements to IFRS. The adoption of these amendments did not have a material effect on the Company s financial statements. F-18

152 KSG Agro S.A. (formerly Borquest S.A. ) 31 December 2010 Notes to the financial statements (continued) (All amounts in Euro unless otherwise stated) This amendment clarifies that a statement of changes in equity is a requirement and the information to be presented in the statement. This amendment states that reconciliations for each component of other comprehensive income can be presented either in the statement of changes in equity or in the notes to the financial statements. (b) The following standards and amendments to existing standards are effective for financial years beginning on 1 January 2010 but are not relevant to the Company: IFRS 1, First-time Adoption of International Financial Reporting Standards Accounting policy changes in the year of adoption; Revaluation basis as deemed cost; Use of deemed cost for operations subject to rate regulation IFRS 3, Business Combinations Transition requirements for contingent consideration from a business combination that occurred before the effective date of the revised IFRS; Measurement of non-controlling interests; Un-replaced and voluntarily replaced share-based payment awards IAS 12, Income Taxes Deferred Taxes IAS 27, Consolidated and Separate Financial Statements Transition requirements for amendments arising as a result of IAS 27 Consolidated and Separate Financial Statements IAS 32, Financial Instruments: Presentation Effective date and transition requirements for contingent considerations arising as a result of business combinations. IAS 34, Interim Financial Reporting Significant events and transactions IAS 39, Financial Instruments: Recognition and Measurement Effective date and transition requirements for contingent considerations arising as a result of business combinations. IFRIC 9, Reassessment of Embedded Derivatives IFRIC 13, Customer Loyalty Programmes Fair value of award credits IFRIC 15, Agreements for the Constructions of Real Estate IFRIC 16, Hedges of a Net Investment in a Foreign Operation IFRIC 17, Distributions of Non-Cash Assets to Owners IFRIC 18, Transfers of Assets from Customers (c) The following new standards and amendments in IFRS are not yet effective but are relevant to the Company (none of which was early adopted): None were identified (d) The following standards and amendments to existing standards are not yet effective for financial years beginning on 1 January 2010 and are not relevant to the Company: IFRS 1, First-time Adoption of International Financial Reporting Standards Removal of fixed dates for first-time adopters; Severe hyperinflation (effective 1 July 2011) IFRS 7, Financial Instruments: Disclosures Derecognition (effective 1 July 2011) Improvements to IFRS were issued in May 2008, April 2009 and May 2010 respectively and contain numerous amendments to IFRS, which the IASB considers non-urgent but necessary. Improvements to IFRS comprise amendments that result in accounting changes in presentation, recognition or measurement purposes as well as terminology or editorial amendments relating to a variety of individual standards which are not all mentioned in detail above. Most of the amendments are effective for annual periods beginning on or after 1 January 2009, 1 January 2010 and 1 January 2011 respectively, with earlier application permitted. No material changes to accounting policies are expected as a result of these amendments. F-19

153 KSG Agro S.A. (formerly Borquest S.A. ) 31 December 2010 Notes to the financial statements (continued) (All amounts in Euro unless otherwise stated) 2.2 Foreign currency translation (a) Functional and presentation currency (b) The performance of the Company is measured and reported to the investors in Euro (EUR). The Board of Managers considers the EUR as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in EUR, which is the Company s functional and presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency assets and liabilities are translated into the functional currency using the exchange rate prevailing at the balance sheet date. Foreign exchange gains and losses arising from translation are included in the statement of comprehensive income. Foreign exchange gains and losses relating to the financial assets and liabilities carried at fair value through profit or loss are presented in the statement of comprehensive income within other net changes in fair value on financial assets and financial liabilities at fair value through profit or loss. 2.3 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term investments in an active market with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown in current liabilities in the statement of financial position. 2.4 Accrued expenses Accrued expenses are recognised initially at fair value and subsequently stated at their recoverable amount. 2.5 Taxation The Company is subject to normal taxation under Luxembourg tax regulations. 2.6 Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 2.9 Going concern Company s management is not aware of any material uncertainties related to events or conditions that may cast significant doubt upon the entity s ability to continue as a going concern. 3. Financial risk management 3.1 Financial risk factors The Company is not exposed to financial risk factors as the Company has not yet started its financial activities Market risk (i) Foreign exchange risk The Company is not exposed to foreign exchange risk. F-20

154 KSG Agro S.A. (formerly Borquest S.A. ) 31 December 2010 Notes to the financial statements (continued) (All amounts in Euro unless otherwise stated) (ii) Price risk The Company is not exposed to price risk. (iii) Interest rate risk The Company is not exposed to interest rate risk Credit risk The Company is not exposed to credit risk Liquidity risk Liquidity risk is the risk that the Company may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The table below analyses the Company s financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date. Less than 1year Between 1and2years More than 2 years Total As at 31 December 2010 Liabilities Other payable and accrued expenses 5, , Total liabilities 5, , Capital risk management The capital of the Company is represented by the adjusted capital attributable to the shareholder. The Company s objective when managing the capital is to safeguard the ability to continue as a going concern in order to provide returns for partners and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Company. 4. Critical accounting estimates and judgements Estimates and judgments are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors. 4.1 Critical accounting estimates and assumptions Management makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. 4.2 Critical judgements (i) Functional currency The board of managers considers the Euro the currency that most faithfully represents the economic effect of the underlying transactions, events and conditions. The Euro is the currency in which the Company measures its performance and reports its results, as well as the currency in which it receives subscriptions from its investors. F-21

155 KSG Agro S.A. (formerly Borquest S.A. ) 31 December 2010 Notes to the financial statements (continued) (All amounts in Euro unless otherwise stated) 5. Cash and cash equivalents Cash and cash equivalents comprise the following balances with original maturity of less than 90 days: Description Cost 2010 Unrealized gain/(loss) Fair value Assets EUR account 30, , Total assets 30, , Share capital As of 31 December 2010, the share capital is divided as follows: Number of shares Share capital Share premium Total 3,100,000 31, , The total number of ordinary shares is 3,100,000 with a par value of EUR 0.01 per share. All shares are issued and fully paid as of 31 December Other payables and accrued expenses Other payables and accrued expenses is made up as follows: Creditors 5, Total 5, Taxation The Company is subject to normal taxation under Luxembourg tax regulations. No provision of Net Wealth Tax made, the Company being incorporated after the 1 st of January Legal and professional expenses Legal and professional expenses are made up as follows: 2010 Audit fees BDO 4, Tax filing fees BDO 1, Total 5, F-22

156 KSG Agro S.A. (formerly Borquest S.A. ) 31 December 2010 Notes to the financial statements (continued) (All amounts in Euro unless otherwise stated) 10. Events after the balance sheet date On 08 March 2011: the Company s name was changed into KSG Agro S.A.; the Company s share capital was converted from EUR into USD; the Company s share capital was increased up to USD 100,000.00; the board of directors was authorised to issue up to 20,000,000 new shares with a nominal value of USD For March 2011 the transfer of 100% of the share capital of a Cyprus company called KSG Agricultural and Industrial Holding Limited to the Company is considered. For the forthcoming year the issue of new shares by the Company will intervene within the framework of the planned application for the admission of these shares for trading in the main market of the Warsaw stock exchange. There have been no other significant events after the balance sheet date to be mentioned. F-23

157 GROUP OF COMPANIES KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED COMBINED FINANCIAL STATEMENTS For the year ended 31 December 2010 Together with independent auditor s report F-24

158 GROUP KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED COMBINED FINANCIAL STATEMENTS As at 31 December 2010 (in thousand USD) Contents: STATEMENT OF MANAGEMENT S RESPONSIBILITY FOR THE PREPARATION AND APPROVAL OF THE COMBINED FINANCIAL STATEMENTS...F-26 INDEPENDENTAUDITOR SREPORT... F-27 COMBINED STATEMENT OF FINANCIAL POSITION... F-29 COMBINEDSTATEMENTOFCOMPREHENSIVEINCOME...F-30 COMBINEDSTATEMENTOFCASHFLOWSFORTHEPERIOD...F-31 COMBINEDSTATEMENTOFCHANGESINEQUITY... F-32 NOTES TO THE COMBINED FINANCIAL STATEMENTS...F Background... F-33 2.Basisofpreparationofthecombinedfinancialstatements... F-34 3.EssentialAccountingEstimationsandAssumptions... F-35 4.Summaryofsignificantaccountingpolicies... F-36 5.NewStandardsandInterpretationsissuedbutnotyeteffective...F-42 6.Property,plantandequipment... F Long-term biological assets... F-44 8.Inventories... F-44 9.Currentbiologicalassets... F Trade and other accounts receivable... F Cashandcashequivalents... F Loansandborrowings... F Trade and other accounts payable... F Statutorycapital... F Income... F Costofsales... F Generalandadministrativeexpenses... F Otheroperatingincome(expenses)... F Financialincome(expenses),net... F Relatedparties... F Integration of companies and acquisition of non-controlling participation share...f Commitmentsandcontingencies... F Financialriskmanagement:objectivesandpolicies... F-55 F-25

159 GROUP KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED STATEMENT OF MANAGEMENT S RESPONSIBILITY FOR THE PREPARATION AND APPROVAL OF THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 The following statement, which should be read in conjunction with the independent auditors responsibilities disclosed in the independent auditors report set out on pages F-27 F-28, is made with a view to distinguishing the respective responsibilities of the management and those of the independent auditors in relation to the combined financial statements of Group KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED. The Group s management is responsible for the preparation of the combined financial statements that present fairly, in all material aspects, the financial position of the Group as at 31 December 2010 and cash flows and changes in the net assets attributable to participants for the year then ended, in accordance with International Financial Reporting Standards ( IFRS ). In preparing the combined financial statements, the management is responsible for: Selecting suitable accounting principles and applying them consistently; Making reasonable assumptions and estimates; Compliance with relevant IFRS and disclosure of all material departures in Notes to the combined financial statements; Preparing the combined financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business for the foreseeable future. Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; Maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Group, and which enable them to ensure that the combined financial statements of the Group comply with IFRS; Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Preventing and detecting fraud and other irregularities. The combined financial statements for the year ended 31 December 2010 were approved on 10 March 2011 on behalf of the Group s management: Director General Financial Director Dnepropetrovsk 10 March 2011 F-26

160 F-27

161 F-28

162 GROUP KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED COMBINED STATEMENT OF FINANCIAL POSITION As at 31 December 2010 (in thousand USD) Notes Assets Non-current assets Property, plant and equipment 6 5,013 4,821 Long-term biological assets Goodwill 5,586 5,569 Total non-current assets 10,846 10,605 Current assets Current biological assets 9 7,621 2,728 Inventories 8 5,149 4,589 Trade and other accounts receivable 10 1,662 4,019 Taxes prepaid 1,022 1,628 Cash and cash equivalents ,564 Total current assets 15,484 15,528 TOTAL ASSETS 26,330 26,133 LIABILITIES AND EQUITY EQUITY: Statutory capital 14 2,628 1,406 Retained earnings 7,671 2,914 Total equity 10,299 4,320 Non-controlling interest 1, Total equity 11,662 4,998 Non-current liabilities Loans and borrowings 12 2,367 2,904 Total non-current liabilities 2,367 2,904 Current liabilities Loans and borrowings 12 5,414 11,008 Trade and other accounts payable 13 6,681 7,008 Promissory notes issued Tax liabilities Total current liabilities 12,301 18,231 TOTAL LIABILITIES 26,330 26,133 /S.V. Mazin/ (General director) /L.V. Velichko/ (Financial director) Notes on pages F-33 F-59 are an integral part of these combined statements. F-29

163 GROUP KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED COMBINED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2010 (in thousand USD) Notes Income 15 15,628 13,785 Change in fair value of biological assets 16,919 4,251 Cost of sales 16 (20,456) (12,102) Gross profit 12,091 5,934 General and administrative expenses 17 (787) (1,158) Other operating income (expense), net Result from operating activities 11,607 5,240 Finance expenses, net 19 (1,558) (2,144) Losses from impairment of financial instruments (565) Profit before tax 10,049 2,531 Income tax expenses (2) (5) Profit for the year 10,047 2,526 Profit attributable to: Participants 9,362 2,287 Minority share Profit for the period 10,047 2,526 Other comprehensive income Foreign currency translation differences for foreign operations (17) (132) Other comprehensive income for the period, net of income tax (17) (132) Total comprehensive income for the period 10,030 2,394 Total comprehensive income attributable to Participants 9,345 2,177 Non-controlling interest Total comprehensive income for the period 10,030 2,394 /S.V. Mazin/ (General director) /L.V. Velichko/ (Financial director) Notes on pages F-33 F-59 are an integral part of these combined statements. F-30

164 GROUP KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED COMBINED STATEMENT OF CASH FLOWS FOR THE PERIOD For the year ended 31 December 2010 (in thousand USD) Cash flows from operating activities Profit for the period 10,049 2,531 Adjustments to: Depreciation and amortization (Reversal)/increase of loss from impairment of doubtful accounts receivable 1, Amortization of discount Fair value of biological assets (16,919) (4,251) Finance lease expenses Loss from retirement of property, plant and equipment 1 (7) Interest expense 1,695 1,716 Interest income (34) (290) Cash received from operating activities before changes in working capital (2,988) 1,322 Change of trade and other accounts receivable 1,954 (3,485) Change of other assets 11,410 3,858 Change of trade and other accounts payable (347) (384) Income tax paid (2) (5) Net cash flows received from (used in) operating activities 10,027 1,306 Cash flow from investment activities Acquisition of property, plant and equipment (793) (944) Acquisition of companies Interest received Net cash flow received from (used in) in investment activities (759) (654) Cash flow from financing activities Inflows from bank loans 5,559 6,941 Repayment of bank loans (9,882) (4,539) Repayment financial lease commitments (2,418) (2,121) Interest payment (1,695) (1,716) Contribution of equity (3,366) 562 Net cash flow received from (used in) financing activities (11,802) (873) Net cash flow for the period (2,534) (221) Cash at the beginning of period 2,564 2,785 Cash at the end of period 30 2,564 /S.V. Mazin/ (General director) /L.V. Velichko/ (Financial director) Notes on pages F-33 F-59 are an integral part of these combined statements. F-31

165 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED COMBINED STATEMENT OF CHANGES IN EQUITY As at 31 December 2010 and for the year then ended (in thousand USD) Statutory capital Retained earnings Non-controlled participation shares Total equity Balance as at 31 December ,019 Net profit for the period 2, ,526 Contributions of participants Integration of interests reorganization (190) (190) Foreign exchange difference (23) (87) (22) (132) Balance as at 31 December ,406 2, ,998 Net profit for the period 9, ,047 Contributions of participants 1,218 (4,584) (3,366) Foreign exchange difference 4 (21) (17) Balance as at 31 December ,628 7,671 1,363 11,662 /S.V. Mazin/ (General director) /L.V. Velichko/ (Financial director) Notes on pages F-33 F-59 are an integral part of these combined statements. F-32

166 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) 1. Background Given combined financial statements represent combination of the financial statements of the companies of Group KSG Agricultural and Industrial Holding Limited (further the Group). The Group includes company KSG Agricultural and Industrial Holding Limited and its subsidiaries, together with Limited liability Company Ukrainian agricultural and industrial holding (UAIH) and its subsidiaries. KSG Agricultural and Industrial Holding Limited was registered as a limited liability company in compliance with the legislation of the Republic of Cyprus, on 2 August The Company s registered address is: Lampousas Street, 1095, Nicosia, Cyprus. Limited liability company Ukrainian agricultural and industrial holding was registered in accordance with Ukrainian legislation on 22 February Legal address is: 16 Grushevskogo st., office No.7, Kiev, Ukraine. Group s core activity areas: production and realization of agricultural products, providing complex of agricultural services. The Group performs its business activities mainly in Ukraine. The Group s management is located at the address: 40-b Komsomolskaya Street, Dnepropetrovsk, Ukraine. The Group s participants as at 31 December 2010 and 2009 were as follows: Company Activity Basis to be included into Group Methodology of enclosure into financial statements Share as at 31 December 2010 Share as at 31 December 2009 KSG Agricultural and Industrial Holding company Parent company Combination Combination 100% Holding Limited (Cyprus) Enterprise No2 of Ukrainian Agriculture Subsidiary Consolidation 100% 100% agricultural and industrial holding LLC (Ukraine) [PUAIH-2 LLC] Scorpio Agro LLC (Ukraine) Agriculture Subsidiary Consolidation 99.9% 99.9% Souz-3 LLC (Ukraine) Agriculture Subsidiary Consolidation 100% 100% Goncharovo Agricultural LLC (Ukraine) Agriculture Subsidiary Consolidation 99.9% 99.9% Agro-Trade House Dniprovsky LLC (Ukraine) [ATD Dniprovsky LLC] Agriculture Subsidiary Consolidation 68.3% 68.3% Ukrainian agricultural and industrial holding LLC (Ukraine) [UAIH LLC] Trade of agricultural products Parent company Combination 100% 100% Agro-Dnister LLC (Ukraine) Agriculture Subsidiary Consolidation 90% 90% Trade House of the Ukrainian Agriculture Subsidiary Consolidation 99.9% 99.9% Agroindustrial Holding LLC (Ukraine) [TH UAIH LLC] Pivdenne Agricultural LLC (Ukraine) Agriculture Subsidiary Consolidation 100% 100% F-33

167 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) 2. Basis of preparation of the combined financial statements Statement of compliance These combined financial statements are prepared in compliance with International Financial Reporting Standards (further IFRS). Basis of preparation of the financial statements These combined financial statements are prepared on the historical value basis, except for the following material items in the combined statement of financial position: current biological assets, agricultural products, and investments available for sale at fair value. Functional and presentation currency Despite the fact that the functional currency of major companies of the Group is a national currency of Ukraine, UAH, these financial statements are presented in USD. Based on economic substance of transactions and operating environment, the Group has determined UAH as a functional currency. Transactions in other currencies are deemed foreign currency transactions. As the Group management uses USD when monitoring operating results and financial condition of the Group, the presentation currency of the financial statements is USD. At the reporting date assets and liabilities of subsidiaries are translated into presentation currency at the rate effective at the reporting date. Items of the statement of comprehensive income are translated at the average annual rate. Exchange differences arising at translation refer directly to a separate equity item. Operations in other currencies are treated as foreign currency operations. Transactions in foreign currency are recorded initially in functional currency at the rate effective as at transaction date. Monetary assets and liabilities reported in foreign currency are translated into functional currency at the rate effective as at reporting date. Any exchange rate differences are reported in the combined statement of comprehensive income for the period. Exchange rates for the basic currencies are presented below: 31 December 2010 Average weighted rate for the year December 2009 Average weighted rate for the year 2009 EURO UAH/EUR Russian ruble UAH/RUB USD UAH/USD Basis of consolidation and combination The combined financial statements include consolidated financial statements of KSG Agricultural and Industrial Holding Limited and its subsidiaries, as well as consolidated financial statements of Ukrainian agricultural and industrial holding LLC as at 31 December of each year. Consolidated financial statements of companies under common control but not related by formal ownership structure, namely KSG Agricultural and Industrial Holding Limited and Ukrainian agricultural and industrial holding LLC, are combined by integration of respective elements of the financial statement by their carrying amount adjusted only due to reconciliation of accounting policy. Any goodwill is not recognized. All intra-group balances, transactions, as well as non-realized profits and losses resulting from intra-group transactions are annulled. F-34

168 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Consolidation method is applied to subsidiaries. Financial statements of the subsidiaries are prepared for the same reporting period as the parent company s ones, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions were eliminated in full. Financial statements of subsidiaries are included in the consolidated financial statements, beginning from the acquisition date being the date the Group receives control and up to the date the control ceases. Non-controlling interests represent the portion of profit, loss or net assets not held by the Group and are presented separately in the statement of comprehensive income for the period and within net assets attributable to participants in the combined statement of financial position, separately from the net assets that belong to parent s owners. Acquisition of non-controlling interests is accounted for using the parent entity s extension method, whereby the difference between consideration paid and the book value of the share of the net assets acquired is recognized as goodwill. Going concern assumption At the date of approval of these combined financial statements the Group operates in an unstable environment associated with the global economic recession. Stabilization of the economic situation in Ukraine will to a great extend depend upon the efficiency of fiscal and other measures taken by the Ukrainian government. As there is no clear view of what actions the Ukrainian government is going to take to overcome the crisis, it is impossible to reliably estimate the effects of the present economic situation on the Group s financial position. As a result there is a significant uncertainty that may affect future operations, the possibility of compensation of the Croup assets cost and its ability to serve and pay debts as they mature. These combined financial statements do not include any adjustments that may appear as a result of such uncertainty. These adjustments will be informed of as soon as they are known or reliably estimated. 3. Essential Accounting Estimations and Assumptions The Group has a number of estimations and assumptions about its future activities. These assessments and resulted assumptions are based on past experience of the management as well as other factors, including such expectations of the future events, which are considered to be grounded in existing circumstances. In future, actual results might differ from these estimations and assumptions. The most significant estimations and assumptions, which can be effected by significant risks of adjustments of carrying amounts of assets and liabilities during the next financial year, are set forth below. Valuation of biological assets fair value based on revaluation. The Group evaluates its biological assets at the initial recognition and as at each reporting date at fair value. The evaluations are made by the Group management without attracting an independent appraiser. In order to determine the fair value the Group uses a discounted cost of estimated cash flows; a discount ratio is applied as calculated on the basis of existing market conditions for cash flows before tax. Also, in order to estimate fair value, the Group determines the conventional yield of crops based on previous figures adjusted to estimated changes. Useful lives of intangible assets and property, plant and equipment. Depreciation or amortization of intangibles and property, plant and equipment is accrued during their useful lives. Useful lives are based upon management estimates of the period during which an asset is going to generate profit. These estimates are periodically reviewed for their further compliance. Goodwill impairment. The Group has to test its goodwill for the impairment annually. The replacement cost is determined on the basis of calculation of the value in use. The use of this method requires future cash flow valuation and choosing the accounting rate with the purpose of calculating current cash flow cost. Actual results may differ. Inventories. The Group examines a net realizable value and demand for its inventories quarterly in order to ascertain that accounted inventories are assessed at the least of cost or the net realizable value. The factors that may affect an estimated demand and selling price are computation of time and success of future technological innovations, competitors actions, prices of suppliers and economic trends. F-35

169 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Income tax. Subsidiary agricultural companies of the Group have chosen the simplified taxation system and are flat-sum agricultural tax payers. The mentioned companies according to the Ukrainian legislation are not income tax payers. The Group does not account a deferred tax of the parent company as these amounts according to management estimation are insignificant. Litigation. In compliance with IFRS, the Group recognizes the provision only when there is current liability related to the prior event, the possibility of transfer of economic benefits, and reliable valuation of the transfer expenses. In case of failure to meet these requirements, the information on the contingent liability can be disclosed in the notes to combined financial statements. The realization of any contingent liability, which was not recognized or disclosed in combined financial statements for the current moment, can considerably affect the Group s financial position. Application of these principles regarding litigation requires management s estimations of different actual and legal issues that are beyond its control. The Group revises unsettled litigation, following the events of the litigation for each combined statement of financial position date to estimate the necessity for provisions in its combined financial statements. Among the factors considered when making a decision about a provision charge, there are the following: nature of the litigation; requirements or estimations; legal process and the potential level of losses in the jurisdiction of the litigation, requirement or estimation (including litigation subsequent to the date of combined financial statements preparation, but before their approving); opinions of legal advisers; experience acquired in connection with similar cases; any decision of the Group management regarding its reaction on the litigation, requirement or estimation. 4. Summary of significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these combined financial statements and have been applied consistently by the Group entities, except as explained in Note 2, which addresses changes in the accounting policies. Certain comparative amounts have been reclassified to conform to the current year s presentation. Property, plant and equipment Property, plant and equipment are stated at historical cost, net of depreciation and accumulated provision for impairment. Depreciation is calculated on the straight-line basis over the estimated useful life of assets as follows: Useful life (years) Buildings and constructions 20 Machinery and equipment, vehicles Other 5 8 When each major inspection is performed, its cost is recognized in the carrying amount of the plant, plant and equipment as replacement if the recognition criteria are satisfied. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on retirement of the asset (calculated as the difference between the net disposals proceeds and the carrying amount of the asset) is included in the statement of comprehensive income for the period in the year the asset is derecognized. The asset s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end. Intangible assets The Group s intangible assets include mainly software and licenses for the licensable types of activity. F-36

170 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) The acquired licenses for software are capitalized on the basis of the software acquisition and implementation expenses. The capitalized software is regularly amortized during the expected useful life period, which comprises 5 years, and the licenses during their validity term. Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognized in the Statement of comprehensive income for the period in those expense categories consistent with the function of the impaired asset. An assessment is made by the Group at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognized. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of comprehensive income for the period. After such a reversal the depreciation charge is adjusted in future periods to amortize the asset s revised carrying amount, less any residual value, on regular basis over its remaining useful life. Recognition of financial instruments The Group recognizes financial assets and liabilities in its combined statement of financial position when, and only when, it becomes a party to the contractual provisions of the instruments. Financial assets and liabilities are recognized using trade date accounting. Financial assets and liabilities are offset and the net amount is reported in the combined statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. In compliance with IAS 39, financial assets are divided into four categories as follows: financial assets at fair value through profit or loss; loans and accounts receivable; investments held to maturity; financial assets available for sale. When a financial asset or financial liability is recognized initially, it is measured at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset. When the Group becomes a contractual party, it determines embedded derivatives in the contract, if any. Embedded derivatives are separated from the host contract that is not assessed at fair value through profit or loss in case the economic character and risks of embedded derivatives materially differ from similar quotients of the host contract. The Group determines the classification of its financial assets after initial recognition and, where allowed or appropriate, reevaluates this designation at each financial year-end. F-37

171 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) All acquisition or sale transactions related to financial assets on standard terms are recognized at the transaction date, i.e. at the date when the Group undertakes an obligation to acquire an asset. Acquisition or sale transactions on standard terms mean acquisition or sale of financial assets that requires to supply an asset within the term determined by legislation or rules accepted in a certain market. Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in the active market. Such assets are reflected at amortized cost using the effective interest method, net of provision for impairment after their initial evaluation. Amortized cost is calculated taking into account all discounts or bonuses that arose at acquisition and includes commissions being an integral part of the efficient interest rate as well as transaction costs. Gains and expenses incurring in result of asset derecognition are recognized in the statement of comprehensive income when assets are derecognized or impaired, as well as through the amortization process. After initial recognition, extended loans are measured at fair value of the funds granted that is determined using the effective market rate for such instruments, if they materially differ from the interest rate on such loan granted. In future loans are measured at amortized cost using the effective interest rate method. Difference between the fair value of the funds granted and loan reimbursement amount is reported as interest receivable during the whole period of the loan. Amortized cost is calculated taking into account all transaction expenses and discounts or bonuses that arose at repayment. Loans that mature more than 12 months after the combined statement of financial position date are included into non-current assets. Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash management are included as a component of cash and cash equivalents for the purpose of the combined statement of cash flows. Investments available-for-sale Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial measurement, available-for-sale financial assets are measured at fair value with unrealized gains or losses recognized in other comprehensive income. When the investment is retired, the cumulative gain or loss recorded earlier in other comprehensive income is recognized in the profit or loss. Interest gained or paid on investments is reported in combined financial statements as interest profit or expense using the effective interest rate. Dividends gained on investments are recognized in the statement of comprehensive income as Dividends received at the moment the Group gains the right for them. Investments held-to-maturity When the Group has the positive intent and ability to hold debt securities to maturity, such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognized initially at fair value plus any directly attributable transactions costs. Subsequent to initial recognition held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment losses. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Group from classifying investment securities as held-to-maturity for the current and the following two financial years. F-38

172 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Fair value The estimated fair value of financial assets and liabilities is determined by reference to market information using appropriate methods of evaluation. However, a qualified opinion would be necessary to interpret marketing information for the purpose of fair value estimation. Correspondingly, at evaluation it is not necessary to indicate the estimated realization amount. Using different marketing assumptions and/or valuation techniques might affect the fair value significantly. The estimated fair value of financial assets and liabilities is determined using the discounted cash flows model and other appropriate valuation methods at the year end; it does not indicate the fair value of such instruments at the reporting date of these combined financial statements. Such estimations do not report any bonds or discounts that might result from the proposal to sell simultaneously the whole package of certain financial instruments of the Group. The fair value estimation is based on assumptions as to future cash flows, current economic situation, risks inherent to various financial instruments and other factors. The fair value estimation is based on existing financial instruments without any attempts to determine the cost of an expected futures transaction and the cost of assets and liabilities not considered to be financial instruments. Besides, tax ramification (branching) related to realization of non-realized profit and loss might impact the fair value estimation and therefore was not accounted for in these combined financial statements. Financial assets and financial liabilities of the Group include cash and cash equivalents, receivables and payables, other liabilities and loans. Accounting policy as to their recognition and evaluation are presented in the relevant sections of these Notes. During the reporting period the Group did not use any financial derivatives, interest swaps or forward contracts to reduce currency or interest risks. Non-derivative financial liabilities At initial recognition financial liabilities can be attributed to those estimated at fair value through profit and loss, if the following criteria are met: (i) attributing to this category excludes or materially reduces inconsistence in accounting methods that might otherwise arise at liability assessment or recognition of profit or loss related to such liability; (ii) liabilities comprise a part of financial liability group that is being managed and results of which are assessed at fair value in compliance with risks management policy; (iii) financial liability includes an embedded derivative that should be reported separately in the combined financial statements. As at 31 December 2010 the Group had no financial liabilities that could be attributed to those estimated at fair value through profit and loss. Trade payables and other short-term monetary liabilities, which are initially recognized at fair value, subsequently carried at amortized cost using the effective interest method. Interest bearing liabilities are subsequently measured at amortized cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the combined statement of financial position. Interest expense in this context includes initial transaction costs and discount payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Assets reported at amortized cost If there is objective evidence that an impairment loss has been incurred in loans and accounts receivable that are reported at amortized cost, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred) discounted at initial effective interest rate for such financial asset (i.e. at the effective interest rate calculated at initial recognition). The carrying amount of the asset is reduced directly or using the reserve. The loss amount is recognized in the statement of comprehensive income for the period. F-39

173 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) The Group first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exist for an individually assessed financial asset, whether significant or not, it includes the asset into a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is recovered. Any subsequent loss recovery is recognized in the statement of comprehensive income in the amount that the carrying amount of an asset should not exceed its amortized cost at the recovery date. Provision for impairment loss is charged in receivables in case there is objective evidence (e.g. a possibility of the debtor s insolvency or other financial difficulties) that the Group might not gain all amounts due to the delivery terms. Carrying amount of receivables is then reduced through the allowance account. Impaired debts are derecognized as soon as they are considered to be bad. Financial investments available for sale Impairment losses on available for sale investments are recognized by transferring the cumulative loss that has been recognized in other comprehensive income, and presented at the fair value in capital reserves, to profit or loss. The cumulative loss that is removed from other comprehensive income and recognized in profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. De-recognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where: the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party; or The Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control over the asset. Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be requested to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, the original liability is derecognized and a new liability is recognized with recognition of the difference in the respective carrying amounts in the statement of comprehensive income for the period. F-40

174 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Biological assets and agricultural products Generally, biological assets are measured at fair value less costs to sell with any change therein recognized in profit or loss. Costs to sell include all costs that would be necessary to sell the assets. Arable crops are initially recognized at their fair value less estimated point-of-sale costs at the time of harvesting. The fair value of arable crops is determined based on market prices in the local region. A gain or loss arising on initial recognition of arable crops at fair value less estimated point-of-sale costs is recognized in the period in which it originated. Un-harvested crops are valued at fair value, being the present value of the expected net cash flows from the asset in its present condition discounted at a current market determined pre-tax rate. The assessment of the present condition of un-harvested crops excludes any increases in value from additional biological transformation and future activities of the Group. Inventories Inventories are stated at the lower of cost or net realizable value. For agricultural produce, fair value less estimated point-of-sale costs at the point of harvest is considered to be the cost. Subsequent to initial recognition agricultural produce is stated at the lower of cost or estimated net realizable value. Cost is assigned using the FIFO method. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Inventories are periodically reviewed and provisions established for deteriorated, excess and obsolete items. Pension liabilities The Group does not have any pension arrangements separate from the State pension system of Ukraine, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged to the statement of comprehensive income in the period the related salaries are earned. In addition, the Group has no post-retirement benefits or significant other compensated benefits requiring accrual. Borrowing costs The Group capitalizes borrowing costs directly attributable to acquisition, construction or production of qualified assets as a part of the asset cost. Other borrowing costs are recognized as expenditure as incurred. Interest-bearing loans and borrowings All loans and borrowings are initially recognized at the fair value of the cash amount received less loan related costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at an amortized cost using the effective interest rate method. Gains and losses are recognized in net profit or loss when liabilities retired, as well as through the amortization process. Lease Lease where the lessor retains all risks and rewards related to ownership of the asset is classified as operating lease. Payments made under operating lease are recognized as expenses in the statement of comprehensive income for the period using the straight-line write off method of these expenses over the lease term. Finance lease under which the Group assumes almost all the risks and rewards related to ownership of leased assets are capitalized at the inception of the lease relations at the fair value of the leased property or, if this amount is less at the discounted value of minimum lease payments. Lease payments are allocated between finance costs and decrease in principal amount of the lease obligation so as to achieve a constant interest rate on the outstanding amount of the obligation. Financing costs are reported directly in the statement of comprehensive income. F-41

175 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Leased assets are depreciated over the asset s useful life period. However, if there is no reasonable certainty that the Group will obtain the right of the ownership of the asset at the end of the lease term, the asset is depreciated over the shorter of the following periods: the estimated useful life of the asset and the lease term. Contingent liabilities Contingent liabilities are not reflected in the combined financial statements, unless it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and reliable estimation of the amount of such obligations is probable. Information on contingent liabilities is disclosed in notes to the financial statements, unless an outflow of resources, which constitute the economic benefits, is remote. Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all provisions to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as finance costs. Revenue and expense recognition Revenue is recognized when the title of the product passes to the customer and it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of the revenue can be measured reliably. The cost of products sold is recognized at the same time as the corresponding revenue. Expenses are accounted for when incurred and reported in the statement of comprehensive income in the period to which they relate. 5. New Standards and Interpretations issued but not yet effective At the moment of the preparation of these combined financial statements there is a number of new Standards, amendments and Interpretations to them that are not effective yet and therefore were not applied to these combined financial statements. Following is the standard that might potentially influence the Group s combined financial statements. In November 2009 IFRS 9 Financial instruments, part 1: Classification and Measurement, which replaces IAS 39 Recognition and Measurement in part of classification and measurement of financial instruments was issued. This new standard is effective starting from 01 January IAS 24, Related Party Disclosures, (in new edition), becomes effective for annual reporting periods beginning on or after 1 January. Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments, becomes effective for annual reporting periods, beginning on or after 1 July The management of the Group has not yet assessed the impact of these standards on the Group s combined financial statements. F-42

176 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) 6. Property, plant and equipment Movement of property, plant and equipment for the year ended 31 December 2010 and 2009 was as follows: Initial cost Buildings and construction Agricultural equipment Vehicles and office equipment As at 01 January , ,432 Addition Disposal (96) (96) Exchange difference (18) (185) (10) (213) As at 31 December , ,066 Addition Disposal (1) (212) (121) (334) Exchange difference As at 31 December , ,690 Accumulated depreciation As at 01 January 2009 (74) (624) (85) (783) Accrued during the year (17) (507) (46) (570) Disposal Exchange difference As at 31 December 2009 (89) (1,030) (126) (1,245) Accrued during the year (17) (549) (34) (600) Disposal Exchange difference (2) (2) As at 31 December 2010 (106) (1,444) (127) (1,677) Net value As at 01 January , ,649 As at 31 December , ,821 As at 31 December , ,013 Total The carrying amount of machinery and equipment used by the Group under finance lease agreements and hire-purchase agreements as at 31 December 2010 amounted to 2,334 thousand USD (2009: 2,553 thousand). Leased assets and assets acquired in instalments, act as collateral for the relevant obligations under finance lease agreements and hire-purchase agreements (Note 12). F-43

177 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) 7. Long-term biological assets As at 31 December 2010 and 2009, long-term biological assets may be represented as follows: Perennial plantings Total non-current biological assets Cost as at 31 December Additions Disposals Revaluation at fair value (9) (9) Exchange difference (31) (31) Cost as at 31 December Additions Disposals Revaluation at fair value Exchange difference (24) (24) Cost as at 31 December Inventories As at 31 December 2010 and 2009, inventories included: Crop products 2,407 2,729 Agricultural stock 1, Fuel Spare parts to agricultural machinery Work in process 1,027 2 Other ,149 4,589 Work in process includes expenses incurred by agricultural companies at the reporting date for improving and supporting land out of crop (dead fallow, recultivation, disking, fertilizing). These improvements refer mainly to the crop of the following year. 9. Current biological assets As at 31 December 2010 and 2009 current biological assets include: Current biological assets (crop products) 7,452 2,527 Current biological assets (livestock husbandry) ,621 2,728 F-44

178 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Current biological assets of livestock husbandry can be presented as follows: Foundation Newborn piggery under 2 months 9 5 Piggery 2 4 months 7 6 Piggery 4 6 months 7 25 Piggery 6 9 months Replacement gilts Reconciliation of changes in carrying amount of biological assets as at 31 December 2010 and 2009 is as follows: Carrying amount as at 1 January Additions Disposal (288) (514) Change in fair value of biological assets Exchange difference 1 (73) Carrying amount as at 31 December As at 31 December 2010 and 2009 current biological assets of crop production can be presented as follows: Carrying amount as at 1 January 2,527 3,564 Costs incurred during a year 5,063 2,829 Income from changes in fair value less expected distribution costs 5, Harvest gathered during the year (5,235) (4,881) Exchange difference (7) 84 Carrying amount as at 31 7,452 2,527 As at 31 December 2010 and 2009 current biological assets include: Area, hectare 2010 Area, hectare 2009 Wheat 5,805 5,058 5,659 1,819 Barley 1, , Rape 1,722 1,865 8,739 7,452 8,604 2,527 Overall area of agricultural soil at the disposal of the Group comprises over 26 thousand hectares. Factual area of arable land in 2010 comprised 26.0 thousand hectares, ( ) and there was approximately 55 thousand tons of crops gathered (2009 approximately 70 thousand tons). The Group plan to increase the scope of cultivation areas in On February 28, 2011 the companies of the Group have concluded share purchase agreements for purchase of 100% corporate right in Ukrainian companies Askoninteks LLC and Unirem-Agro Plus LLC, having 5,787 ha land lease rights. The Group plans to purchase another Ukrainian company (named Agro-Golden LLC) having 611 ha land lease rights after the date of this report. F-45

179 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) In order to discount cash flows, a rate of 19.3% was applied to current biological assets. During the reporting period the Group increased costs of soil preparation and application of new sowing technologies for winter crops. The Group s management believes that this will lead to significant crop yield growth of winter crops. To determine discounting rate the following factors and assumptions were considered: Risk free rate Market premium Agricultural premiums for the risk, typical for the Group Earnings from medium-term internal state loan bonds (rotation period of 2 3 years) issued in UAH are taken as the basis for risk free rate in Ukraine. Rotation period for securities includes % 20% Currently, the most adequate representation of the equity markets in Ukraine can be presented by such financial instrument as corporate bonds. Outcome of stock and OTC markets trading show 22% of current earnings from repayment of corporate bonds issued in UAH (in average for the market). The difference between the average earnings from Ukrainian corporate and state bonds is the indicator of market premium value. 5.1% 4.0% Risk of Group business. Land use territory is within the zone of risk land tenure. Such zone is characterized by significant temperature jumping during vegetation period of grain crops. 2.0% 2.0% 19.3% 26% 10. Trade and other accounts receivable As at 31 December 2010 and 2009 trade and other accounts receivable included: Trade accounts receivable 2,450 3,174 Advances made 575 1,030 Other accounts receivable Provision for doubtful debts (1,754) (745) 1,662 4,019 As at 31 December 2010 and 2009 trade accounts receivable included: Trade accounts receivable 2,450 3,174 Provision for doubtful debts (1,492) (430) 958 2,744 F-46

180 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Trade accounts receivable according to their ageing are presented as follows: Total carrying amount Provision for impairment Total carrying amount Provision for impairment Up to 90 days From 91 to 180 days 86 1,594 From 181 to 270 days From 271 to 365 days Over 1 year 1,492 (1,492) 430 (430) 2,450 (1,492) 3,174 (430) As at 31 December 2010 and 2009 other current accounts receivable included: Advances paid 577 1,030 Settlements with other debtors Provision for doubtful debts (262) (315) 706 1,275 Advances made and other receivables by ageing are stated as follows: Total carrying amount Provision for impairment Total carrying amount Provision for impairment 0 90 days days days days Over 1 year 262 (262) 461 (315) 968 (262) 1,590 (315) 11. Cash and cash equivalents As at 31 December 2010 cash and cash equivalents included balances on current bank accounts of USD 30 thousand (31 December 2009: USD 2,564 thousand). F-47

181 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) 12. Loans and borrowings As at 31 December 2010 and 2009 loans and borrowings are represented as follows: Long-term Financial lease liabilities 561 2,368 Loans 1, Total 2,367 2,904 Current Financial lease liabilities 1,662 1,496 Loans 3,752 9,512 Total 5,414 11,008 Bank loans as at 31 December 2010 and 2009 were as follows: Bank Currency Annual rate % Maturity Current debt Long-term debt Current debt Long-term debt JSC Rodovid bank UAH ,507 JSC Rodovid bank UAH ,112 JSC Bank Natsionalniye investitsiyi UAH ,400 CB Credit-Dnepr UAH ,074 Soyuz CB UAH ,678 RED-PLAZA OJSC CNVCIF UAH Olbis Invesnments Ltd SA USD ICD Investments SA* USD ,752 1,806 9, * Credit line amounting to 1 million was granted by the main owner of the Group the company ISD Investments S.A. in US dollars, with fixed rate of 5% annual. The loan is not secured by collateral. Collateral securing the loan commitments are the following Group assets: Property, plant and equipment Inventories Bank deposit 301 Total Pledge and guarantee agreements of related parties serve as the collateral for the loan commitments. F-48

182 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) As at 31 December 2010 and 2009 obligations under financial lease included: Long-term financial lease liabilities 560 2,367 Short-term financial lease liabilities 1,662 1,496 Total 2,222 3, Future minimum lease payments 2,443 4,550 Less: interest expenses (221) (687) Discounted value of future minimal lease payments 2,222 3,863 As at 31 December 2010 future minimum lease payments and their discounted value under financial lease agreements that are not subject to early termination and concluded for a term exceeding one year, are as follows: By maturity term Total Future minimum lease payments 1, ,443 Less: interest expenses (203) (17) (1) (221) Discounted value of future minimal lease payments 1, ,222 As at 31 December 2009 future minimum lease payments and their discounted value under financial lease agreements that are not subject to early termination and concluded for a term exceeding one year, are as follows: By maturity term Total Future minimum lease payments 1,934 1, ,550 Less: interest expenses (438) (221) (26) (2) (687) Discounted value of future minimal lease payments 1,496 1, , Trade and other accounts payable As at 31 December 2010 and 2009, trade and other accounts payable included: Payables to guarantor 4,126 Interest payable Prepayments received Trade accounts payable 498 2,280 Land share lease payables Wage arrears Settlements with participants 6 64 Share purchase settlements 3,484 Other accounts payable ,681 7,008 F-49

183 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) 14. Statutory capital The structure of the Group s equity as at 31 December 2010 and 2009 can be represented as follows: Share thous. US dollars Share thous. US dollars KSG Agricultural and Industrial Holding Limited 100% 3 100% 3 LLC Ukrainian Agricultural and Industrial Holding 100% 2, % 1,403 2,628 1,406 In the reporting period LLC Ukrainian Agricultural and Industrial Holding had an increase of statutory capital up to 2,625 thous. US dollars. 15. Income For the year ended 31 December 2010 and 2009 the Group s income included: Sale of agricultural products 14,580 13,504 Sale of services Other sales ,628 13, Cost of sales For the year ended 31 December 2010 and 2009, cost of sales of the Group included: Material costs 20,025 10,917 Services 9 14 Other 422 1,171 20,456 12,102 The cost includes: Social charges Salary The effect of changes in the fair value of biological assets to the cost of sold products can be stated as follows: Incurred costs included in the cost of sold products 5,694 7,637 Changes of fair value net of preliminary estimated point of sale expenses 14,762 4,465 20,456 12,102 F-50

184 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) 17. General and administrative expenses For the year ended 31 December 2010 and 2009, Group general and administrative expenses included: Salary and social taxes Taxes Informational, expert and consulting services Insurance 46 2 Lease Bank services Transport services Amortization POL 8 44 Materials 5 3 Services of crop storage and refining Communication costs 2 5 Repairs and maintenance of fixed assets 1 6 Marketing expenses 7 Other costs , Other operating income (expenses) For the year ended 31 December 2010 and 2009 other operating expenses of the Group included: State subsidies (VAT) 1,271 1,386 (Expenses)/income from exchange differences Income from sale of foreign currency 8 2 (Expenses)/income from sale of non-current assets (1) 7 Impairments of assets (2) (106) Income from sale of current assets (4) (83) Penalties, fines and forfeits (73) (3) Provision for doubtful debts (1,009) (427) Other (expenses)/income (472) (313) Financial income (expenses), net For the year ended 31 December 2010 and 2009, net financial income (expenses) of the Group included: Loan interest (1,695) (1,716) Interest on the financial lease (611) (626) Financial lease commitments 714 (92) Interest received (1,558) (2,144) F-51

185 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) 20. Related parties Control relationships The Group s owners are legal entities, which prepare financial statements available for public use. The main participant of the Group is its ultimate controlling party. Related parties include: shareholders key management personnel and their close family members companies that are controlled or significantly influenced by shareholders Information on interest rates and maturity dates of long-term loans from shareholders is disclosed in Note 12. Companies that are controlled or significantly influenced by shareholders ICD INVESTMENTS SA (Switzerland); Fortholing (Switzerland) Zemivor Holding Limited (Cyprus) KSG Export Limited (Cyprus) Vernilia Holding Limited (Cyprus) Hellpic Limited (Cyprus) Olcom Limited (Cyprus) KS Retail Limited (Cyprus) LLCICDUA(Ukraine) LLC KS Development (Ukraine LLC Niko Plaza (Ukraine) LLC Newfort (Ukraine) LLC K.Marx (Ukraine) LLC Innovative City Development Investments (Ukraine) LLC Berezinka (Ukraine) LLC Kiev Marketing Center (Ukraine) LLC SPAR-Logistic (Ukraine) LLC SPAR-Center (Ukraine) LLC SPAR-Ukraine (Ukraine) LLC Business Management Group (Ukraine) Transactions with the key management Remuneration of key management personnel for the year ended 31 December 2010 is in the form of short-term employee benefits amounting to US dollars 203 thousand (2009: US dollars 154 thousand). The key management personnel is those having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly. F-52

186 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) As at 31 December 2010 and 2009 the Group s indebtedness on transactions with related parties can be represented as follows: Assets Trade accounts receivable Other accounts receivable Liabilities Trade accounts payable 14 3 For the years 2010 and 2009 income of the Group from the transactions with related parties is as follows: Sales of agricultural products Other sales 70 Other services (rent of premises) 19 6 Other services 1 2 In 2010 economic relations with related parties included transactions of sale, granting and receiving loans. 21. Integration of companies and acquisition of non-controlling participation share During 2008 the Group acquired 100% of corporate rights in Agricultural Limited Company «SOUZ 3». Given company is located in Ukraine and performs agricultural activities. Fair value of identified assets and liabilities of companies at acquisition date and respective carrying amounts were as follows: Carrying amount Fair value Long-term biological assets Property, plant and equipment 2,962 2,962 Accounts receivable 1,127 1,127 Cash 2,754 2,754 Inventories Current biological assets ,078 8,078 Loans (4,641) (4,641) Accounts payable (3,178) (3,178) (7,819) (7,819) Net assets Acquisition price 6,034 Goodwill from acquisition 5,775 Cash outflow from acquisition: Net cash amount acquired together with the company 2,754 Cash paid (92) Net cash flows in acquisition 2,662 F-53

187 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Goodwill amount equal to 5,775 thous. US dollars includes value of estimated positive effect from acquisition and the right for lease of land of agricultural nature, which is not recognized in the financial statements as separate asset. In accordance with the contractual terms set for acquisition, the lease right is not a separate asset, as such, it does not comply with recognition criteria for intangible asset as per IFRS (IAS) 38 Intangible assets. It is expected that the recognized goodwill will not be deductible for taxation purposes neither to full extent, nor partially. 22. Commitments and contingencies Commitments The Group has operational lease liability to individuals. These liabilities mainly refer to farm land, where the Group performs its activity. Structure of leased agricultural land by lenders and geographical location can be presented as follows: Group company Geographical location (region) 31 December 2010 (hectare) 31 December 2009 (hectare) Agro-Dnister LLC Khmelnitsk 1,531 1,379 Agro-Trade House Dniprovsky LLC Dnepropetrovsk 3,490 3,561 Goncharovo Agricultural LLC Dnepropetrovsk 2,539 2,571 Pivdenne Agricultural LLC Kherson 1, Enterprise No2 of Ukrainian agricultural and industrial holding LLC Dnepropetrovsk 1,845 1,845 Scorpio Agro LLC Dnepropetrovsk 6,017 6,152 SOUZ-3 LTD Dnepropetrovsk 6,730 6,671 SOUZ-3 LTD Kharkov 2,974 2,937 26,797 26,033 Lease payments for the land are preliminary agreed between the Group and a respective lessor. As it is seen from the table above, the Group powerfully increased its production capacity in having enlarged the area of land in lease; due to that it incurred additional one-time expenses related to legalization of lease relations. The Group did not capitalize such expenses and referred them to expenses in these periods. Contingent liabilities Legal aspects In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial position or the results of future operations of the Group. Tax risks Ukrainian legislation and regulations regarding taxation and other operational matters, including currency exchange control and customs regulations, continue to evolve due to transitional period in the economy. Legislation and regulations are not always clearly written and are subject to varying interpretations by local, regional and national authorities, and other Governmental bodies. Instances of inconsistent interpretations are not single. The Group s operations and financial position will continue to be affected by Ukrainian political developments including the application of existing and future legislation and tax regulations. The Group does not believe that these contingencies, as relating to its operations, are any more significant than those of similar enterprises in Ukraine. F-54

188 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Financial lease and obligations under hire-purchase agreements The Group has entered into several financial lease agreements and hire-purchase agreements in respect of various agricultural equipment. These agreements contain provisions on the right to purchase an asset. Minimum future lease payments under finance lease agreements and hire purchase agreements, as well as the present value of net minimum lease payments are set out in the table below: Minimum lease payments Current cost of minimum lease payments Amounts payable under financial lease agreements During 1 year 1,865 1,934 1,365 1,451 Over 1 year but no more than 5 years 578 2,616 2,516 2,223 More than 5 years Total minimum lease payments 2,443 4,550 3,881 3,674 Net of future financial costs (221) (687) Discounted value of minimal lease payments 2,222 3, Financial risk management: objectives and policies The Group s principal financial instruments comprise interest-bearing loans and borrowings, cash and cash equivalents and short-term deposits. The Group has various other financial instruments, such as trade receivables and trade payables, which arise directly from its operations. The Group has not entered into any derivative transactions. It is the Group s policy not to trade in financial instruments. The Group s overall risk management program focuses on the unpredictability and inefficiency of the Ukrainian financial markets and seeks to minimize potential adverse effects on the financial performance of the Group. The main risks, arising from the Group s financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk. The management reviews and agrees policies for managing each of these risks. The essence of these approaches is disclosed below. Interest rate risk Risk of changes in interest rate is generally related to interest-bearing loans and other debt obligations of the Group. The Group s management analyses market interest rates to minimize interest rate risk of the Group. The table below represents the Group s profit before tax sensitivity to a possible moderate interest rates change, when all other variable remain constant (as the effect to loans at variable interest rate). There is no effect to the net assets attributable to the Group s participants. Increase/decrease of basis points Effect on profit before tax For the year ended 31 December 2010 Change in interest rate 20 (34) Change in interest rate (20) 34 For the year ended 31 December 2009 Change in interest rate 20 (34) Change in interest rate (20) 34 F-55

189 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Foreign currency risk Like for many other companies having their activities in Ukraine, foreign currencies, particularly US dollar, take a sufficient part in the Group s operations. The Group performs its operations mainly in the following currencies: Ukrainian hryvnya (UAH), US dollars (USD), Euro (EUR). According to IFRS 7, the currency risk arises on monetary financial instruments in currency, which is not a functional one; risks related to the currency translation are not taken into account. The currency risk arises mainly on non-functional currencies, in which the Group has its financial instruments. The table below represents sensitivity of the Group s profit before tax to a possible moderate change of exchange rates, when other components remain unchangeable. Increase/decrease Effect on profit before tax For the year ended 31 December 2010 Change in USD exchange rate 5% (15) Change in USD exchange rate (5%) 15 For the year ended 31 December 2009 Change in USD exchange rate 5% 114 Change in USD exchange rate (5%) (114) The table shows the Group s assets and liabilities at their carrying amount as at 31 December UAH EURO USD Non-monetary items ASSETS Property, plant and equipment 5,013 5,013 Non-current biological assets Goodwill 5,586 5,586 Inventories 5,149 5,149 Current biological assets 7,621 7,621 Total Trade and other accounts receivable 1,662 1,662 VAT accounts receivable 1,022 1,022 Cash and cash equivalents Total assets 2,714 23,616 26,330 LIABILITIES Long-term loans and borrowings (2,068) (299) (2,367) Promissory notes issued (188) (188) Short-term loans and borrowings (5,414) (5,414) Trade and other accounts payable (6,681) (6,681) Tax accounts payable (18) (18) Total liabilities (14,369) (299) (14,668) Net position (11,655) (299) 23,616 11,662 F-56

190 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) As at 31 December 2009 UAH EURO USD Non-monetary items ASSETS Property, plant and equipment 4,821 4,821 Non-current biological assets Goodwill 5,569 5,569 Inventories 4,589 4,589 Current biological assets 2,728 2,728 Total Trade and other accounts receivable 4,019 4,019 VAT accounts receivable 1,628 1,628 Cash and cash equivalents 89 2,475 2,564 Total assets 5,736 2,475 17,922 26,133 LIABILITIES Long-term loans and borrowings (2,707) (197) (2,904) Promissory notes issued (188) (188) Short-term loans and borrowings (11,008) (11,008) Trade and other accounts payable (7,008) (7,008) Tax accounts payable (27) (27) Total liabilities (20,939) (197) (7,035) (21,135) Net position (15,202) 2,278 17,922 4,998 Short-term and long-term loans in foreign currency, trade accounts receivable and payable give rise to foreign exchange risk exposure. Liquidity risk The Group s objective is to maintain a balance between continuity of funding and flexibility through the use of loans provided by banks and suppliers. The Group monitors its assets and liabilities as to circulation and mature terms and plans its liquidity depending upon the expected term of obligations fulfillment. When liquidity of individual entities is insufficient or redundant, the Group redistributes its resources and funds to achieve optimal financing of every Group s entity needs. The table below summarizes the maturity profile of the Group s financial liabilities at 31 December 2010 based on contractual undiscounted payments: Less than 3months 3to12months 1to5years Total For the year ended 31 December 2010 Long-term portion of borrowings 2,367 2,367 Short-term loans and borrowings 5,414 5,414 Trade and other accounts payable 18 6,681 6,699 For the year ended 31 December 2009 Long-term portion of borrowings 2,904 2,904 Short-term loans and borrowings 11,008 11,008 Trade and other accounts payable 7,223 7,223 F-57

191 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Credit risk Financial instruments that potentially expose the Group to the concentration of credit risks primarily include trade receivables. Credit risk related to trade receivables is minimized due to the limited number of customers grain traders with sound reputation. The Group manages this risk through monitoring of the customers credit capacity. Cash is placed in financial institutions, which are considered to have minimal risk of default at the time of deposit. The Group management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. Most of the Group s sales are made to the customers with an appropriate credit history or on a prepayment basis. The Group does not require collateral in respect of its financial assets. The credit risk exposure of the Group is monitored and analyzed on a case-by-case basis and, based on historical collection statistics, the Group s management believes that there is no significant risk of loss to the Group beyond the impairment allowances recognized against the assets of each category. Capital risk management The Group considers debt and net assets as primary capital sources. The Group s objectives when managing capital are to safeguard the Group s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders as well as to provide financing of its operating requirements, capital expenditures and Group s development strategy. The Group s capital management policies aim to ensure and maintain an optimal capital structure to reduce the overall cost of capital and flexibility relating to Group s access to capital markets Total amount of borrowings 7,781 13,912 Net of cash and cash equivalents (30) (2,564) Net debt 7,751 11,348 Total capital 11,662 4,998 Adjusted capital 11,662 4,998 Debt to adjusted net assets ratio 64.46% % Management monitors on a regular basis the Group s capital structure, and may adjust its capital management policies and targets following changes of its operating environment, market sentiment or its development strategy. Risk of grain prices change Apart from the risks arising from the use of financial instruments, the Group is exposed to the risk, connected with grain price changes. The Group did not conclude derivative contracts or other contracts for this risk management. The Group constantly regulates grain prices to evaluate the necessity of active financial risk management. F-58

192 KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS As at 31 December 2010 and for the year then ended (in thousand USD) Classification of financial instruments As at 31 December 2010, financial instruments are classified as follows: As at Loans and accounts receivable Non-financial assets Property, plant and equipment 5,013 5,013 Non-current biological assets Goodwill 5,586 5,586 Inventories 5,149 5,149 Current biological assets 7,621 7,621 Trade and other accounts receivable 1,662 1,662 VAT accounts receivable 1,022 1,022 Cash and cash equivalents Total 1,692 24,638 26,330 Long-term loans and borrowings (2,367) (2,367) Short-term loans and borrowings (5,414) (5,414) Promissory notes (188) (188) Trade and other accounts payable (6,681) (6,681) Tax accounts payable (18) (18) TOTAL (7,969) (6,699) (14,668) Net balance position (6,277) 17,939 11,662 As at 31 December 2009, financial instruments are classified as follows: As at Loans and accounts receivable Non-financial assets Property, plant and equipment 4,821 4,821 Non-current biological assets Goodwill 5,569 5,569 Inventories 4,589 4,589 Current biological assets 2,728 2,728 Trade and other accounts receivable 4,019 4,019 VAT accounts receivable 1,628 1,628 Cash and cash equivalents 2,564 2,564 Total 6,583 19,550 26,133 Long-term loans and borrowings (2,904) (2,904) Short-term loans and borrowings (11,008) (11,008) Promissory notes (188) (188) Trade and other accounts payable (7,008) (7,008) Tax accounts payable (27) (27) TOTAL (14,100) (7,035) (21,135) Net balance position (7,517) 12,515 4,998 F-59

193 GROUP OF COMPANIES KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED COMBINED FINANCIAL STATEMENTS For the year ended 31 December 2009, 31 December 2008 Together with independent auditor s report F-60

194 GROUP KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED COMBINED FINANCIAL STATEMENTS As at 31 December 2009, 31 December 2008 (in thousand USD) Contents: STATEMENT OF MANAGEMENT S RESPONSIBILITY FOR THE PREPARATION AND APPROVAL OF THE COMBINED FINANCIAL STATEMENTS...F-62 INDEPENDENTAUDITOR SREPORT... F-63 COMBINED STATEMENT OF FINANCIAL POSITION... F-65 COMBINEDSTATEMENTOFCOMPREHENSIVEINCOME...F-66 COMBINEDSTATEMENTOFCASHFLOWSFORTHEPERIOD...F-67 COMBINEDSTATEMENTOFCHANGESINEQUITY... F-68 NOTES TO THE COMBINED FINANCIAL STATEMENTS...F Background... F-69 2.Basisofpreparationofthecombinedfinancialstatements... F Essential Accounting Estimations and Judgments... F-71 4.Summaryofsignificantaccountingpolicies... F-72 5.NewStandardsandInterpretationsissuedbutnotyeteffective...F-78 6.Property,plantandequipment... F Long-term biological assets... F-80 8.Inventories... F-80 9.Currentbiologicalassets... F Trade and other accounts receivable... F Cashandcashequivalents... F Loansandborrowings... F Trade and other accounts payable... F Statutorycapital... F Income... F Costofsales... F Generalandadministrativeexpenses... F Otheroperatingincome(expenses)... F Financialincome(expenses),net... F Relatedparties... F Integration of companies and acquisition of non-controlling participation share...f Commitmentsandcontingencies... F Financialriskmanagement:objectivesandpolicies... F-91 F-61

195 GROUP KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED STATEMENT OF MANAGEMENT S RESPONSIBILITY FOR THE PREPARATION AND APPROVAL OF THE COMBINED FINANCIAL STATEMENTS As at 31 December 2009, 31 December 2008 The following statement, which should be read in conjunction with the independent auditors responsibilities disclosed in the independent auditors report set out on pages F-63 F-64, is made with a view to distinguishing the respective responsibilities of the management and those of the independent auditors in relation to the combined financial statements of Group KSG AGRICULTURAL AND INDUSTRIAL HOLDING LIMITED. The Group s management is responsible for the preparation of the combined financial statements that present fairly, in all material aspects, the financial position of the Group as at 31 December 2009 and 31 December 2008 and cash flows and changes in the net assets that belong to participants for the year then ended, in accordance with International Financial Reporting Standards ( IFRS ). In preparing the combined financial statements, the management is responsible for: Selecting suitable accounting principles and applying them consistently; Making reasonable assumptions and estimates; Compliance with relevant IFRS and disclosure of all material departures in Notes to the combined financial statements; Preparing the combined financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business for the foreseeable future. Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; Maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Group, and which enable them to ensure that the combined financial statements of the Group comply with IFRS; Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Preventing and detecting fraud and other irregularities. The combined financial statements for the year ended 31 December 2009 and 31 December 2008 were approved on 27 December 2010 on behalf of the Group s management: Director General Financial Director Dnepropetrovsk 27 December 2010 F-62

196 F-63