Contents. IHB at a glance Management 2007 in figures IHB portfolio Revenue by industries Export map Financial highlights

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1 Annual Report 2007

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3 Annual Report 2007

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5 Contents IHB at a glance Management 2007 in figures IHB portfolio Revenue by industries Export map Financial highlights IHB Operating review CEO s letter Consolidated annual management report 2007 Operating results IHB operating results IHB companies operating results Financial resources managenet. Used financial instuments. Financial risk management. Description of major risks Important events occured after the annual closure of accounts Important scientific research and developments Foreseen development of the company Changes in the price of the company s shares Data on the trading of the company s bonds Inaformation about holdings of and trading in own shares Shareholding structure as at 31 December IHB Financial Statements Independent Auditor s Report Consolidated Financial Statements Notes to the consolidated financial statements IHB governance Comply or explain report Information about the members of the MB and SB Investor Relations Director s report IHB team Corporate social responsibility report IHB companies 3

6 IHB is a public limited company managing investment portfolio of companies from different industries. IHB aims to possess controlling interest over 51%, which gives the opportunity to determine the strategy and to achieve the strategic management of the companies from its portfolio. In partnership with other investors, IHB invests in projects in which it can have significant influence - up to 50%. IHB pursues a permanent optimization of the investment portfolio. As at 2008 the investments are mainly in maritime business - shipbuilding, ship repair, port operations, sea transport, classification and certification, machine building and river cruises. IHB is listed on the highest segment A on the official market of Bulgarian Stock Exchange - Sofia. IHB shares are one of the most liquid positions on the stock exchange and are included in all the Bulgarian indeces and in some indeces of the index families Dow Jones STOXX and Dow Jones Wilshire. 4

7 IHB at a glance IHB at a glance The beginning The company was established in September 1996 as a privatization fund with the objective of participation in the mass privatization process in Bulgaria during In February 1998, Privatization Fund Bulgaria PLC was reorganized as a Holding Company in accordance with the Law of Commerce and was renamed as Industrial Holding Bulgaria PLC /IHB/. The activities IHB s main activities are acquisition, evaluation and sales of equity in companies, management of companies in its portfolio, financing its subsidiaries. The capital and shareholders IHB is the fifth privatization fund in terms of size of issued capital in investment bonds and number of shareholders among 81 privatization funds licensed in Bulgaria. The founding capital was BGN and the founders were shareholders. After several capital raisings, as at 31 May 2008 the issued capital of IHB is BGN , distributed in ordinary voting shares with BGN 1 nominal value. As at 31 May 2008 IHB has over natural and 200 legal persons, possessing respectively 17% and 83% from the voting shares. The four biggest shareholders holding over 5% of the voting shares posses 55% and the free float is 45%. The vision IHB is the biggest industrial holding in Bulgaria. IHB continuously supports its subsidiaries to become best performers in their business activities and encourages its employees to improve their individual skills. Due to its prosperous subsidiaries, IHB generates high shareholder value. It is therefore attractive for investors and reflects the sound image of a solid and sustainable company. 5

8 Management Management Supervisory Board (SB) DZH AD - Chairman DZH AD is a family company with main activities investments in real estates and securities. The company is the third one out of the biggest shareholders in IHB. In the SB, DZH AD is represented by Ambassador Dr. Elena Kirtcheva 1. Ambassador Dr. Elena Kirtcheva (58) was elected as representative in SB in She has great administrative and managerial experience in state institutions, government and non-government organizations, academic and teaching experience in low and economic fields, big experience in diplomacy - ex-ambassador of Bulgaria in Switzerland, Lichtenstein, Finland and Austria. Awarded with the Grand Decoration of Honour in Gold with Sash for Services to the Republic of Austria. She was member of the First democratic Parlament of Republic of Bulgaria and member of commissions and parlament delegations of Republic of Bulgaria in European Council and Organization for Security and Cooperation in Europe /OSCE/. She graduated law in Sofia University Kliment Ohridski. PhD in Law. Founder, Member of the Board and Secretary General of Vienna Economic Forum. 2. Mrs. Snejana Hristova (58) joined the management team in 2003 when she was elected member of the Managing Board. In July 2003 she was elected independent member of the SB. She has rich experience in the insurance sector and business administration of commercial companies. She graduated Insurance in the Economic Academy D.A. Tzenov in Svishtov. MSc in Economics. 3. Mr. Konstantin Zografov (51) joined the SB in September He has rich experience in business administration in the Ministry of Defense and General Staff of Bulgarian Army, Organization for Security and Cooperation in Europe, commercial companies and international non-profit organizations. He graduated National Military University Vassil Levski in Veliko Tarnovo, with civil major eastern languages, Staff College G.S. Rakovski in Sofia and Defense and Security policy strategic course in the GCSP, Geneva, Switzerland. Mr. Zografov is Associated Director of AFCEA International and Regional Vice President of AFCEA International for Mediterranean and Black Sea region. Managing Board (MB) 4. Mr. Bojidar Danev (69) has been member of the Managing Board and its Chairman since IHB s establishment. Mr. Danev has a great experience in business administration of commercial companies and non-government organiza- 6

9 Management IHB has a two-tier management system - Managing Board and Supervisory Board tions. He graduated the Technical University, Sofia and has a PhD specialization in Germany. MSc in Engineering, PhD in Economics and Senior Research Assistant - second degree. Mr. Danev is Chairman of the Managing Board and Executive Chairman of the Bulgarian Industrial Association. 5. Mrs. Daneta Zheleva (40) - Chief Executive Officer joined the management team of IHB in September 1999 as a representative of Dia Expert EOOD - member of the SB. In July 2003 Mrs. Zheleva was elected member of MB and CEO. She has a 10 year experience as a lawyer in the Sofia Bar Association. She graduated law in Sofia University Kliment Ohridski. MLL in Law. Mrs. Zheleva is a deputy chairperson of the Managing Board of the Bulgarian Industrial Capital Association and of the Bulgarian Private Ports Association. 6. Mr. Anguel Katzarov (66) - Chief Executive Officer joined the management team in July In July 2003 he was elected CEO of IHB. He has great experience in business administration in the Ministry of Defense and General Staff of Bulgarian Army, as well as in commercial companies. He graduated National Military University Vassil Levski in Veliko Tarnovo, with civil major mechanical engineering, Staff College Frunze in Moscow and General Staff College in Moscow. MSc in Engineering and Lt. General /ret./. 7. Mr. Borislav Gavrilov (32) joined the management team of IHB in July He has been working in IHB, Elprom ZEM and Alcomet before that. He has experience in business administration of commercial companies. He graduated economics in Hull University, Great Britain. Economist. 8. Ambassador Boyko Noev (54) joined the management team in March He has rich experience in administration in government institutions - he has been member and deputy-head of the Bulgarian delegations to the CSCE and CFE Vienna negotiations and head of the European Organizations Department, Ambassador to NATO, Belgium and Luxembourg, Minister of Defense in Bulgaria. He graduated International Relations in Moscow Institute for International Relations. Ambassador Boyko Noev is Director of European Program at the Center for Study of Democracy. 7

10 2007 in figures 2007 in figures 80% Consolidated assets growth 2007 to % Consolidated net assets growth 2007 to % Consolidated total revenue growth 2007 to % Consolidated operating revenue growth 2007 to % Consolidated net profit growth 2007 to % Share price rise for

11 IHB Portfolio IHB portfolio Portfolio IHB is a holding company managing a portfolio of companies. Depending on the share and the possibility for IHB to influence their management, these companies are classified as follows: Subsidiaries (s) - companies controlled by IHB; Associates (a) - in which IHB has significant influence, but not control, over the financial and operating policies; Companies with minority interest /portfolio investments/(pi) - companies over which IHB has no influence. Some of the companies are indirectly controlled by IHB through affiliates (ss) or (as). These companies are owned and/ or controlled by some of IHB subsidiaries. Here are presented IHB subsidiaries and associates with their own subsidiaries. Portfolio structure by industries as at May 31, 2008 Investments: BGN thousand 5 6% 2 4 7% 1 3 2% 18% 67% Maritime business Bulyard AD (s) Bulyard Shipbuilding Industry AD (ss) Dockyard Port Bourgas AD (s) Odesos PBM AD (a) Maritime Holding AD (s) Bulgarian Register of Shipping AD (ss) VIK Sandvik IHB Design (as) Machine building ZMM Bulgaria Holding AD (s) ZMM Sliven AD (ss) Mashstroy PLC (ss) ZMM Nova Zagora AD (ss) Elprom ZEM PLC (ss) Leyarmach AD (ss) Bulcari (ss) Furniture production Avgusta Mebel AD (s) 4 River cruises Dunav Tours AD (a) Dunav Tours Hotels AD (as) Tourist Company Dunav AD (as) Danube River Navigation AD (as) Ship Company Dunav AD (as) Other Privat Engineering AD (s) Emona Ltd (ss) Marciana Ltd (ss) Karvuna Ltd (ss) IHB Shipping Co AD (ss) KLVK AD (s) Hydro Power Bulgaria AD (s) International Industrial Holding Bulgaria AG (s) 9

12 Revenue by industries Industry Shipbuilding Ship repair Port operatiaons Classification and certification Ship design Machine building Metal cutting machines Electric machines Metal casting River cruises Furniture production Other including: The data presents the operating revenue generated by the companies from IHB portfolio, grouped by industries. The data is from the Financial Statements of the companies as at 31 December of the relevant year and is also shown in the Consolidated Annual Management Report 2007 /page 22/. The other operating revenue is not included. The operating revenue by industries is before elimination of intra group transactions.

13 Revenue by industries Operating revenue as at 31 December /BGN, 000/ IHB Consolidated Operating Revenue /BGN, 000/ The operating revenue of IHB (non consolidated) and ZMM Bulgaria Holding (non consolidated) are not shown above. The consolidated operating revenue of IHB comprises the operating revenues of IHB and its subsidiaries (together referred to as the Group ) and the Group s interest in associates. The basis of consolidation is explained in the Consolidated Financial Statements /page 80/. 11

14 Export map Export map of the products and services of IHB companies for

15 Export map 13

16 Export map 2007 legend Our business Industry Symbols Maritime Business Products/services Shipbuilding Bulyard Shipbuilding Industry AD Ship repair Dockyard Port - Bourgas AD, Bulyard Shipbuilding Industry AD Odesos PBM AD, Dockyard Port - Bourgas AD Port activities Classification and Certification Bulgarian Register of Shipping AD Ship design VIK Sandvik - IHB Design AD Metal - cutting machines ZMM Bulgaria Holding AD, ZMM Sliven AD Mashstroy AD, ZMM Nova Zagora AD Electric machines Elprom ZEM AD Metal casting Leyarmach AD River cruises River cruises Dunav Tours AD, Tourist Company Dunav AD, Dunav Tours Hotels AD Furniture production Furniture production Avgusta Mebel AD Machinebuilding Export 14 Companies Region Countries Europe Albania, Austria, Cyprus, Czech Republic, Denmark, France, Germany, Greece, Hungary, Italy, Malta, The Netherlands, Norway, Turkey, Poland, Portugal, Romania, Russia, Spain, Sweden, Ukraine, United Kingdom, Finland, Ireland, Belarus, Norway, Kingdom of Belgium, Moldova, Slovenia, Scotland Central America St. Vincent, Panama North America Canada, USA, Mexico Latin and South America Venezuela, Colombia, Peru, Ecuador, Republic of Chile, Argentina, Belize Middle East Jordan, Syria, Iran, Israel, Saudi Arabia Africa Algeria, Egypt, Libya, Tunisia, Marocco Asia China, Kuwait, India, Thailand, Vietnam

17 Location map of IHB companies in Bulgaria Bulgaria Location map Rousse Sofia Troyan Shumen Sliven Nova Zagora Varna Bourgas 15

18 Financial highlights Operating revenue /BGN 000/ Total assets /BGN 000/ % 6% 86% 47% 20% change from previots year % 22% 100% 12% 80% change from previots year EBITDA-Financial result from operating activities before amortization and depreciation /BGN 000/ % 47% 275% -60% 37% change from previots year Net assets /BGN 000/ % 20% 73% 13% 103% change from previots year Net profit for the year /BGN 000/ % 119% 290% -68% 27% change from previots year Return on sales revenue /%/ Earnings per share /EPS/ /BGN 000/ 1,60 1,40 1,20 1,00 0,80 0,60 0,40 0,20 0,00 1,42 0,36 0,34 0,17 0, % 119% 290% -78% 9% change from previots year Return on equity /ROE/ /%/ 16 40,00 35,00 32,45 30,00 25,00 20,00 15,47 15,00 10,00 7,50 7,55 5,00 0, , ,00 35,00 36,43 30,00 25,00 20,00 15,00 16,19 10,00 8,91 10,41 5,00 0,

19 Financial highlights Return on assets /ROA//%/ 25,00 20,00 19,19 15,00 10,00 9,82 5,48 5,52 5,00 0, Return on invested capital /ROIC/ /%/ 45,00 40,00 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 9,55 16,64 41,37 10, P/E-Price/earnings per share P/S-Price/Sales Ratio 35,00 30,00 33, ,96 0,82 0,94 0, ,00 20,00 15,00 10,00 5,00 0,00 13,19 2,34 6,20 2, The given figures are as at 31 December of the respective year as per the audited consolidated financial statements of IHB for the same period, prepared in compliance with IFRS. The net assets and net profit figures exclude minority interests. The indicators are calculated on this basis. The total amount of net assets, including minority interests, as at 31 December 2007 is BGN thousand, and the net profit - BGN thousand. 1 BGN = EUR 0.51 Comparison of IHB share price grouth to indexes SOFIX, BG40 and BGTR 30 grouth 2007 The indicated data are from Bulgarian Stock Exchange - Sofia. IHLBL - IHB shares code of Bulgarian Stock Exchange - Sofia. 17

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21 IHB OPERATING REVIEW 19

22 Ceo`s letter Daneta Zheleva, CEO Worldwide, 2007 was strongly influenced by the global financial crises and we still feel its resonance. The dramatic rise of the prices of the energy sources and the raw materials, as well as the high inflation put all industrial companies on challenges not seen in the last several decades. Despite this, IHB Group fulfilled the engagement to investors as for 2007 it reached 20% revenue growth on consolidated bases compared to The net profit for the Group with minority interest amounts to BGN 13,3 million and the profit without minority interest for 2007 marked an increase of 27% compared to The company raised its capital with two thirds through initial public offering of shares and all the new shares were subscribed. 20

23 Ceo`s letter The past 2007 differed from the others mostly with the significant size of investments for development of the intellectual product. A license agreement for building a modern bulk carrier ship dwt, type Future 56 was signed. Thus we laid the foundation of a fruitful and long-term partnership with IHI Marine United Inc. and Mitsubishi Corporation. We founded a new company VIK Sandvik-IHB Design for ship design in which 40 young highly qualified naval architects are working already. Together with Deloitte we realized a project for optimization of the production in the shipyard. At the same time a significant amount of investments were made in new business lines IHB started to invest in sea transport and ordered new ships for construction in Bulyard Shipbuilding Industry. We started the project for expanding the Dockyard Port Bourgas, the technical re-equipment of Elprom ZEM and Leyarmach and the modernization of Bulyard Shipbuilding Industry. During the year, the IHB management s efforts were also focused on managing the risks for the Group: the process of setting up the internal audit was run; actions were undertaken for hedging the currency risk; long-term contracts for delivery of materials and equipment were signed; actions for importing labor forces from Azerbaijan, Ukraine and Turkey were undertaken. I would like to thank to our business partners and investors for their support. Their appraisal and trust are extremely valuable for us. I also would like to thank to our team employees and managers. Despite being in different places of the country, some of them in different countries, they professionally and devotedly work for the prosperity of IHB Group. I am confident that with their support and efforts in 2008 we will keep a stable revenue growth of 20% as well as similar profit growth on consolidated bases. 21

24 Consolidated annual management report of Industrial Holding Bulgaria PLC for 2007 Dear Shareholders, 2007 was another successful year for IHB and its group companies a year characterized by expansion of the investments in the maritime business. IHB increased its interest in the capital of Bulyard Shipbuilding Industry after the State sold a share of 25% to Bulyard. IHB increased its investments in the sea transport by signature of agreements on construction of another new ship designated for bulk freight. The project for expansion of Dockyard Port Bourgas started. IHB invested in two new companies for ship design and sea transport. The strong investment program of IHB and its group subsidiaries resulted in necessity of additional financing, which IHB ensured through increase in its capital two times in The first increase was realized through conversion of the 2004 issue of convertible bonds, and the second through a new issue of shares. Thus IHB ensured additional amount of BGN thousand BGN thousand and BGN thousand through the two issues, and increased its registered capital to BGN Some key data about IHB operations: The assets of IHB, on consolidated basis, marked an increase of 80% compared to The net assets marked an increase of 92% compared to The revenue of IHB, on consolidated basis, marked an increase of 20% compared to The consolidated net profit increased by 27% compared to 2006 and amounts to BGN thousand. The shares of IHB added 89% to their value in 2007, and their rise is higher than the SOFIX index /42%/ and lower than the BG40 index /158%/. In 2007 the shares continued to be one of the most liquid items on BSE-Sofia operating results IHB Group consolidated financial results The 2007 consolidated revenue of IHB amounts to BGN thousand, i. e. it increased by 20% compared to The operating revenue is BGN thousand compared to BGN thousand in 2006 or an increase of 11%. It includes: In BGN thousand Sale of production Shipbuilding Sale of services Ship repair Port operations Sale of goods and materials Total The other operating revenue, on consolidated basis, amounts to BGN thousand compared to BGN thousand in It includes gains on sale of non-current assets /BGN thousand compared to BGN thousand in 2005/ and other /BGN thousand compared to BGN thousand/. The 2007 consolidated net profit, excluding minority 22

25 Consolidated annual management report interests, is BGN thousand compared to BGN thousand in 2006, i. e. it increased by 27%. IHB operating results Organizational group changes. Portfolio restructuring In 2007 some changes in the operations of the IHB group were made and investments were made in new projects. In August Dockyard Port Bourgas terminated its operations in shipbuilding. The core activity of the company includes port operations as of August The shipbuilding operations within the IHB group were redirected to Bulyard Shipbuilding Industry. Newly established companies In partnership with Vik Sandvik, Norway, IHB invested in shares of a new company named VIK-Sandvik-IHB DESIGN AD with scope of activity including ship design. The capital of the company amounts to BGN distributed into shares of BGN 1 nominal value each. Each shareholder participates with 50% of the voting shares. The new company was registered with a decision of Varna District Court dated 22 August Over 40 highly qualified ship designers work at VIK-Sandvik-IHB DESIGN AD. Privat Engineering, a subsidiary of IHB, established its subsidiary Karvuna Ltd. The newly established company invested in the building of a ton multi-purpose ship at Bulyard Shipbuilding Industry designated for unrestricted region of navigation and bulk freight. The price of the ship, which is to be delivered by December 2009, is EUR 21 million. In December 2007 Privat Engineering invested in shares of a new company named IHB Shipping Co EAD having capital of BGN divided into shares of BGN 1 nominal value each. The scope of activity of the new company includes commercial sea navigation and related production and technical, forwarding and intermediation activities, ship brokerage and agency, etc. Increased shareholding in some portfolio companies In February 2007 Bulyard, a subsidiary IHB, launched a procedure for the acquisition of 25% of the capital of Bulyard Shipbuilding Industry. The procedure was finalised on 6 March The transaction values amounts to USD As a result of the transaction, IHB Plc control in Bulyard Shipbuilding Industry reached 61.50%. By virtue of Decision No 5 of 19 March 2007 Sofia City Court entered an increase in the capital of Bulyard from BGN to BGN The funds raised through the increase were used to pay 25% of the capital of Bulyard Shipbuilding Industry, which Bulyard acquired from Navigation Maritime Bulgare EAD. IHB participated in Bulyard capital increase by subscribing shares of BGN 1 nominal value each in proportion to its interest in the capital of Bulyard. By virtue of Decision No 6 of 20 April 2007 Sofia City Court entered an increase in the capital of Bulyard from BGN to BGN The funds raised through the increase are for an increase of the 23

26 Consolidated annual management report capital of Bulyard Shipbuilding Industry by BGN from BGN to BGN IHB subscribed shares of BGN 1 nominal and issue value each in proportion to its interest in the capital of Bulyard. As a result of the two increases in Bulyard capital, in 2007 IHB invested BGN thousand and its interest in the capital of Bulyard reached BGN thousand. By virtue of Decision No 4 of 2007 Bourgas District Court entered increase in the capital of Dockyard Port Bourgas from BGN to BGN All new shares from the capital increase of BGN 1 nominal value each were subscribed by IHB. Following the capital increase, the interest of IHB in the capital of its subsidiary Dockyard Port Bourgas reached 98.24%. In March 2007 the capital of the subsidiary Privat Engineering, 100% owned by the Group, was increased through the issuance of ordinary registered voting shares of BGN 1 nominal value and BGN 7 issue value each In September 2007 the capital of the subsidiary Privat Engineering was increased for the second time through the issuance of shares of BGN 1 nominal value and BGN 10 issue value each. The shares have been acquired and fully paid up by a company within the Holding s group. The capital of Privat Engineering as at the end of 2007 is BGN In April 2007 the capital of Leyarmach, a company controlled by the Group, was increased. The shares from the increase were purchased by Mashstroy shares and ZMM Sliven shares of BGN 1 nominal value each and the Group retained 100% control of the company. ZMM Bulgaria Holding made a tender offer on 25 April 2007 and a revised tender offer on 4 June 2007 to the rest of the shareholders of ZMM Sliven for purchase of shares at a price of BGN per share through Aval In Investment Intermediary. ZMM Bulgaria Holding held shares /92.89%/ before the tender offer. The tender offer was successfully completed and, as a result, ZMM Bulgaria Holding acquired shares from the other shareholders. The General Meeting of Shareholders of ZMM Sliven made a decision on dissolution and deletion of the company from the Register of Public Companies at a session held on 3 October 2007 in Sliven. By virtue of Decision No 1308 dated 22 October 2007, the Financial Supervision Commission deleted ZMM Sliven from the Public Register of Securities Issuers. IHB slightly increased its share in Dounav Tours by 0.04% for BGN 1 thousand. The total amount of funds invested directly by IHB / non-consolidated/ in corporate securities in 2007 is BGN thousand. Sale of portfolio shares In 2007 all shares in the capital of Bulgartabac Holding, held by IHB, were sold at a price of BGN per share. The net gains on the sale of all shares are BGN 250 thousand. As a result of the restructuring, the IHB portfolio as 24

27 Consolidated annual management report at 31 December 2007, directly and through related parties, is formed of 29 companies: 9 subsidiaries, 3 associates and 17 subsidiaries of subsidiaries and associates. The direct investments of IHB in corporate securities amounted to BGN thousand at the end of the year. Graphs 1-2: Structure of the IHB portfolio as at 31 December of the last 2 years 2007 Portfolio structure. Investments: BGN thousand 2007 Portfolio structure. Investments: BGN thousand % % % % % 6.77% % 1.85% Management of the subsidiaries 17.74% 67.43% 1 Maritime business 2 Machine building 3 Furniture production 4 River cruises 5 Other Pursuing the tasks set at the beginning of the year with respect to its subsidiaries, in 2007 as well, IHB participated actively in the strategic planning of the business of the subsidiaries. IHB encouraged and assisted in the following: carrying out of investment activities; improvement of their products and services, development and introduction in production of new products and services, depending on market requirements; enhancement of the marketing activities, the human resources management activities, as well as other activities related to the companies management; provision of funds for the operating and investment 25

28 activities of the companies; analysis and assessment of the possibilities for utilizing the new Internet technologies. Participating in the process of business planning and control over the results achieved Realizing the important role of control in the management of the subsidiaries, the IHB management continued applying its practice of business planning and monitoring results. The management of IHB set strategic goals and results, which each company had to achieve in the respective year. Each executive director has a personal business task for the year, related to the priorities of the company s activities. The management and experts of IHB endeavour to be constantly aware of the activities of the subsidiaries. Information is exchanged on monthly basis as the companies submit reports on their operations for each month. A total of 3 work meetings are held per year among the management of the Holding and the respective management teams of the companies, at which the results from the past quarter are reported. At the meetings the results for the reporting period are discussed, the difficulties faced by the management teams of the companies are shared and the possibilities for resolving the problems are analyzed. The direct result of the management of the subsidiaries is the dividend received upon distribution of their profits. Providing support in the financing of the subsidiaries. Information about transactions IHB supports the financing of the group companies by granting loans and assistance in the negotiations on financing by banks. In 2007 loans of the total amount of BGN thousand were granted to subsidiaries. The receivables on loans granted to subsidiaries as at 31 December 2007 amount to BGN 60 thousand. Further information is given hereinafter. The 2007 collaterals provided by IHB are in the form of corporate guarantees and avals of promissory notes. Further information is given hereinafter. In 2007 the subsidiaries of IHB financed their operations through bank loans granted by Bank Allianz Bulgaria AD, DSK Bank EAD, Raiffeisenbank Bulgaria AD, United Bulgarian Bank AD and Biochim AD. The interests agreed on the loans utilized by the subsidiaries vary between EUROLIBOR + an addition of 2.5% - 4%. Teams of IHB assist in the development of the business plans of the subsidiaries, required by the banks as substantiation for loan granting. In 2007 IHB concluded no other material transactions except for the investments in subsidiaries and agreements on financing of subsidiaries. The 2007 transactions with related parties represent granting of loans by IHB to the group companies and vice versa, interest income and interest expenses, loans repayment by the companies to IHB and vice versa, income from sale of services and capital increase contributions. The transactions executed over the period are characterized by no extraordinary 26

29 Consolidated annual management report circumstances or deviation from market conditions. Information about the transactions between IHB and related parties executed over the year is given in Item 26. Transactions with related parties of the Notes to the Financial Statements as at 31 December 2007, where the transaction values and types of relation are indicated. No other offers for conclusion of such transactions or transactions out of the usual operations or deviating from the market conditions, to which IHB or a subsidiary of IHB is a party, were made. The loans granted by IHB to its companies and vice versa in 2007 are in BGN with interest rates within the range of 6% - 8%, in EUR with interest rate of 8% and in USD with interest rate of 10%. There are no 2007 events or indicators of unusual nature to IHB, having material impact on its operations. The guarantees for liabilities of associates provided by IHB as at 31 December 2007 are as follows: In favour of DSK EAD: IHB ensured the issuance of bank guarantees at the amount of EUR 671 thousand to secure liabilities of Elprom ZEM to a client. A contract was signed with DSK Bank EAD for credit limit for issuance of bank guarantees, letters of credit and working capital financing of IHB and/or its group companies at the total of BGN thousand. Two guarantees were issued for the credit limit as at 31 December 2007 /BGN 100 thousand for Dockyard Port Bourgas and EUR 339 thousand for Elprom ZEM/ and two letters of credit of Bulyard Shipbuilding Industry for EUR 404 thousand and EUR 92 thousand. The two letters of credit were closed as at 28 February 2008 and new ones were issued for the freed funds. The two contracts with DSK Bank EAD are secured with pledge of the business enterprise of Dockyard Port Bourgas AD, a subsidiary of the Holding. In favour of Bank Allianz Bulgaria AD: IHB provided avals of promissory notes at the total amount of BGN 62 thousand to secure performance bonds of Elprom ZEM to clients. The guarantees have different maturity dates based on the contract validity terms. Corporate guarantees: On 15 November 2006 IHB Plc issued a corporate guarantee at the amount of EUR and USD to secure the third advance payment in favour of Bulyard Shipbuilding Industry before the buyer Georgi Maritime Ltd for ship with construction No 457, which was closed in April 2007 due to performed obligations. In July IHB issued a corporate guarantee at the amount of EUR and USD to secure the third advance payment for ship with construction No 515 from the buyer Maritime Ltd. All guarantees are secured by pledge of immovable property of Bulyard Shipbuilding Industry. IHB will receive remuneration for the corporate guarantees issued equal to 2% of the amount of each guarantee provided. The Management of the Company is of the opinion that there are no indications for liabilities non-settlement so no provisions for contingent liabilities have been charged. As at the date of the Annual Report the corporate guarantees were closed. Internal control system The Internal Control Unit of IHB reviews the operations and finances of the IHB group. 27

30 IHB companies` operating results Generally, maritime business includes the following sectors: shipbuilding, ship repair, port operations, classification and certification, sea transport and ship design.

31 Maritime business Bulyard /s/ Bulyard Shipbuilding Industry /ss/ Vik-Sandvik-IHB design /ss/ Shipbuilding Maritime Holding /s/ Bulgarian Register of Shipping /ss/ Classification & Certification MARITIME BUSINESS Port activities Dockyard Port - Bourgas /s/ Odessoss PBM /as/ Shipping Privat Engineering /s/ Karvuna /ss/ Marciana /ss/ Emona /ss/ IHB Shipping Co /ss/ 29

32 Shipbuilding and ship repair Mr. Todor Daskalov Chief Executive, Bulyard Shipbuilding Industry 2007 ended with an income increase of 19% and a profi t of BGN 1 mln. which was within the business plan. For 2008 Bulyard SI will deliver the dwt bulk carrier Hemus to Navigation Maritime Bulgare, the supply vessel hull N 190 to the Norwegian Solstad Offshore ASA and the fi rst 9800 dwt multi-purpose ship to IHB. Ship repair is contracted for occupation of the free docks till October We expect the Government, as per the Armed Forces modernization projects, to take a decision for building of corvettes and the related offset program for production of frigates. Shipbuilding and ship repair As a whole the world shipbuilding industry enjoys progress. Considerable increase in sea transport volume is reported, which imposes the necessity of new and more ships for transportation of the bigger volume of cargoes among the countries. Supplying and other special purpose ships of moderate tonnage, high technology and at good prices are most demanded. The second place is occupied by ships for bulk cargo of dwt. All dockyards are 100% work loaded until 2010 and this increases ship prices. Since 2007 IHB has reorganized ship repair operations within the group redirecting them to Bulyard Shipbuilding Industry. Dockyard Port Bourgas performed shipbuilding operations until August 2007 when it sold its floating dock for the price of EUR thousand. The higher requirements and the introduction of new ones on ship technical safety resulted in more frequent repairs - a factor having favourable effect on shipbuilding operations. Bulyard Shipbuilding Industry is able to provide ship repairs within a wide capacity range - ships of tons up to tons. 30

33 Consolidated annual management report Bulyard AD and its subsidiary Bulyard Shipbuilding Industry EAD The activity of Bulyard is related to the management of its subsidiary Bulyard Shipbuilding Industry EAD. In March 2007 Bulyard acquired 25% of the capital of Bulyard Shipbuilding Industry from Navigation Maritime Bulgare EAD for USD and became sole owner of Bulyard Shipbuilding Industry. In 2007 Bulyard increased its capital two times, and as a result its capital was increased from BGN to BGN The funds raised through the first increase were used to pay 25% of the capital of Bulyard Shipbuilding Industry, while the funds raised through the second increase were used to increase the capital of Bulyard Shipbuilding Industry by BGN 5 million. All shareholders participated in the two Financial results of Bulyard /non-consolidated/ increases in proportion to their interest shares. The 2007 income of IHB amounts to BGN 77 thousand representing financial income /interest income/, i. e. it marked a fall of 48% compared to the 2006 income /BGN 148 thousand /. The expenses of the Company decreased by 25% in 2007, amounting to BGN 112 thousand. They include operating expenses /hired services and other/ and financial expenses / net exchange rate loss/. The 2007 financial result of Bulyard is loss at the amount of BGN 35 thousand. The assets of Bulyard as at 31 December 2007 amount to BGN ,thousand and BGN thousand of them represent investments in Bulyard Shipbuilding Industry. Operating income Profit after taxation BGN` Other operating revenue Profit after taxation BGN` Bulyard Shipbuilding Industry EAD The core activity of Bulyard Shipbuilding Industry is building of new ships, construction of separate ship sections and units and ship repair. Following the start of shipbuilding operations in 2005, in 2006 and 2007 the dockyard characterizes by gradual loading of its production capacities with building of new ships. In 2007, the building of two ships was completed and they were delivered to their owners: No 516 was delivered in June 2007 and No 457 was delivered in October In 2007 Bulyard Shipbuilding Industry signed a contract with IHI Marine Unitåd Inc Japan for licensing the building of a new ship for bulk freight of dwt of the type super handymax F56. The ship type is exclusively popular on the market and there is a strong interest in such orders on behalf of ship owners Bulyard Shipbuilding Industry purchased a license for eight ships. In 2007 and by March 2008 Bulyard Shipbuilding Industry signed contracts for purchase of packages of materials for the building of these ships. A package of materials includes a main engine, a diesel generator and other accessories to secure the building of ship F56. The total value of these contracts is some JPY 10 billion or USD 92 million. In 2007 and by the beginning of April 2008 Bulyard Shipbuilding Industry had an agreement on the building of 6 ships F56 sites 101 and 103 for the client Diler Shipping and Trading - Turkey, sites 102 and 105 for IHB group companies and sites 106 and 107 for companies of Navigation Maritime Bulgare. In addition to the ships F65, in 2007 the building of some other ships and hulls was agreed. Contracts were signed on the building of two ships for bulk freight of dwt site 459 for Varna Maritime Ltd. a company of Navigation Maritime Bulgare and site 458 for Karvuna Ltd.- a company of IHB group. Another contract was signed on the hull of a supply ship for the Norwegian Dockyard Flekkefjord Slipp & Maskinfabrikk ASÏ with construction No contracts were signed with Aker Toulcha for the production of hull sections for supply ships /orders 372, 374, 374À, 716/. Navigation Maritime Bulgare is in the process of negotiations for the production of hulls for 7-16 frigates FREMM over the period The production of corvettes for the Bulgarian Navy as a part of the offset program of the French 31

34 Consolidated annual management report Shipyard Armaris is in process of negotiations. As of March 2007 the shipyard is certified under the quality management system in compliance with the requirements of ISO 9001:2000. The scope of the certificate includes design of vessels, shipbuilding and ship repair. The certifying organization is BV Bureau Veritas Certification Bulgaria. The 2007 investment program is for EUR thousand. There have been implemented key projects for production capacity increase, working conditions improvement and production process modernization, including the purchase of 8 ships of the super handymax F56, small-size ship equipment, certification under ISO , reconstruction of workshop Ê1 and others. The total expenses on investment amount to EUR thousand, including repair and maintenance at the amount of EUR thousand. The implementation of the 2007 investment program was financed by the reinvested 2006 profit and an investment credit granted by SG Expressbank. The 2007 income of Bulyard Shipbuilding Industry amounts to BGN thousand The income from shipbuilding is BGN thousand compared to BGN thousand in The result of the two ships sites 516 and 457, built and delivered to their owners in 2007, is loss at the amount of BGN thousand. This is mainly due to the low agreed ship prices and that these are the first ships built after the bankruptcy of Varna Shipyard. The negative result from shipbuilding operations is partially compensated for orders of higher return and ship repair. The Company continues ship repair operations along with shipbuilding with the purpose of 100% use of the capacities. Over the periods when the chambers are free, Bulyard Shipbuilding Industry executes shipbuilding operations. In 2007 seven repairs of vessels owned by foreign persons were made and their total value is BGN thousand, while in repairs of vessels owned by 16 Bulgarian and 9 foreign ship owners were made their total value is BGN4 008 thousand. The 2007 income from ship repair operations occupies 3% of the total sales income /BGN / compared to 6% in The sales income of Bulyard Shipbuilding Industry amounts to BGN thousand, including estates sales, and the gains on these transactions amount to BGN thousand. The 2007 financial result of the company is profit at the amount of BGN 213 thousand. In 2008, Bulyard Shipbuilding Industry focuses on production facilities improvement and modernization in compliance with its investment plan and maintenance of quality management system complying with the European standards. Conclusion of contracts securing the implementation of the production program until 2012, enhancement of the qualification of workers involved in the production processes, reduction of production and administrative and management expenses by 10% compared to 2007, finding of new methods for staff recruitment, offering of more motivating social benefits and improvement of working standards. Financial results of Bulyard Shipbuilding Industry /from all activities shipbuilding and ship repair/ BGN` Operating income Other income Sales income Profit after taxation Profit after taxation BGN`

35 33

36 Port operations 2007 will take place in the analysis of the company as year or reborn from ship repair company to commercial port. The total handled cargo of MT, respectively the achieved incomes are clear evidence for the right business policy can be described with one word growth. The term will be fulfi lled with consistency by the volume of cargo as well as the assets of the company. Mr. Vesselin Statev Ghief Executive, Dockyard Port - Bourgas Dockyard Port - Bourgas AD, Odessoss PBM AD Port operations are expected to progress in the forthcoming years. The sea transportation of goods is expected to mark greater activity against transportation by land due to environmental reasons. The increased economic exchange among the countries, resulting from economies growth, is another reason predetermining this progress. This trend is observed in Bulgaria as well - there are growth in GDP and growth in export and import. In this aspect, the two ports of the IHB Group have the chance to find places in this sector. The ports are located in Varna and Bourgas - Odessoss PBM covering an area of 150 decares and Dockyard Port - Bourgas covering an area of 50 decares. The two ports are constructed on own terrain which represents a competitive advantage and have obtained regional importance port licenses. Both ports avail with certificates for procession of general, liquid and bulk cargo. 34

37 Consolidated annual management report Dockyard Port - Bourgas AD Until the end of July 2007 the company performed two key activities: ship repair and port operations. In July 2007 a floating dock, having carrying amount of BGN 959 thousand, was sold for the market price of BGN thousand and a floating workshop, having carrying amount of BGN 36 thousand, was sold for the market price of BGN 215 thousand. Thus, ship repair operations were suspended and port operations became the only operations executed by the company. In 2007 freight of tons was processed compared to tons processed in In 2006, metal freight and finished metal products were the main processed items. In 2007, the company expanded its scope of processed freight. There were processed metals and metal products /reinforced iron, profiles, coils, packed iron and pipes/, wood, glass, technical property, salt, vegetable oil and others. During the year there was total income realized for the amount of BGN 3,950 thousand compared to BGN 3,993 thousand in The income from ship repair operations by July 2007 amounts to BGN 567 thousand compared to BGN thousand gained over the whole The 2007 income from port operations amounts to BGN thousand, including freight procession, warehouse and exploitation activities /BGN thousand/, rent and other accompanying activities /BGN 140 thousand/ compared to BGN 442 thousand in 2006, including freight procession, warehouse and exploitation activities /BGN 218 thousand/, rent and other accompanying activities /BGN 224 thousand/. Dockyard Port-Bourgas realized gains on the sale of non-current assets at the amount of BGN thousand, including the gains on the floating dock sale. The profit prior to taxation amounts to BGN thousand, while the 2007 net profit is BGN thousand. In November the capital of the company was increased from BGN to BGN The new shares were subscribed by IHB. The 2008 policy focuses on ensuring new freight flows and attracting new clients. It envisages freight turnover increase and reaching 258 tons of processed freight. In 2008 there will be commissioned two railway lines, two travelling bridge cranes tons, new open warehouse facilities, etc. There are plans for commencement of the construction works related to the port expansion project, and the main portion of the required funds will be secured by bank credit. The project, the value of which is some BGN 23 million, is to be implemented over a period of three years. Financial results of Dockyard Port-Bourgas /from all activities ship repair and port operations/ Operating income BGN` Other operating revenue Sales income Profit after taxation Profit after taxation BGN`

38 36

39 Consolidated annual management report Odessoss PBM AD The 2007 key operating results of Odessos PBM are as follows: income growth of 75.33% as compared to 2006, profit increase by three times compared to 2006, own investments in non-current tangible assets at the amount of BGN thousand, increased market share of the services offered by the company and reaching better results due to new partners. The 2007 income of Odessoss PBM amounts to BGN thousand, marking a growth of BGN 627 thousand compared to The growth is mainly due to the significantly higher receipts from reloading operations and increased income from rendered services. The income sources remained the same as the 2006 ones, and namely: receipts from quay lineal charge, reloading operations, freight storage and long-term rents, other income from rendered services, including power and water supply, mechanization and freight packaging. In 2007 freight of tons was processed compared to freight of tons processed in In 2006, all types of metal freight and finished metal products were processed. In 2007, the company expanded its scope of processed freight. There were processed metals and metal products /reinforced iron, scrap, sheet iron/, wood, ammonium nitrate and grains. In 2007 freight of tons was processed compared to tons processed in In 2006, metal freight and finished metal products were the main processed items. In 2007, the company expanded its scope of processed freight. There were processed metals and metal products /reinforced iron, scrap, iron sheets/, wood, ammonium nitrate and grain. The 2007 accounting profit of the company after taxation amounts to BGN 240 thousand compared to BGN 86 thousand in In 2007 the process of restructuring of the region of the supporting shipbuilding enterprise kept by the company into a port enterprise with established facilities for ship, wagon, motor, warehouse, container and rear procession of bulk and general freight was completed. The 2008 objectives of the Company include increase in the investments for creation of proper conditions and in the freight flow through a quay, expansion of operations and the possibilities for freight storage and procession, expansion of the scope of offered services through commissioning a 32-tones travelling bridge crane at the rear and possibility for general freight procession onto/down wagons. The company intends to perform rear procession of full 20- and 40-foot containers, including refrigerator, and bonded storage regime. Financial results of Odessoss PBM Operating income BGN` Income Other operating income Profit after taxation Profit after taxation BGN`

40 Classifi cation and certifi cation 2007 was successful in terms of provided services and in terms of new contracts for partnership: we signed contracts for authorization by three maritime administrations and a contract for joint activities with the Japanese classifi cation society. For 2008 we aim at increasing the number of ships with class from BRS, to sign new contracts for authorization with maritime administrations and to achieve higher fi - nancial results. Mr. Andrei Todorov Ghief Executive, Bugarian Register of shipping Maritime Holding AD and its subsidiary Bulgarian Register of Shipping AD The classification and certification of vessels depend on shipbuilding and ship repair development. As these sectors have been developing and enjoy progress, the classification and certification of newly built and repaired ships mark growth. Another contributing factor is the introduction of new higher requirements on navigation security and safety by the World Maritime Organization.. Maritime Holding AD The 2007 activity of Maritime Holding AD is the management of investments in subsidiaries. Maritime Holding holds 99.81% of the capital of Bulgarian Register of Shipping AD Varna and 100% of the capital of Bulgarian Lloyd EOOD. In 2007, Maritime Holding realized dividend income at the amount of BGN 699 thousand compared to BGN 749 thousand in The dividend income was received from its subsidiary Bulgarian Register of Shipping AD. The 2007 financial result of Maritime Holding is profit at the amount of BGN 696 thousand, which is equal to the net profit compared to net profit of BGN 750 thousand in The amount of the assets of Maritime Holding as at 31 December 2007 is BGN thousand, the highest share being occupied by investments in subsidiaries BGN thousand. 38

41 Consolidated annual management report Financial results of Maritime Holding Operating income BGN` Other income Dividend income Profit after taxation Profit after taxation BGN` Bulgarian Register of Shipping AD /BRS/ The 2007 operating income of BRS amounts to BGN thousand. In ships owned by foreign persons were issued class by BRS. The process of attraction of ships owned by foreign persons will continue and related requirements on ship age and technical conditions, applying for BRS class, will be increased. In 2006 contracts for authorization by the maritime administrations of Dominica, Saint Vincent and the Grenadines and Moldova were signed. On 2 October 2007 a contract was signed by the Japanese Register NKK and BRS for joint activities in relation to the NKKclass certification. In relation to this contract, the enhancement of the qualification of three inspectors of BRS, acquisition of NKK inspector status and their participation in the new ships building project were agreed. The 2007 income from sales of services of BRS marked an increase of BGN 141 thousand or 7% as compared to the preceding year. The profit of the company increased by BGN 58 thousand or 6% as compared to the preceding year. The company will proceed with the training of inspectors for employment abroad and finding of new prestigious partners abroad. The mid-term objectives of Bulgarian Register of Shipping AD include the company s preparation for recognition by the European Union and increase of the tonnage of the supervised fleet. The company has submitted documents for recognition by the European Union as register. The basic classification and certification activity is becoming more and more competitive and Bulgarian Register of Shipping AD finds it difficult to compete with its multinational competitors Lloyd s Register of Shipping, Bureau Veritas, Germanischer Lloyd. Therefore, the objective is development in the sector of industrial audit and related operations. In 2007, BRS certified 137 Bulgarian and 84 foreign ships. The activities related to the Project for Development of Technologies for Ship Inspection and Certification and Internet- Based System for Inspection Management were completed. In March 2008, the system will be put into operation. Financial results of BRS Operating income Profit after taxation BGN` Other operating income Income BGN` Profit after taxation

42 Ship design 40

43 Consolidated annual management report 2007 was the year of establishment of our company. For the four months of existing we managed to enter the market of ship design services. We received a good appraisal from our partners which led to an increase of the signed contracts and doubling the staff of the company in Our goals for 2008 are to strengthen our positions on the market and to become a preferable partner to shipyards and ship owners. Mr. Boyko Georgiev Chief Executive, VIK Sandvik-IHB Design VIK Sandvik IHB Design AD In August 2007 IHB and VIK Sandvik - Norway established a ship design company in Bulgaria named VIK-Sandvik-IHB Design. The company is an associate of IHB as it holds 50% of its capital. The core activity is development of working documentation and exercising of author s control. Over the period September December 2007 the company realized income at the amount of BGN 550 thousand. The 2007 financial result is profit of BGN 296 thousand. The 2008 objectives include offering of full scope of design services in performing a particular order, specialization in ship design servicing offshore floating facilities and research and experience related to entry into the sphere of design of oil platforms and other special-purpose floating facilities. Financial results of VIK Sandvik - IHB Design AD Sales income BGN` Sales income Year Net profit for the period BGN`

44 42 The machine building sector includes the following subsectors: production of metal cutting and electric machines and metal casting.

45 Machine building ZMM Sliven /ss/ Mashstroy /ss/ ZMM Nova Zagora /ss/ Metal cutting machines Leyarmach /ss/ Metal casting MACHINE BUILDING ZMM Bulgaria Holding /s/ Electric machines Elprom ZEM /ss/ Bulcari /s/ 43

46 We are pleased to report the successful ending of the year In 2007 the orders for heavy duty machines and CNC machines sensibly increased. We consider the year for successful also because of the smooth transition of our sales in euro price list only. In 2007 signifi cant investments were made in Leyarmach, Elprom ZEM and the other companies thus enabling the improvement of the products and services quality. Mr. Anguel Katzarov Chairman Board of Directors, ZMM Bulgaria Holding ZMM Bulgaria Holding AD and its subsidiaries ZMM Sliven AD, Mashstroy AD, ZMM Nova Zagora AD, Leyarmach AD and Elprom ZEM Metal cutting machines universal lathes, CNC lathes and column drilling machines belong to the so-called group of products designated for investment (production) consumption. They are characterized with long useful lives. The demand for such products directly depends on the overall economic environment and investment activity in a particular country or on a particular market. They may be used in the processes of single, retail and serial production and used in all material production sectors. They are purchased by a wide range of clients and of significant importance to the technical security of each national economy. The demand for metal cutting machines is characterized by a relative permanence in long-term aspect and variation and decrease per each 3-4 years. World and regional stagnation and economic crises negatively affect this realization. This fact does not concern the export and trade in these basic products when the market and their demand are stable. With a view to improvement of the good business image of these products and prolongation of their life cycles, their design and technical characteristics and work safety need constant improvement and the standards and requirements of ISO 9001, as well as the European standards on safety mark (CE), are to be complied with. ZMM Bulgaria Holding AD ZMM BH trade in the following basic products produced by the companies under its control: Universal lathes - produced by ZMM Sliven and Mashstroy. Over 90% of the income of the company is realized through the sales of universal lathes. The produced lathes are divided into small, medium and large ones. The company has strong positions due to the characteristics of its middle-class machines of this type - a relevant quality for reasonable price, technical characteristics and maintenance; Lathes with CNC control produced by Mashstroy and ZMM Sliven; Lathes with cyclic program operation based on universal machines produced by Mashstroy; Drilling machines produced Mashstroy and ZMM Sliven; Combined wood processing machines produced by ZMM Sliven; 44

47 Consolidated annual management report In 2008 the ZMM Bulgaria Holding group companies are facing big challenges related with the price rises of row materials and energy sources as well as the lack of qualifi ed working force. The management has to fi nd the balanced approach to the market, keeping the interest of the clients on one hand and ensuring the process of growth and modernization in the group companies on the another hand. We also have to achieve higher results meeting the expectations of our investors. Mr. Dobromir Todorov Chief Executive, ZMM Bulgaria Holding Spare parts, units and details for metal cutting machines produced by ZMM Nova Zagora; Strip cutting machines produced by ZMM Nova Zagora; Cast irons produced by Leyarmach AD; Electric machines, hydro-generators, and repair of hydrogenerators produced, offered by Elprom ZEÌ. To gratify customer demand, modifications of new types of universal lathes and lathes with CPU were developed. The objectives for the period include expansion of the range of production of all basic products through improvement of sale effectiveness, promotion of the modified machines with CPU, the configuration of which includes units and details of basic universal lathes. The observed trend is towards increased production and sales of large lathes and lathes with CPU and gradual reduction of the production and sale of small and medium lathes. The 2007 net sales income of ZMM BH amounts to BGN thousand compared to BGN thousand in This is the result of a change in the company s strategy concerning production realization. The net sales income realized over the reporting period is at the amount of BGN thousand, including income from sale of goods amounting to BGN thousand. Compared to 2006, a decrease by BGN thousand or 18.61% is reported, and there is a trend towards increase in the income from agency services, marking an increase of BGN thousand or 159 %. Their relative share is 2.97% for the preceding year and 9.70% in the current year. The accounting profit before taxation of ZMM BH amounts to BGN thousand, i. e. it marked an increase of BGN 717 thousand or 21.32% compared to In 2007 ZMM BH purchased shares of the capital of ZMM Sliven, thus the interest of the Holding reached 95.98%. In January 2007 ZMM BH sold 500 shares to Elprom ZEM and realized profit of BGN 12 thousand. Financial results of ZMM Bulgaria Holding /non-consolidated/ Sales income BGN` Sales income Profit after taxation Profit after taxation BGN`

48 Metal cutting machines 46

49 Consolidated annual management report In 2007 ZMM Sliven achieved an income increase of 21% compared to 2006 and kept its position as a leading producer and exporter of lathes in Bulgaria. The company implemented and launched to the market medium dimensions CNC lathes type LCC-5. We plan a 13.5 % increase of sales for 2008 as well as increase of the share of heavy duty universal and CNC lathes to more then 30% from all sales. Mr. Georgi Dobrev Chief Executive, ZMM Sliven ZMM Sliven In 2006 ZMM Sliven produced a total number of 1001 machines, including 995 universal lathes and 6 CNC lathes compared to 960 machines produced in universal lathes, 4 CNC lathes and 9 column drilling machines. The 2007 production marked an increase of 4.27% as compared to the preceding year. The 2007 operating income of the company amounts to BGN thousand compared to BGN thousand in 2006, which represents an increase of 20.77%. The main portion of the operating income represents income from sales of production, occupying a share of 97.42%. The remaining portion represents income from sales of goods and services, while financial income occupies an insignificant share. In 2007, the company realized material sales on the domestic market for the first time, i. e. sale of 14 machines or 1.46% of the total sales volume. This is due to the favourable development of the Bulgarian economy over recent years. Compared to the increase in the operating income in 2007 by 20.79% compared to 2006, the operating expenses for the same period have increased by 22.75% and that reduced the 2007 net profit compared to The increase in the operating expenses is mainly due to the raised prices of raw materials and materials /steel, casts, cooperated deliveries, power supply, etc/. The 2007 payroll costs increased in proportion to the operating income. The amortization and depreciation costs remained nearly the same as the 2006 ones. In 2007, the company invested BGN 554 thousand in acquisition of non-current tangible assets and reconstruction and modernization of the production capacities and BGN 350 thousand in acquisition of financial assets. As the company was deleted from the Register of Public Companies at the Financial Supervision Commission, its shares are no longer offered for trade at BSE as of 25 October Financial results of ZMM Sliven Operating income BGN` Other operating income Sales income Profit after taxation BGN` Profit after taxation

50 48

51 Consolidated annual management report In 2007 Mashstroy achieved a high increase in the production of NC and CNC machines as well as of heavy duty universal lathes. The sales increase for 2007 compared to previous year is 23%. For 2008 the company aims at increasing the sales of CNC machines with inclined quideways axis and NC lathes for pipes production. Mr. Minko Taslakov Chief Executive, Mashstroy Mashstroy The 2007 net sales income amounts to BGN including income from sales of production at the amount of BGN thousand, sales of services at the amount of BGN 89 thousand and other sales at the amount of BGN 523 thousand. In 2007 the company sold machines on the international market at the value of BGN thousand, which represents 92.80% of the net sales income, and the remaining 7.20% - on the domestic market. The 2007 production sales income increased by BGN thousand as compared to The company sold its shares in Privat Engineering. Over the period the company acquired shares at the total value of BGN 150 thousand or 4.84% of the capital of Leyarmach. In 2007 the company invested mainly in machines and equipment and improvement of the buildings fund. The machines and equipment purchased over the year are at the total value of BGN 135 thousand; the company also purchased motor vehicles at the value of BGN 40 thousand and computer equipment at the value of BGN 12 thousand. The 2007 total value of buildings fund improvement is BGN 34 thousand. In 2007, the company continued its work related to the deployment of a software product for production management and purchased software and new computers. In 2008, the company will invest in the construction of new type of heating of workshops to reduce its heating costs and improve the social and working conditions. The company has been constantly working to innovate and expand its range of products. In 2008, this trend will be preserved. Two major tasks may be outlined commissioning into the production process of lathe with inclined guides with CPU model Ñ700Å and lathes with CPU models ÊNÑ 8S and ÊNÑ 10S. BGN`000 Financial results of Mashstroy Operating income Other operating income Sales income Profit after taxation Profit after taxation BGN`

52 50

53 Consolidated annual management report In 2007 we achieved signifi cant increase of the production of gear wheels and we expect this tendency to remain for Mr. Margarit Todorov Chief Executive, ZMM Nova Zagora BGN` ZMM Nova Zagora AD The products produced and sold in 2007 are split into three major groups: details, units and machines. The equipment dominant within the works allow the production of rotation and symmetrical details such as pivots, shafts, shaft and cogged and cylindrical cogged wheels with involuted profile, chain wheels, gear racks and gåàr pulleys. 100% of the units produced in 2007 were designed to be deployed into universal lathes in the country and Russia. In 2008, the company will produce series of feeding and support boxes for export. In 2007 ZMM NZ produced production for BGN thousand. The 2007 production volume marked an increase of % compared to the preceding year. The details occupy a share of 53.10% of this volume but the number of machines produced over the year exceeds the number of produced units due to the number of cutting machines (67 manual for BGN 361 thousand and 4 automated for BGN 156 thousand) and the two types of wood processing machines (23 capautomated and 92 rotating tables). The units occupy 18.52% Financial results of ZMM Nova Zagora Operating income Other operating income Sales income Profit after taxation of the 2007 production volume. The 2007 net production sales income and receipts from sale of non-current and current unused tangible assets are respectively BGN thousand and BGN 203 thousand. The production sales income increased by BGN 699 thousand compared to 2006, which represents an increase of % and % compared to all sales realized over the year. The units sold in 2007 for the total price of BGN thousand represent 53.71% of the total volume of sold production; i. e. the 2006 volume was preserved. The sales rise is the result of the export of 23 cap-automated machines and 92 hoisting rotating tables to Germany at the total value of BGN 672 thousand and the sale of 69 strip cutting machine at the total value of BGN 506 thousand. ZMM NZ has invested in the development of a full range of chip transporters for the lathes and centres type MAZAK imported in the country designated for users in the country and abroad the Czech Republic and possibly England, and the mastering of metal cutting machine production for export. BGN` Profit after taxation

54 Metal casting 2007 was a successful year for Leyarmach - the company realized a production increase of 19 % and an income increase of 24% compared to 2006 and for the fi rst of several years the company ended at profi t. In 2007 Leyarmach invested in two new induction ovens put into operations in the beginning of This will help the company to improve the capacity and the quality of the casts production and also to make the production more energy and eco effi cient. Mr. Boyan Dimitrov Chief Executive, Leyarmach Leyarmach AD 52 BGN` Financial results of Leyarmach Operating income Other operating income Sales Income Profit after taxation The core activity of the Company is casting of bodies and other details for lathes. The products are designed as a basic machine building element and are the most permanent products in terms of innovations. Leyarmach had certain production problems and had to make a strategic decision on its development. Its available furnaces and equipment were not sufficient for ensuring the required quality of produced casts with a view to achievement of good return. On the other hand, the foundry is one of the main suppliers of ZMM Sliven and Mashstroy - it provides 50-55% of the casts used for lathe production but it needs investment to be efficient and profitable. Following thorough analyses, the management of IHB made a decision on development of cast production within the system of ZMM Bulgaria Holding and approved an investment program at the value of BGN 1.5 million for restoration and modernization of the capacities of Leyarmach. The aim is meeting the higher requirements on cast quality and quantity and ensuring environment protection and maintenance of healthy and safe working conditions. The investment in two new Inductotherm heating units, each of 5 tons and working under Dual-Track regime, was completed at the beginning of 2008 and they were commissioned in February The new furnaces ensured production capacity of the company of some tons under two-shift working regime. In tons of casts was produced compared to tons in In 2007 a quantity of tons /73.45 %/ of casts was sold to ZMM Sliven and Mashstroy, a quantity of 455 tons of casts /19.33%/ was sold to other clients in the country and a quantity of 170 tons /7.22%/ of casts was exported. The 2007 sales volume marked an increase of 377 tons compared to The total volume to be produced in 2008 is tons. The estimated production value is made based on orders made by companies belonging to the Holding, an expert opinion and estimated sales, as well as up-to-now orders by regular clients.2008 will be characterized by increased production volume designated for external clients as well, and the cast quality and profitability will be strictly controlled. In 2008 Leyarmach will rely on the new Inductotherm heating units working under Dual-Track regime to implement the 2008 production plan and increase the volumes by 300 tons/month in 2009 on gradual basis. The two furnaces will operate under economic night working regime to service the intensive daily moulding fields. Profit after taxation BGN`

55 Consolidated annual management report Electric machines In 2007 we increase the production volume with 10% was the year in which Elprom ZEM entered new markets North America and Africa. During 2008 we will continue the technological and technical renovation of our production and will start the production of hydro-generators and electric motors with increased energy effi ciency. Mr. Valentin Filipov Chief Executive, Elprom ZEM Elprom ZEM AD Elprom ZEM produces the following electric machines - synchronous and asynchronous electric engines, asynchronous generators and hydro-generators. The Company also repairs hydro-generators and machines for low and high voltage /HH and BH/. The produced products are mainly related to the building of new sites and replacement of existing ones in case of failure. The major consumers are companies operating in the power engineering, mining and oredressing, cement and food, beverage and tobacco industries, agriculture, water supply and other sectors. The market strongly depends on world economy, the condition of the Bulgarian economy and the region in particular. The trend of stimulation of ecological power generation is a prerequisite for increase in the volume of construction of facilities for using renewable energy sources water and wind. This increased the volume of production of hydro-generators and machines for small and large water power plants and of generators and electric motors for wind power plants. The 2007 operating income of the company amounts to BGN thousand. The production income is BGN thousand. 245 electric engines and 11 hydro-generators / HG/ were produced. Repair services for BGN 5 99 thousand were rendered, including the production of a new HG stator of CHKD Blansko, rehabilitation of HG 5 of VETS Peshtera, repair of an electric engine of Kremikovtsi AD, Belovo Paper Works, etc. The other operating income of Elprom ZEM at the amount of BGN 896 thousand includes rental income, receipts from technological waste sale, etc. The 2007 operating profit and profit after taxation of Elprom ZEM are respectively BGN 917 thousand and BGN 823 thousand. In 2007 Elprom ZEM worked under the following major contracts: NEC EAD rehabilitation of stator magnetic circuits, stator windings and stator poles for the rotors of HG1, HG2 and HG4 of VETS Peshtera; VA TECH HYDRO, Austria as a subcontractor of the production of a HG for VETS Stouden Kladenets and VETS Tsnakov Kamak; CHKD BLANSKO the Czech Republic production and delivery of 4 HG; Kiloscar Brothers, India production of 2 HG. 53

56 54

57 In 2007, the company defended a Project for Development and Deployment of New Technology for Construction of Insulation System Increasing the Efficiency of Low-Voltage and High-Voltage Electric Machines subsidized by the Small and Medium Size Enterprises Promotion Agency. This technology will be deployed in the production process in In 2008 the company will focus on expansion of production capacities and product range through development, improvement and expansion of the functions of the newly deployed production capacities and new technologies. Development of new competitive rotating electric engine structures, improvement and expansion of the potential for continuous exploitation and high quality of the machinery fleet operation through planned and preventive maintenance, rehabilitation, modernization, purchase of new machines /large and medium horizontal lathes. Establishment and equipment of new departments Maintenance and Cooperated Deliveries and further development and equipment of the newly established External Assembly Department and Welding Unit. In 2008 activities will be carried out under the contract for design and development of a new stator magnetic circuit. A new stator windings for HG 1, 2, 3 and 4 and rehabilitation of the rotor poles of HG 2, 3 and 4 of VETS Stouden Kladenets signed by NEC EAD and Elprom ZEM and the four contracts signed with VAP HYDRO OOD for a HG for MVETS STOB, MVETS DZHERMAN, Blagoevgradska Bistritsa Cascade MVETS 1-8 and MVETS SLAVOVA. Financial results of Elprom ZEM Operating income Profit after taxation BGN` Other operating income Production and services sale income BGN` Profit after taxation

58 River cruises 56 The world trends regarding the tourist travel by ship are towards increase of the number of cruises and tourists using this kind of holiday. This concerns not only sea cruises but also river cruises.

59 Consolidated annual management report The past 2007 was a successful year for Dunav Tours. In this year started her fi rst season under Bulgarian fl ag the purchased in December 2006 passenger ship Elegant Lady. The company achieved a growth of revenue 55 % and with the ships of the company sailed more passengers. The main strategy of the company for strengthening its position on the strongly competitive market was successfully further developed.we managed to expand our positions in Bulgarian and Russian market. Mrs. Katya Stoyanova Chief Executive, Dunav Tours Dounav Tours AD In 2007 Dounav Tours and its subsidiaries operated a fleet of five own passenger ships. The major market of the company is the European market. The route of the ships is Budapest Vienna Passau and the way back. Some cruisers navigate to the delta of the Danube River. The Elegant Lady, Heinrich Heine and Rousse Prestige ships also navigate along the Rhein-Main-Danube channel. Over 100 passenger ships of various nationalities navigate along the same route. Dounav Tours and its subsidiaries give their own ships to charter companies that provide tourists. Dounav Tours sign agreements on long-term basis for over 3 years and receives a charter price that is its main income. The company ensures the technical maintenance and proper technical condition of the ships, deals with the insurances and provides crews and hotel staff. In March 2007, Dounav Tours purchased from the Bulgarian State, the Balkan Yacht, used by the former President Todor Zhivkov. It is in process of renovation at a Turkish shipyard. The company also offers own cruises along Rhein - Main - the Danube River and Moselle out of the main ship season, as well as during Christmas, New Year and Easter days. The company has its own pontoon on the Danube River, covering an area of some 4 decares and suitable for the quayage of all types of river ships, including passenger ones and welcomes over 280 ships per year. Dounav Tours AD is majority owner of Dounav Tours Hotels AD, Tourist Company Dounav AD, Dounav River Shipping AD and Shipping Company Dounav EAD. The 2007 consolidated income of the company amounts to BGN thousand, of which BGN thousand is income from core activity chartering of the five ships. The income marked an increase of 55% as compared to 2006 when it was BGN thousand and this is the result of the start of the exploitation of the newly acquired Elegant Lady Ship in Financial results of Dounav Tours /consolidated/ BGN` Operating income Other operating income Income Profit after taxation Profit after taxation BGN`

60 Furniture production 58 Financial results of Augusta Mebel Operating income BGN` Other operating income Income Profit after taxation Profit after taxation BGN`

61 Consolidated annual management report During 2007 Avgusta Mebel retained all of its customers and invested in the establishment of new business partnerships. In accodance with its strategy to increase the share of contract furniture in its total sales, the company focused on new product development within the framework of an expanded web of customers. In we entered the market for ship furniture. Mrs. Tamara Hristova Chief Executive, Avgusta Mebel Augusta Mebel The 2007 volume of produced and sold products marked a decrease of 17.82% as compared to the preceding year due to insufficient number of orders. Contacts were established with a number of new potential clients and price offers and samples were prepared and provided in due time. The company participated in the furniture exhibitions in Cologne, Germany and Athens, Greece. Because of the efforts made, at present the company works jointly with two new clients for hotel equipment Base, France and Roomings, England. There were achieved good organization and flexibility in the preparation of offers and sample products but not all of them resulted in large orders and related income. The inclusion of new clients requires time for development of samples and their approval by clients, and the resultant orders are made for small quantities. A great number of the prepared offers have resulted in orders but they will be fulfilled in There were fulfilled a number of orders for furniture of villas and small hotels in the country and households tables, beds, drawers, plots, etc. in the country and abroad. Business contacts were established with the Bulgarian Hypoland Commercial Chain for sale of children s beds. The products produced and sold by Augusta Mebel in 2007 include 44.8% products for hotel equipment and 55.2% household and other furniture; 27.4% furniture of massive timber, including wardrobes and drawers and 72.6% furniture of veneered MDF and TPS with low percentage of details of massive timber. The major markets of the company are the markets in Great Britain, France, Greece, USA and Ireland. Most foreign clients of the company are wholesale trades and big companies for catalogue trade. Production renovation to meet new market demand is a permanent process. The total share of new and improved products will reach 75% in The highest share of this renovation will be occupied by the new markets directed at Ireland, Greece, Francem USA and the up-to-now English market where new opportunities will be searched. In 2007, there were produced samples of new furniture models and sample equipment of hotel rooms, and for some of them production contracts were signed some of the samples, however, will be realized in 2008 or are not the subject of any orders. In 2007, August Mebel introduced a new segment ship equipment with an order for overall furniture of ship with construction No 515 owned by Navigation Maritime Bulgare. The 2007 net sales income of Augusta Mebel amounts to BGN thousand, including income from export of BGN thousand /81%/ and income from sales on the domestic market of BGN 484 thousand /19%/. The share of sales of exported products marked an increase of 4.8% as compared to 2006 when the sales income amounted to BGN thousand, including sales of exported products of 76.2% and sales of products on the domestic market of 23.8%. The 2007 financial result of Augusta Mebel after taxation is loss of BGN 114 thousand compared to profit of BGN 51 thousand for

62 Other 60

63 Consolidated annual management report Privat Engineering AD The basic activity of Privat Engineering is related to the management of projects in various sectors, insurance and reinsurance intermediation and consulting services. The 2007 activity of Privat Engineering was carried out in three main directions: investments of its subsidiaries in new ships construction, insurance intermediation and consulting service. In 2006, the subsidiaries Emona Shipping Ltd and Marciana Shipping Ltd agreed the construction of two ton multi-purpose ships at Bulyard Shipbuilding Industry EAD. The value per ship is EUR 13.5 million. Ship No 288 will be delivered in December 2008 and ship No 289 in In 2007 Karvuna Ltd, a newly established subsidiary of Privat Engineering, agreed the construction of a ton multipurpose ship at Bulyard Shipbuilding Industry EAD. The value of ship No 458, which is to be delivered in 2009, is EUR 21 million. The payments due under the ship building contracts are in EUR and USD. Privat Engineering has financed the ships building with own funds and loans granted by IHB. The financing is made through additional contributions to the capitals of the subsidiaries Emona, Marciana and Karvuna. At the end of 2007 BGN thousand of the value of the Emona ship and BGN thousand of the value of the Marciana ship were paid. The remaining amounts will be financed through loans from IHB and its group companies. As at 31 December 2007 BGN thousand of the value of the Karvuna ship was paid. The financing of the other construction stages may require new increases in the capital of Privat Engineering or utilization of credits or funds generated through operations. In 2007, the capital of Privat Engineering was increased twice in March and in September. International Industrial Holding Bulgaria, a member of the IHB group, subscribed the shares. As a result, the capital of Privat Engineering was increased to BGN The 2007 operating income of Privat Engineering amounts to BGN 524 thousand compared to BGN thousand in This decrease is the result of the reduced income from insurance and consulting services. The 2007 financial income is BGN 775 thousand compared to BGN 957 thousand in They include income from interests on payment and deposit accounts of the company at CB Allianz Bulgaria AD and loans granted to IHB group companies. The 2007 financial result of Privat Engineering is loss at the amount of BGN 116 thousand compared to profit of BGN thousand in This loss is the result of the fact that the company is in a process of material investments and incurs expenses on a new business sea transport, which will generate income after completion of the three new ships and commencement of their management. The total amount of the assets of Privat Engineering as at 31 December 2007 is BGN , of which BGN represents receivables from related parties. These are additional contributions to the capitals of the subsidiaries Emona, Marciana and Karvuna, bearing no interests. The equity of Privat Enginnering AD is at the amount of BGN thousand and consists of retained earnings for the amount of BGN thousand, share capital for the amount of BGN thousand and share premium for the amount of BGN thousand. Profit after taxation BGN`000 Operating income BGN` Other operating income Services income Profit after taxation

64 KLVK AD Financial results of KLVK Operating income BGN` Other operating income Services income Profit after taxation International Industrial Holding Bulgaria AD The 2007 activity of KLVK is related to consulting services. The 2007 operating income of KLVK amounts to BGN 227 thousand compared to BGN 133 thousand in 2006 or an increase of 71%. The 2007 expenses of the company, amounting to BGN 117 thousand, have increased. In 2007, a part of the construction and design of ships was transferred from Bulyard Shipbuilding Industry EAD to the company, because of which KLVK AD approved a new structure and staff organization. Thirty experts engineering designers were transferred from Bulyard Shipbuilding Industry EAD. The 2007 financial income amounts to BGN 198 thousand compared to BGN 200 thousand in the preceding year. The main portion of this income is income from interests on deposit accounts of the company at CB Allianz Bulgaria and CB Raiffeisenbank Bulgaria EAD the banks that issued the bank guarantees. In addition, the company received remuneration of BGN 90 thousand from Bulyard Shipbuilding Industry AD, representing 2% of the blocked deposit amounts per year. KLVK incurred exchange rate loss for BGN 172 thousand. The 2007 financial result of KLVK is profit for BGN 94 thousand, and the net profit after taxation is BGN 84 thousand compared to BGN 26 thousand in The total amount of the assets of KLVK as at 31 December 2007 is BGN thousand, the major amount of which consists of cash and cash equivalents BGN thousand, which are funds on blocked deposit accounts under issued bank guarantees securing an obligation of Bulyard Shipbuilding Industry EAD in relation to advance payments on ship building contracts /additional information is given in Item 14 of the Notes to the Annual Financial Statements/. The receivables from related parties amount to the total of BGN thousand; they are related to loans granted to IHB group companies. The equity of KLVK is at the amount of BGN thousand, including retained earnings of BGN thousand. The total amount of the payables of the company as at 31 December 2007 is BGN 145 thousand; they represent due retirement compensations calculated on the basis of an actuarial valuation, trade and other payables at the amount of BGN 132 thousand current payables to suppliers, the staff, the budget, etc. Profit after taxation BGN` The 2007 income of the company represents income from consulting services and investments. Financial results of IIHB Operating income BGN` Other operating income Investments income Profit after taxation Profit after taxation BGN`

65 Consolidated annual management report Personnel. Personnel development As at 31 December 2007, IHB had 10 employees in total. As at the end of 2007 the IHB Group had employees in total, of which 250 employed by associates. Besides the employees hired under labour contracts, some 850 persons work for Bulyard Shipbuilding Industry - employees of the companies - dockyard subcontractors of the works site. The table below shows the Group personnel as at 31 December 2007, including associates, by sectors and activities as per the approved sector structure of IHB Plc portfolio: Personnel by sectors and activities I. IHB II. Maritime business - shipbuilding and ship repair - port operations - classification and certification - ship design - sea transport III. Machine building IV. Furniture production V. River cruises VI. Other Total subsidiaries Total associates Total subsidiaries and associates Average number as per the 2007 list of employees Average number as per the list of employees as at 31 December Information about the personnel of IHB on consolidated basis The specifics of the operations of IHB, its sector portfolio and development of its group individual companies predetermine the requirements to its personnel. For the purpose, the management of the Holding applies a policy directed at enhancing the qualifications of hired employees who are in charge of the various aspects of the company activity. The development of priority sectors and operations and the related new projects imply what experts are needed. In the course of time, the issue concerning the training of employees with secondary special, engineering, and technical education becomes quite serious. Many young people do not want to work in the production and industry sectors. The settlement of this issue directly affects not only personnel provision but also production quality and the opportunities for development of research and innovation activities at the companies. To solve the problem, the management of IHB works in close cooperation with the academic society through: Training of students from technical schools and universities at most companies Bulyard Shipbuilding Industry AD, Elprom ZEM AD, Mashstroy AD and ZMM Sliven AD; Participation of the companies management bodies in boards of technical universities, the Naval School, etc.; Development of joint projects between the higher education institutions and the Group s companies in relation to new developments and solving of certain issues related to the production and repair operations of Bulgarian Register of Shipping AD, Elprom ZEM AD and Bulyard Shipbuilding Industry AD; Hiring of trainees and graduates at the companies The various programs for human resources development and employment encouragement of the Ministry of Labour and Social Policy, financed by the pre-accession funds, form another source for solving this problem In associates In subsidiaries 63

66 Financial resources management. Used financial instruments. Financial risk management. Description of major risks and uncertainties faced by the Company IHB is able to cover all of its liabilities. The key financial commitments of the Company are related to investment projects of its subsidiaries. In respect of receivables, the companies form relevant provisions when uncertainty as to their collectibility exists. IHB has minimised payments in currencies other than BGN and EUR and therefore it does not face currency risk. Bulyard Shipbuilding Industry has signed contracts in USD and has payables under delivery contracts in JPY. Measures have been undertaken to hedge the credit risk. IHB has no payables on loans from banks or other financial institutions. The guarantees that IHB has provided for liabilities of subsidiaries are secured. Furthermore, at this stage no risk exists that the subsidiaries may not perform their commitments, which the guarantees have been issued for. At present two out of the three corporate guarantees to Navigation Maritime Bulgare have been repaid as a result of performance of the obligations of Bulyard Shipbuilding Industry. The fall in world stock exchange prices of shares, observed as of the beginning of January 2008, is also observed on the Bulgarian Stock Exchange and affects nearly all shares of Bulgarian companies, in particular the shares of IHB. According to international analysts and experts, there is a risk of recession in USA and worsening of economic indicators worldwide. There are financial crises in USA and some European countries. The prices of energy resources such as oil and raw materials petrol are expected to be variable and volatile and there is a risk of rise in these prices. In case of worsening of world economy, the operations of the companies within IHB group may be exposed to risk. Information about used financial instruments and risk valuation is given in Item 25. Financial instruments of the Notes to the Financial Statements as at 31 December Comments on the risks concerning the company s operations and risk management are given also in Item 5. Financial risk management of the Notes to the Financial Statements as at 31 December Opportunities for investment objectives realization, available funds and possible changes in the structure of operations financing In 2007 IHB covered its operating expenses with own and borrowed funds. The own funds represent operating income. The 2007 income sources of IHB include dividend income received from subsidiaries, followed by income from sale of services, gains on company shares sale and interests. The Holding used some of these funds to finance its investment program. The available funds raised through the bonds issue were used for the purpose as well. In 2007 IHB used borrowed funds in the form of convertible bonds issue at the amount of BGN issued in All bonds were converted on the maturity date in July 2007 and the total issue value was used for increase in the share capital of IHB. The raised funds were used for financing of the investment projects of the Holding and some of its group companies. In August 2007 the procedure related to the second increase in the capital of IHB for 2007 was commenced by virtue of a decision of the General Meeting of Shareholders. The Prospectus for Public Offering of Shares from the capital increase, and namely new ordinary dematerialized voting shares of BGN 1 nominal value and BGN 2.40 issue value each was confirmed by FSC with Decision No 1259-Å dated 3 October On 19 October 2007, an announcement on public offering of IHB shares was published in the State Gazette, Issue No 84 of 19 October 2007 and in the Dnevnik Newspaper, Issue No 204 of 19 October The entire information about IHB capital increase, including terms of trade in rights and subscription of shares, is on the website of IHB Section Investors/ Capital Increase The public offering (subscription) of ordinary dematerialized voting shares of BGN 1 nominal value and BGN 2.40 issue value each, realized during the period 29 October December 2007, was successfully completed. The subscription results are as follows: Total number of subscribed and paid shares: shares; Issue value per share: BGN 2.40; Total amount of subscribed and paid shares received: BGN ; Total public offering costs: BGN By Decision No 22 of 27 December 2007 Sofia City Court entered increase in the capital of IHB from BGN to BGN Through the two capital increases in 2007 IHB raised a total of BGN thousand share capital of BGN 64

67 Consolidated annual management report thousand and additional reserves of BGN thousand. The non-exercised rights of shareholders as at 12 September 2007 were sold at an official auction for the total price of BGN thousand. IHB received the amount in January 2008 and started payments to the holders of non-exercised rights on 4 February IHB has a credit limit, agreed with DSK Bank as of the end of 2006, for issuance of bank guarantees and working capital financing of the Holding and/its group companies at the amount of BGN 4.5 million, BGN 3 million of which is in the form of revolving credit line. In case of necessity, the management uses it to finance the operations of IHB. As a result of the registration at Sofia City Court of the IHB capital increase at the end of December, the available cash as at 31 December 2007 amounts to BGN thousand, BGN thousand of which is in bank deposits and the rest on payment accounts. They will be used for financing the investment projects of IHB and its group subsidiaries in 2008 the building of the three ships ordered by Privat Engineering at Bulyard Shipbuilding Industry, expansion of Dockyard Port Bourgas and others. The receivables of IHB as at 31 December 2007 amount to BGN thousand, including receivables in relation to deferred payments on shares sale agreements of BGN 777 thousand /long-term BGN 363 thousand and shortterm BGN 414 thousand/ and receivables from related parties on granted loans and rendered services of the total of BGN 114 thousand. The others represent receivables on rendered services, refundable taxes, prepaid services, etc. The equity of IHB as at 31 December 2007 amounts to BGN thousand it has increased by BGN thousand or by 143%. The increase is the result of the increase in the share capital by BGN thousand, the premium reserves by BGN thousand and the retained earnings by BGN thousand. The net retained earnings as at 31 December 2007 amount to BGN thousand, including the 2007 profit of BGN thousand. The total liabilities of IHB as at 31 December 2007 amount to BGN thousand, marking a decrease by BGN thousand as compared to those as at 31 December This decrease is the result of the debenture loan repayment /BGN thousand as at 31 December 2006/ due to maturity and conversion of the bonds into shares. The trade and other payables decreased from BGN thousand as at the end of 2006 to BGN 387 thousand as at the end of The payables to related parties of BGN 649 thousand are payables on granted loans, additional contributions in the capital of Dockyard Port Bourgas and others. All payables are short-term except for the long-term payables of BGN 3 thousand. The necessity of borrowed funds will be assessed for each case depending on the particular investments and available funds of IHB and the group. Additional funds will be ensured from banks or investors. Utilization of the funds raised through the two issues of shares in 2007 The funds raised through the bonds issue are used for investments of the holding company and of its subsidiaries mainly in the following priority sectors: maritime business, river cruises and machine building. IHB finances the projects of its group companies in these sectors in the form of granted loans and/ or acquisition of shares in their capitals, including subscription of shares from the increase in their capitals. Priority projects are financed in the order of their arising. The used forms of investment financing and the movement of available free funds of the Holding make it difficult to precisely calculate the debenture loan funds disbursed in relation to the individual projects, some of which undergo changes. Major investments financed with funds raised through the issue: The Holding granted loans, on stage-by-stage basis, to KLVK and Privat Engineering to finance their investment projects in the real estate sector. The two subsidiaries sold the estates purchased in 2005, fully repaid the funds borrowed, while IHB ceased investing in this sector. The accelerated realization of these investments decreased the risk of changes in the market conditions and enable the redirection of these freed funds to other priority sectors and projects in 2006 and 2007; In April 2006 IHB purchased from Dockyard Odessoss its share of 10% in the capital of Bulyard for USD 2 million, thus the interest of the Holding in the company reached 61.50%; In 2006 the subsidiaries Emona Shipping Ltd and Marciana Shipping Ltd agreed the building of two ton multi-purpose ships at Bulyard Shipbuilding Industry. The vessels are intended for unrestricted region of navigation and shipping of bulk freights and containers. The value of each ship is EUR 13.5 million. The payments are in EUR and USD. In August 2006 the Holding partially financed the second advance payment for the first ship in the form of a loan of USD 480 thousand. As at 31 December 2006 the remaining amount due under the loan amounts to USD 55 thousand; In March 2006 IHB granted a loan of BGN 110 thousand to Dockyard Port-Bourgas for construction of a new road to the port, which was repaid. During the second half of the year the company received another financing from the Holding at the amount of EUR 224 thousand for the project for expansion of the port terminal; 65

68 At the beginning of 2006 IHB granted a loan of BGN 600 thousand to ZMM Bulgaria Holding to support it in its participation in the privatization of Balkancar Sredets, Sofia. ZMM Bulgaria Holding established a new 100% owned subsidiary under the name of Bulkari, admitted by the Privatization Agency to participate in the publicly announced tender, which was classified second. In July 2006, the funds of the Holding were fully reimbursed; In September 2006 IHB granted a loan of BGN 120 thousand to Elprom ZEM, which was to be repaid by 31 March Regarding some of the priority investment projects, besides funds collected through the bonds issue, IHB used its own funds depending on the amount of the investment and cash and cash equivalents available as at the particular moment. The funds raised through the second issue of shares in 2007 will be used for commitments on capital expenses made by IHB. Over the period capital expenses will be incurred to finance the projects in implementation and the new projects of IHB and its subsidiaries, including extension of the port terminal in Bourgas and financing the next stages of the building of the three multi-purpose ships. Capital expenses may be incurred in conclusion of contracts for new ships building, concession of passenger ports along the Danube, etc. The capital expenses are related to the development priorities of IHB in mediumterm aspect and the investment purposes described in the Foreseen Development of the Company Item. Important events occurred after the annual closure of accounts On 7 January 2008 the Central Depository registered the issue of shares resulting from the second increase in the capital of IHB by a registration document. By a decision of 23 January 2008 the Financial Supervision Commission entered into the Public Register the new issue of shares issued by IHB at the amount of BGN divided into ordinary shares of BGN 1 nominal value each. On 30 January 2008 the new issue of shares was listed on BSE Sofia. On 4 February 2008 the payment of amounts from the sale at an official auction of the non-exercised options of IHB issued in relation to the capital increase in 2007 started. The proceeds from the sale of the non-exercised options of shareholders amount to the total sum of BGN This amount was transferred to an account of IHB by the Central Depository in January 2008 and, therefore, their total amount has not been reported in the Balance Sheet of the Company as at 31 December 2007 as available funds and a liability for payments to shareholders who have not exercised their options. Until 4 May 2008 due amounts will be paid in the whole country, and after this date at the business and financial centres in Sofia. On 4 February 2008 the third corporate guarantee of EUR and USD , issued by IHB in relation to ship building contracts signed by Bulyard Shipbuilding Industry and Navigation Maritime Bulgare, was closed. The guarantee was issued in relation to the third advance payment under a contract for building of ship with construction No 515 and closed due to performance of contractual obligations. This was the third and last corporate guarantee issued by IHB in relation to the aforementioned contracts for the building of ships with construction No 516, No 457 and No 515. IHB commenced investment in the building of two new ships type Future 56, dwt, at Bulyard Shipbuilding Industry at the total value of EUR 60 million. The investment will be financed through the subsidiary KLVK. The ships are to be delivered in May 2010 and The first payment of EUR 3 million has been already paid. On 21 January 2008, Bulyard Shipbuilding Industry commissioned ship with construction No

69 Consolidated annual management report Important scientific research and developments IHB did not carry out important scientific research and developments in IHB Group companies have been permanently carrying out development activities as to their products and technologies. The most innovation efforts of the teams are directed at improvement of offered products and certain processes of their development through use of modern materials and technologies. Shipbuilding The two ships named Emona and Marciana will be the improved design version of ship with construction No 283. Classification and certification The technology for inspection and classification of ships and a web-based system for inspection management, developed by Bulgarian Register of Shipping in 2007 under a contract signed with the Small and Medium-Sized Enterprises Promotion Agency, is the result of the research and development activities of the company s team and top experts in this field from the Technical University in Varna. In this sense, it will be a know-how bearer but it is not subject to registration in compliance with the Law on Copyright and Adjacent Rights. Machine building The companies within ZMM Bulgaria Holding group offer on the market ranges of basic products, which are expanded through improvement and further development on annul basis. At Mashstroy and ZMM Sliven there are developments in progress for improvement of the offered universal lathes with respect to expansion of the range of heavy machines, models with increasing of centre distance with over 5 m and offering of machines with lighter mandrel opening, the range of CNC machines and development of machines with cyclic program operation. Leyarmach mastered the spheroidal-graphite cast iron technology. Elprom ZEM has deployed a new technology for insulation of rods for hydro-generators. A new insulation system for high voltage stator windings for hydro-generators, developed by the experts of the Company and Isovolta Austria in , ensures the possibility for increasing the energy efficiency of hydro-generators up to 15% and their safety and reliability, and longer guarantee period from 18 to 48 months. On 29 March 2007 Elprom ZEM, in cooperation with NEC EAD, patented the development under the name of Stator Unit of High Voltage Generator and Method of Production. Furniture poduction Due to the furniture market dynamics, Augusta Mebel, Shoumen, made significant changes in the range of offered products over the last years. New modern furniture is continuously developed but this is usual for a company operating in this sector. Foreseen development of the company Major trends in the activities of IHB The major trends regarding the activities of the Holding in the next years are expected to be related to: acquisition, assessment and sale of interests in other companies; management of the companies in its own portfolio, where IHB can exercise control, directly or through related parties; establishment of new companies; investment in the portfolio companies, where IHB has long-term interests; financing of the companies, where the Holding owns interests. The major strategic interests of IHB are in the following sectors and activities: maritime business shipbuilding and ship repair, port operations, classification and certification, sea transport; river cruises; machine building. Plans of material importance related to IHB operations Shipbuilding, ship repair and port operations IHB intends to increase the investments in this sector through supporting the investment projects of the companies operating therein: Bulyard Shipbuilding Industry, Dockyard Port- Bourgas and Odessoss PBM. One of the key investment objectives is the implementation of the project for extension and modernization of the port terminal at Dockyard Port Bourgas in compliance with the directions provided for in the National Program for Development of Bulgarian Ports. At the beginning of 2007 the preliminary research was approved, and in July the General Port Development Plan, developed by Transproject Sofia In 2007 the activity restructuring is expected to be completed gradual suspension of ship repair and focusing of efforts on port operations, shifting of the floating dock to Bulyard Shipbuilding Industry or its sale based on market assessment made. As initial financing of the project, the Holding obtained a loan of EUR 224 thousand, and leasing schemes were agreed for part of the new equipment purchased in The plan envisages extension of the existing quay wall with 180 metres westwards, including water area according to special technology separation by feather-points. Thus the total port area will reach some 67

70 80 decares. Strengthening works will be done on the old quay wall as well. The ship lots will become 3, each of 125 metres. The project also envisages the construction of additional quay. In the western section of the port there will be built special grains terminal, while the remaining area will be used for procession and storage of general freight. The project, the value of which is some BGN 23 million, is to be implemented within 3 years and a tender for its implementation has been planned to be announced. Dockyard Port Bourgas received initial financing from IHB in the form of a loan of EUR 224 thousand, and lease schemes were agreed for part of the equipment purchased in Some EUR 2 million of the funds raised through the last IHB capital increase is planned to be invested in this project. Sea transport In 2008 the building of the three multi-purpose ships owned by the subsidiaries of Privat Engineering will continue. Some of the funds raised though the new issue of shares of IHB will be used for financing their building. The two ton ships are expected to be commissioned after delivery ship No 288 is to be delivered in December 2008 and ship No 289 in The third ton multi-purpose ship with construction No 458 will be delivered in The scope of activity of the newly established company IHB Shipping Co EAD includes commercial sea navigation and related production and technical, forwarding and intermediation activities, ship brokerage and agency, etc. The company was established with the purpose of exercising control in the process of building of the ships ordered for the IHB group companies, management and recruitment of crew. It is possible that new increases in the capital of Privat Engineering may be required in the future, and related decisions will be disclosed in due time. IHB intends to strengthen its position on the sea transport market gradually and to continue building ships for the needs of its companies. Development of river cruises Offering cruises by 5 ships along the Rhein, Main, Mosel and Danube Rivers, the ambitions of the management of Dounav Tours and its owners are directed at: Increase of the occupancy of the bed base before, during and after the tourist season, including using some of the ships as hotels out of the season; Increase of the number of cruises through organization of additional excursions in the days of Christmas and New Year holidays; Development of own pontoon in Rousse along Danube; Readiness for concession of the passenger ports along Danube, the ones in Rousse and Vidin in particular. The decision on financing of the above-listed priorities will depend on the needed investments and available funds of the Company as at each particular moment. Changes in the price of the company s shares In 2007 the price of IHB shares marked an increase from BGN 6.00 to BGN per share at the end of the year or a rise of 89%. The indices of BSE Sofia marked an increase for the same period SOFIX by 42%, BG40 by 158 % and BGTR30 by 9%. The shares of IHB enjoyed extremely high popularity among analysts and investors. The shares remained one of the most liquid items on BSE- Sofia during the whole year. On 1 January 2007 the shares of IHB were included in the Dow Jones indices: The index Dow Jones STOXX EU Enlarged Total Market Index. The index belongs to the Dow Jones STOXX /www. stoxx.com/ indices family, which cover Europe, the Eurozone, the region of the countries that became EU members /EU Enlarged region/, America and Asia /the Pacific Ocean/. The index Dow Jones STOXX EU Enlarged TMI is a sub-class of Dow Jones World Index. As at 1 January 2007 it includes 130 companies established in Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Bulgaria and Romania, the last two having being included on 1 January The indices Dow Jones Wilshire Global Total Market IndexSM, Dow Jones Wilshire Bulgaria IndexSM, Dow Jones Wilshire Specialty Finance IndexSM. The index Dow Jones Wilshire Global Total Market IndexSM includes the national indices Dow Jones Wilshire for 59 countries, including ones with developed and well-developed markets. The index for Bulgaria is Dow Jones Wilshire Bulgaria Index. It belongs to the group of regional indices that also serve as basis of a number of indices on regional principle. Dow Jones Wilshire Specialty Finance Index belongs to the group of indices by sector as it is a sub-sector index included in the General Financial Indices Sector, which forms a part of the Financial Services Sub-sector included in the Finances Sector. The shares of IHB are included in a number of other Dow Jones Wilshire indices measuring through specific sections of the global capital market. On 1 November 2007 the shares of IHB were included in another Dow Jones index - Dow Jones STOXX Balkan 50 Equal Weighted Index, which reflects the movements of the 50 most significant and most liquid shares traded on the Balkan exchanges. The companies are Croatian, Greek, Macedonian, Romanian, Serbian, Slovenian and Turkish. To ensure balanced presence of all mentioned countries, the index includes the top 10 companies in Greece and Turkey and the 5 largest 68

71 Consolidated annual management report public companies of each of the other 6 countries. The Bulgarian companies IHB, Bulgarian Telecommunication Company, Sopharma Chimimport and CB Central Cooperative Bank. The weight of each component (company) in the structure of Dow Jones STOXX Balkan 50 Equal Weighted Index is fixed and equal to 2%, as the index is weighted average and comprises 50 public companies. On 26 February 2007 IHB was included in the SOFIX index following its first ranking in the list of the other index of BSE-Sofia - BG40. IHB is the company with the largest free float 57% of the companies is included in the SOFIX index. As of 3 September 2007 IHB is included in the newly created BG TR30 index based on the change in price of shares included in the index with equal weight of each included issue. In January 2007 the changes in the structures of BSE Sofia markets and the considerably higher criteria regarding official markets came into force. The shares of IHB meet the highest criteria and remained tradable on Segment A of the official market. The 2007 data on the trading of shares of IHB /stock exchange code IHLBL/ are as follows: Statistics for the period 1 January December 2007 / source: BSE- Sofia/ Initial price opening price (BGN) Last average weighted price (BGN) Maximum price (BGN) Historical: For accounting purposes * Minimum price (BGN) Historical: For accounting purposes * Average weighted price in 2007 (BGN) For accounting purposes * Percentage change Value change (BGN) Number of transactions in 2007 Traded volume in 2007 (number of shares) Average monthly volume 2007 (number of shares) Value Turnover in 2007 (BGN) Average monthly turnover 2007 (BGN) * The values have been adjusted due to capital increase % Date Graph of the movement of the price of shares of IHB during the period 1 January December 2007 As of the beginning of 2008 there is downturn on the Bulgarian and world securities markets. As of the end of 2007 till 20 March 2008 the indices fell as follows: SOFIX by 30.40%, BG40 by 32.84% and BGTR30 by 27.03%. The price of IHB shares also moved in this direction and the price per share fell by 33.95% to BGN It should be mentioned that the new issue of shares / shares/ was registered at the Central Depository and BSE-Sofia in January Data on the trading of the company s bonds In 2007 the convertible bonds of IHB were traded on the bonds market of BSE-Sofia but no transactions with them were concluded from the beginning of the year till their maturity date - 2 July Information about holding of and trading in own shares /Art. 187e of the Law on Commerce/ The Company has never hold and does not hold own shares. 69

72 Consolidated annual management report Shareholding structure as at 31 December 2007 The capital of IHB at the Central Depository as at 31 December 2007 is BGN The new increase in the capital was registered on 7 January As at 31 December capital: BGN As at 7 January capital: BGN Shareholders All Legal entities Individuals Number of shareholders Number of shares % of the capital 100,00% 74.30% 25.70% Number of shareholders Number of shares % of the capital 100,00% 83.45% 16.55% Shareholders owing over shares /0004%/ Shareholders legal entities owing over shares % 74.26% % 83.41% Shareholders individuals owing over shares % % Shareholders foreign persons owing over shares, including % % Legal entities, including: Individuals owing over shares inclusive Shareholders owing over 5%, including Venside Enterprise Limited Bulls AD DZH AD Chimimport AD Shareholders owing less than 5% % 0.14% 48.54% 30.41% 12.86% 5.27% % % 0.06% 58.09% 30.79% 12.55% 5.58% 9.17% 41.91% As at the date of preparation of this Report Chimimport AD held, through the controlled company Central Cooperative Bank AD - Sofia, shares, representing 5.35%. Information about pending litigation, administrative or arbitration proceedings concerning payables or receivables of IHB at the minimum amount of 10% of the equity None. 70

73 Industrial Holding Bulgaria PLC Consolidated Financial Statements for the year ended 31 December 2007 With Independent Auditors Report Thereon

74 Consolidated Financial Statements Independent Auditors Report To the shareholders of Industrial Holding Bulgaria PLC Report on the Financial Statements We have audited the accompanying consolidated financial statements of Industrial Holding Bulgaria PLC, ( the Company ) which comprise the consolidated balance sheet as at 31 December 2007, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, adopted by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. Except as described in the Basis for qualification in our Оpinion paragraph, we conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Basis for Qualified Opinion In the consolidated financial statements of the Company as at 31 December 2007 work-in-progress amounts to BGN 22,649 thousand. Part of the work-in-progress, amounting to BGN 14,733 thousand, relates to uncompleted ship construction in Bulyard Shipbuilding Industry EAD. Using the current accounting processes of the company, the total amount of costs allocated to each ship construction contract can be sufficiently and reasonable determined and accounted for when the construction of the ship is finished. Аs at 31 December 2007 Bulyard Shipbuilding Industry EAD is in the process of introducing accounting procedures to determine and account for the costs attributable to each stage of construction of the ship on a forecasted basis. Therefore, due to the long period of construction of ships and transition in different accounting years, we were not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for work-inprogress and related impact on the income statement for the year ended 31 December Qualified Opinion In our opinion, except for the effects of such adjustments, if any in Bulyard Shipbuilding Industry EAD, as might have been determined to be necessary to work-in-progress, changes in inventory, revenue, income taxes and net profit, the consolidated financial statements give a true and fair view of the financial position of the Company as at 31 December 2007, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards, adopted by the European Union. 72

75 Consolidated Financial Statements Report on Other Legal and Regulatory Requirements Annual report of the activities of the Company in accordance with the requirements of article 33 of the Accountancy Act As required under the Accountancy Act, we report that the historical financial information prepared by Management and disclosed in the annual report of the activities of the Company, as required under article 33 of the Accountancy Act, is consistent, in all material aspects, with the financial information disclosed in the audited financial statements of the Company as of and for the year ended 31 December Management is responsible for the preparation of the annual report of the activities of the Company which was approved by the Management Board of the Company on 25 April Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 25 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 73

76 Consolidated Financial Statements Consolidated income statement For the year ended 31 December 2007 In thousands of BGN Note Revenue 7 147, ,404 Other operating revenue 8 15,007 2,684 Increase in work- in- progress 9 4,103 4,258 Capital expenses for construction 10 12,947 1,572 Cost of materials 11 (92,938) (75,993) Hired services 12 (33,048) (21,027) Depreciation and amortization (4,500) (3,903) Personnel expenses 13 (31,446) (27,673) Cost of assets sold 14 (1,862) (617) Other operating expenses 15 (3,567) (3,519) Profit from operations 12,082 8,186 Finance income 1,687 3,618 Finance expenses (1,804) (951) Net finance income 16 (117) 2,667 Income from equity accounted associates 20 2,424 1,972 Profit before tax 14,389 12,825 Income tax expense 17 (1,051) (1,789) Profit after tax 13,338 11,036 Attributable to equity holders of the company 12,258 9,647 Minority interest 1,080 1,389 Net profit for the year 13,338 11,036 Basic earnings per share (BGN) The income statement is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 79 to 106. Daneta Zheleva Executive Director Toshka Vassileva Chief Accountant Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 25 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 74

77 Consolidated Financial Statements Consolidated balance sheet For the year ended 31 December 2007 In thousands of BGN Note Assets Property, plant and equipment ,218 56,391 Intangible assets 19 1, Goodwill 19 7,840 6,318 Investments in equity accounted associates 20 11,627 9,077 Other investments Long-term receivables ,185 Total non-current assets 141,048 73,656 Inventories 23 54,765 49,559 Trade and other receivables 24 30,942 33,032 Non-current assets held for sale 25 1,338 - Financial assets held for trade 26-1,361 Cash and cash equivalents 27 86,256 17,310 Total current assets 173, ,262 Total assets 314, ,918 Equity Issued capital 28 43,756 21,003 Share premium 24,503 - Reserves 51,269 15,296 Retained earnings (net) 68,882 56,356 Total equity attributable to equity holders of the company 188,410 92,655 Minority interest 29,155 20,903 Total equity 217, ,558 Liabilities Loans and borrowings 30 7,351 6,757 Other long-term payables Provisions Deferred tax liabilities 33 6,046 1,136 Total non-current liabilities 14,282 8,803 Loans and borrowings 30 4,934 2,892 Debenture loan 30-5,244 Trade and other payables 34 77,205 44,315 Provisions Total current liabilities 82,502 52,557 Total equity and liabilities 314, ,918 The balance sheet is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 79 to 106. Daneta Zheleva Executive Director Toshka Vassileva Chief Accountant Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 25 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 75

78 Consolidated Financial Statements Consolidated statement of cash flows For the year ended 31 December 2007 In thousands of BGN Note Operating activities Net profit for the year 13,338 11,036 Adjustments for: Depreciation and amortisation 18, 19 4,500 3,903 Provisions 468 1,685 Foreign exchange losses, net (778) Interest expense 16 1, Interest income 16 (746) (1,280) (Income)/loss from associates 20 (2,424) (1,972) (Gain)/loss on disposal of subsidiary - (549) (Gain)/loss on sale and writing-off of property, plant and equipment 8.а (12,890) (1,541) (Loss)/gain derived from investments available-for-sale - (6) (Loss)/gain derived from investments held for trading (253) (338) Income tax expense 17 1,051 1,789 Operating profit before changes in working capital and provisions 4,341 12,575 (Increase)/decrease in trade and other receivables (47,175) (12,963) (Increase)/decrease in inventories (5,206) (19,355) Increase/(decrease) in trade payables, other payables, and provisions 32,383 2,997 Cash generated from operations (15,657) (16,746) Interest paid (1,096) (370) Income taxes paid (1,321) (4,664) Cash flows from operating activities (18,074) (21,780) Investing activities Proceeds from sale of plant and equipment 16,323 22,950 Proceeds from sale of shares in subsidiaries Interest received 722 1,280 Proceeds from sale of investments available for sale - 34 Proceeds from sale of investments held for trading 1, Sales of investments in associates Proceeds from repaid loans 6,552 - Loans given (326) (6,259) Acquisition of property, plant and equipment (7,479) (4,160) Acquisition of minority interest (8,491) (1,509) Acquisition of other investments (125) - Dividends received Cash flows from investing activities 9,333 13,716 76

79 Consolidated Financial Statements Consolidated statement of cash flows, continued For the year ended 31 December 2007 In thousands of BGN Note Financing activities Share issue 47,123 - Loans received 29,273 9,955 Loans repaid (25,568) (2,850) Payment of finance lease liabilities (700) - Other financial expenses paid (157) (637) Dividends paid (267) (286) Cash flows from financing activities 49,704 6,182 Net increase in cash and cash equivalents 40,963 (1,882) Cash and cash equivalents at 1 January 27 12,593 14,475 Cash and cash equivalents at 31 December 27 53,556 12,593 The Statement of cash flows is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 79 to 106. Daneta Zheleva Executive Director Toshka Vassileva Chief Accountant Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 25 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 77

80 Consolidated Financial Statements Consolidated statement of changes in equity For the year ended 31 December 2007 In thousands of BGN Note Share capital Share premium Additional and legal reserves Revaluation reserves Retained earnings Total Group Minority interest Total Balance as at 31 December ,003-6,785 6,950 47,321 82,059 21, ,362 Changes in accounting policy ,065 Adjusted balance as at 1 January ,003-6,785 6,950 47,812 82,550 21, ,427 Recognised profit for the current year ,647 9,647 1,389 11,036 Movement from changes in tax rate Movement in the revaluation reserve from (155) sale of assets Allocation of profit for reserves - - 1,190 - (1,190) Other movements (68) (68) Dividends paid (292) (292) Acquisition of minority interest (2,460) (2,460) Sale of minority interest Balance at 31 December ,003-7,975 7,321 56,356 92,655 20, ,558 Balance as at 1 January ,003-7,975 7,321 56,356 92,655 20, ,558 Recognized profit for the current year ,258 12,258 1,080 13,338 Share issue 22,753 24, ,256-47,256 Share capital increase of a subsidiary ,925 1,925 Increase in share holdings in a subsidiary (263) - Revaluation ,557-39,557 11,059 50,616 Tax effect from revaluation 17, (3,956) - (3,956) (1,106) (5,062) Movement in the revaluation reserve from (323) sale of assets Allocation of profit for reserves (488) Other movements - - (71) Dividends paid (273) - Acquisition of minority interest (4,172) (4,172) Foreign currency translation difference (23) (23) - (23) Balance at 31 December ,756 24,503 8,520 42,749 68, ,410 29, ,565 The statement of changes in equity is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 79 to 106. Daneta Zheleva Executive Director Toshka Vassileva Chief Accountant Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 25 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 78

81 Consolidated Financial Statements Notes to the consolidated financial statements Note Page 1. Reporting entity Basis of preparation Significant accounting policies Determination of fair values Financial risk management Segment Reporting Revenue Other operating revenue Increase/(decrease) in work- in- progress Capital expenses for construction Expenses for materials Expenses for hired services Personnel expenses Cost of assets sold Other operating expenses Net finance income/(expenses) Income tax expense Property, plant and equipment Intangible assets Investments in equity accounted associates Other investments Long term receivables Inventories Trade and other receivables Non-current assets held for sale Financial assets held for trade Cash and cash equivalents Share capital and reserves Earnings per share Loans and borrowings Other long-term payables Provisions Deferred tax assets and liabilities Trade and other payables Financial instruments Related parties Subsequent events Contingent liabilities

82 Consolidated Financial Statements 1. Reporting entity Industrial Holding Bulgaria PLC (the Company or the Holding) is a public limited company domiciled in Bulgaria and with registered address: Sofia 1000, 47, Vassil Levski Blvd. The consolidated financial statements of the Company for the year ended 31 December 2007 comprise the financial statements of the Company and its subsidiaries (together referred to as the Group ) and the Group s interest in associates. The operations of the Group include production and trading of heavy machinery, shipbuilding, shiprepair and transport, furniture production, operations with real estates, port operations, support activities from/to vessels and vehicles, maintenance and repair and other services. Industrial Holding Bulgaria PLC as well as some of the subsidiaries are traded on the Bulgarian Stock Exchange - Sofia. 2. Basis of preparation (а) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), prepared by the International Accounting Standards Board (IASB) and adopted by the European Union. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: Land, buildings, plant, machinery and equipment are presented at a revalued amount, reduced with the accumulated depreciation and impairment losses Financial instruments at fair value through profit or loss are measured at fair value Available-for-sale financial assets are measured at fair value. (c ) Functional and presentation currency These consolidated financial statements are presented in Bulgarian Lev (BGN), which is the Company s functional currency. All financial information presented in leva has been rounded to the nearest thousand. (d) Use of estimates and judgements The preparation of financial statements in compliance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: Note 18 Property, plant and equipment Note 19 Intangible assets Note 24 Trade and other receivables Note 26 Financial assets held for trade Note 32 Provisions Note 33 Deferred tax assets and liabilities 3. Significant accounting policies Except as described below, the accounting policies have been consistently applied by Group enterprises and are consistent with those used in the previous year. When the presentation or classification of items in the financial statements was amended, comparative amounts have been reclassified, to ensure comparability with the current period. Such reclassifications have resulted from the more detailed presentation of balance sheet and income statement items in the notes to the financial statements. Change of accounting policy In 2006, the company Bulyard Shipbuilding Industry AD has changed its accounting policy regarding the accounting of indirect production costs. In prior periods, the Company recorded partially its indirect production costs as administrative expenses, and charged them as expenses for the period in which they occurred. As of 1 January 2006, those indirect production costs that were previously accounted as administrative expenses were booked as part of the cost of production and services for which part was recognized as work-inprogress in the balance sheet. Management assessed the new policy as being more appropriate. The change in accounting policy has been recognized and the comparative information for 2005 has been restated. The opening balance of retained earnings for 2006 has been increased by BGN 1,065 thousand. In 2007 there were no changes in the accounting policy of the Group. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are the enterprises controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (ii) Associates Associates are those enterprises in which the Group has significant influence, but not control over the financial and operating policies. The consolidated financial statements include the Group s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group s share 80

83 Consolidated Financial Statements of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. (iii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates are eliminated to the extent of the Parent interest in the enterprise. Unrealized gains arising from transactions with associates are eliminated against the investment in associates. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the functional currency at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to BGN at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in the income statement. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to BGN at exchange rates at the reporting date. The income and expenses of foreign operations are translated to BGN at exchange rates at the dates of the transactions. Foreign currency differences from translation are recognised directly in equity. (c) Financial instruments Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition non-derivative financial instruments are measured as described below. A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e., the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group s obligations specified in the contract expire or are discharged or cancelled. (i) Held-to-maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-tomaturity. Held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. (ii) Available-for-sale financial assets The Group s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, and foreign exchange gains and losses on availablefor-sale monetary items, are recognised directly in equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. (iii) Investments at fair value through profit or loss An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments 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. Upon initial recognition, attributable transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. (iv) Trade and other receivables Trade and other receivables are stated at amortised cost less any amounts, which are not expected to be collected. The latter are presented as impairment losses on the basis of the calculated recoverable amount of trade receivables. (v) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. 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 statement of cash flows. (vi) Loans and borrowings Interest-bearing borrowings are recognised initially at cost, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. (vii) Trade and other payables Trade and other payables are stated at their amortised cost. 81

84 Consolidated Financial Statements (d) Property, plant and equipment (i) Recognition and measurement Measurement at initial recognition At initial recognitions, items of property, plant and equipment are measured at cost, which comprises its purchase price, including import duties and non-refundable purchase taxes and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Measurement after recognition The group has chosen the revaluation model of IAS 16 for carrying land, buildings, plant and machinery at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subseqent accumulated impairment losses. The fair value of items of land, buildings, plant and machinery is usually determined from market-based evidence by an appraisal that is undertaken by professionally qualified valuers. The revaluation of items of land, buildings, plant and machinery is usually made every 5 years. An additional revaluation can be made when the fair value substantially changes from the carrying value within a shorter period. The Group s land, buildings, plant and machinery were revalued to their fair market value based on estimates, by an independent registered valuer as at 31 December Items of vehicles, fixtures and fittings, other tangible assets and assets under construction are stated in the balance sheet at their acquisition cost less accumulated depreciation and impairment losses. (ii) Reclassification to investment property Property that is being constructed for future use as investment property is accounted for as property, plant and equipment until construction or development is complete, at which time it is remeasured to fair value and reclassified as investment property. Any gain or loss arising on remeasurement is recognised in profit or loss. When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified as investment property. Any gain arising on remeasurement is recognised directly in equity. Any loss is recognised immediately in profit or loss. (iii) Subsequent expenditure Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the income statement as an expense as incurred. (iv) Depreciation Depreciation is recognised in the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the assets are as follows: buildings 7-50 years plant and equipment 4 20 years vehicles 2 10 years fixtures and fittings 5 10 years Depreciation methods, useful lives and residual values are reassessed at the reporting date. (e) Intangible assets (i) Goodwill Acquisitions Goodwill represents the excess of the cost of the acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Acquisitions of minority interests Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment. (ii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see below) and impairment losses. Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred. (iii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (iv) Amortisation Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives of intangi- 82

85 Consolidated Financial Statements ble assets, other than goodwill, from the date that they are available for use. The estimated useful lives are as follows: patents and trademarks 7 years software products 5 years (f) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and, except for investment property, the leased assets are not recognised on the Group s balance sheet. Investment property held under an operating lease is recognised on the Group s balance sheet at its fair value. (g) Inventories Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Write downs are recognised when the cost of inventories exceeds their net realizable value. Write downs are recognised in profit or loss. The cost of inventories is based on the weighted average principle for materials and work in progress. In the case of manufactured inventories (produced goods), cost also includes direct labour, social security and depreciation expenses. These expenses are allocated to products based on normal operating capacity. (h) Impairment (i) Financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value. Individually significant financial assets are tested for impairment on a individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in the income statement. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to the income statement. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity. (ii) Non-financial assets The carrying amounts of the Group s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. (i) Share capital and reserves The capital of the Group is presented at historical cost at the date of registration. Additional and legal reserves comprise those reserves of the parent company, as well as the share of subsidiaries reserves allocated after the date of acquisition. Revaluation reserves are allocated as at the date of revaluation of property, plant and equipment. (j) Employee benefits (i) Defined contribution plans According to the current legislation, the Government of Bulgaria is responsible for providing pensions in Bulgaria under a defined contribution pension plan. The obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss when they are due. (ii) Annual paid leave The Company recognises as a liability the undiscounted amount of the estimated costs related to annual leave expected to be paid in exchange for the employee s service for the period completed. (iii) Other long-term employee benefits The Group has an obligation to pay retirement benefits to 83

86 Consolidated Financial Statements those employees, who retire with the Group in accordance with the basic provisions of art.222 Para 3 of the Bulgarian Labor Code. According to the provisions of the Labor code, on termination of the labor contract of a worker or an employee of the Group who has become entitled to retirement, the Group is due to pay him/her a compensation amounting to his/her double gross monthly salary. If a worker or an employee has work experience of 10 or more years in the company as at the date of retirement, he or she is entitled to compensation amounting to 6 gross monthly salaries. At each balance sheet date the management makes an approximate estimation of the potential compensations due to employees, using reports from actuaries. (k) Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (i) Warranties A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. (ii) Restructuring A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. (iii) Site restoration In accordance with the Group s published environmental policy and applicable legal requirements, a provision for site restoration in respect of contaminated land, and the related expense, is recognised when the land is contaminated. (iv) Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. (l) Revenue (i) Goods sold Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods. (ii) Services rendered Revenue from services rendered is recognized in the income statement in proportion to the stage of completion of the transaction at the balance sheet date. The stage of completion is assessed by reference to the costs incurred compared to the total expected costs under the contract. (iii) Construction contracts As soon as the outcome of a construction contract can be estimated reliably, contract revenue and expenses are recognised in the income statement in proportion to the stage of completion of the contact. The stage of completion is assessed by reference to surveys of work performed. An expected loss on a contract is recognised immediately in the income statement. (iv) Rental income Rental income from investment property is recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. (m) Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed. (n) Finance income and expenses Finance income comprises interest income on funds invested, dividend income, gains on the disposal of availablefor-sale financial assets, changes in the fair value of financial assets at fair value through profit or loss, foreign currency gains, and gains on hedging instruments that are recognised in profit or loss. Interest income is recognised as it accrues, using the effective interest method. Dividend income is recognised on the date that the Group s right to receive pay- 84

87 Consolidated Financial Statements ment is established, which in the case of quoted securities is the ex-dividend date. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, foreign currency losses, changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognised on financial assets, and losses on hedging instruments that are recognised in profit or loss. All borrowing costs are recognised in profit or loss using the effective interest method. (o) Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement, except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. (p) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group s primary format for segment reporting is based on business segments. (q) Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees. (r) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2007, and have not been applied in preparing these consolidated financial statements: IFRS 8 Operating Segments introduces the management approach to segment reporting. IFRS 8, which becomes mandatory for the Group s 2009 financial statements, will require the disclosure of segment information based on the internal reports regularly reviewed by the Group s Chief Operating Decision Maker in order to assess each segment s performance and to allocate resources to them. The management does not expect IFRS 8 to have significant effect on the Company s financial statements disclosures. Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised IAS 23 will become mandatory for the Company s 2009 financial statements and will constitute a change in accounting policy for the Company. In accordance with the transitional provisions the Company will apply the revised IAS 23 to qualifying assets for which capitalisation of borrowing costs commences on or after the effective date. The Company is currently assessing the effect of the revised standard. IFRIC 11 IFRS 2 Company and Treasury Share Transactions (effective for reporting periods commencing on or after 31 March 2007) requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments are obtained. IFRIC 11 will become mandatory for the Company s 2008 financial statements, with retrospective application required. It is not expected to have any impact on the financial statements. IFRIC 12 Service Concession Arrangements (effective 1 January 2008) provides guidance on certain recognition and measurement issues that arise in accounting for public-toprivate service concession arrangements. IFRIC 12, which becomes mandatory for the Company s 2008 financial statements, is not expected to have any effect on the financial statements. IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes for their customers. It relates to customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13, which becomes mandatory for 85

88 Consolidated Financial Statements the Company s 2009 financial statements, is not expected to have any impact on the financial statements. IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective 1 January 2008) management estimates that IFRIC 14 is not expected to have any effect on the Company s financial statements due to the Company s transactions. 4. Determination of fair values A number of the Group s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) Property, plant and equipment The fair value of property, plant and equipment are presented on market values determined by an independent registered valuer. (ii) Investments in equity and debt securities The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date. The fair value of held-to-maturity investments is determined for disclosure purposes only. (iii) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements. 5. Financial risk management The Group has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market risk This note presents information about the Group s exposure to each of the above risks, the Group s objectives, policies and processes for measuring and managing risk, and the Group s management of capital. Further quantitative disclosures are included throughout these financial statements. The management has overall responsibility for the establishment and oversight of the Group s risk management framework. The Group s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s receivables from customers and investment securities. Trade receivables The Group s exposure to credit risk is influenced mainly by the individual characteristics of each customer. This exposure may also depend on the default risk of the industry and the internal market on which the Group operates. In order to diversify the risk the Group manages the risk for each sector in conformity with its weight in the portfolio of Industrial Holding Bulgaria PLC. Because of that the Group diversifies its risk. The credit policy determines that each new customer is analysed individually for creditworthiness before the Group s standard payment and delivery terms and conditions are offered. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Investments The Company invests primary in businesses and companies which it controls and could establish their development strategy. In its portfolio construction the Group invests only in liquid securities. Guarantees The Group s policy is to provide financial guarantees only upon approval from its management board. At 31 December 2007 the Group has provided guarantees for liabilities to third parties as disclosed in note 38. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 30 days, including the servicing of financial obligations; 86

89 Consolidated Financial Statements this excludes the potential impact of extreme circumstances that cannot reasonably be predicted. The Group management supports the efforts of its subsidiaries to receive bank credits for investments and to use the opportunities, provided by revolving credit lines, for working capital management. The amount of borrowed capital is maintained at a certain level and new borrowing is undertaken only after its economic efficiency is proved by the subsidiary. Borrowed capital improves the Company liquidity and is essential for the operations growth. In the last years the management policy aims the Group to obtain new funds from the capital markets by issuing shares, bods and other similar financial instruments. New funds are invested in the subsidiaries by providing loans in order to finance their projects and by participating in the subsidiaries share increases. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Currency risk In order to minimise the exposure to currency risk the management of the Group reduced to a minimum payments in currencies other than the Bulgarian lev (BGN) or Euro (EUR). Some of the companies in the Group are exposed to a limited currency risk mainly due to purchases and/or sales and/or loans in currencies other than the functional currency. A Group tendency is to deal in BGN or EUR. Bulyard Shipbuilding Industry AD has contracts in U.S. Dollars (USD) and Japanese yen (JPY). There are measures undertaken for hedging the currency risk. Interest rate risk The group is exposed to interest rate risk. There are loans with flexible interest rates corresponding to the current market prices. To reduce the interest rate risk exposure, the Company is trying to increase the proportion of loans with fixed interest. 6. Segment reporting Segment information is presented in respect of the Group s business segments. The format is based on the Group s management and internal reporting structure. Inter-segment pricing is determined on an arm s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise goodwill, minority interest, loans and tax liabilities. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. Business segments The Group comprises the following main business segments: Machine building. The production and sale of metal-cutting machines, production, repair and sales of electric machines and foundry. Shipbuilding and transport. The production and reconstruction of ships and all types of vessels, as well as related services, transport services, port activities and classification and certification. Other operations include provision of consulting services, production of furniture, real estate operations and others. Geographical segments All of the segments are located and operate in the geographical area of Bulgaria. Capital management The management s policy is to maintain a strong capital base so as to maintain owners and market confidence and to sustain future development of the business. The Company seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. In 2007 the Group s return on equity is 6.51% (2006: 10.41%). There were no changes in the Company s approach to capital management during the year. The Company is not subject to contractual or legally imposed capital requirements. 87

90 Consolidated Financial Statements Business segments Machine building Shipbuilding & transport Other operations Eliminations Consolidated In BGN thousand Total revenue from external customers 57,029 49, ,521 80,070 4,843 5, , ,088 Inter-segment revenue (561) (756) - - Total revenue 57,029 50, ,524 80,070 5,401 5,728 (561) (756) 162, ,088 Profit from operations 6,940 5,450 4,100 1,189 1,042 1, ,082 8,186 Net financing costs (117) 2,667 Income/(loss) from associates - - 2,424 1, ,424 1,972 Income tax expense (1,051) (1,789) Net profit for the year 13,338 11,036 Segment assets 75,781 47, ,837 86,974 56,904 18, , ,239 Investment in associates ,627 9, ,627 9,077 Unallocated assets ,171 12,602 Total assets , ,918 Segment liabilities 15,363 10,882 65,498 31,874 2,338 2,716 83,199 45,472 Loan liabilities ,285 14,893 Income tax liabilities , Total liabilities 96,597 61,360 Capital expenditure 4,599 3,870 10,543 5,576 7, ,178 9,615 Depreciation 1,926 1,672 2,214 1, ,322 3,775 Amortisation Revenue In BGN thousand Note Sale of production 51,247 44,172 Shipbuilding 7a 76,197 66,439 Sale of services 10,665 10,075 Ship repair 3,827 8,466 Port activities 1, Sale of goods and materials 3,552 3, , ,404 7a. As at 31 December 2007 revenues from construction of ship with Hull number 288, commission by a subsidiary, are not recognized in the financial statements. Revenues of Bulyard Shipbuilding Industry AD in the amount of BGN 6,738 thousand are eliminated and the recognized expenditure is reported in note 10 Capital expenses for construction. 8. Other operating revenue In BGN thousand Note Gain on disposal of property, plant and equipment 8a 12,890 1,541 Other revenue 2,117 1,143 15,007 2,684 88

91 Consolidated Financial Statements 8a. Gain on disposal of property, plant and equipment In BGN thousand Income from sale of non-current assets 16,479 2,093 Carrying amount of assets sold (3,589) (552) 12,890 1,541 Gain on disposal of property, plant and equipment is mainly due to: sale of floating dock, property of Dockyard Port-Burgas AD due to discontinuance of ship repair activities and concentrating on port activities; sale of building and land, property of Bulyard Shipbuilding Industry AD; sale of building and land, property of Mashstroy PLC. 9. Increase in work- in- progress In BGN thousand Mashstroy PLC 287 (389) Leyarmash AD (169) (16) ZMM Sliven AD (24) 188 Augusta Mebel AD (141) 188 Dockyard Port-Bourgas AD (10) 25 ZMM Nova Zagora AD Elprom ZEM PLC Bulyard Shipbuilding Industry AD 3,623 3,017 KLVK AD 30-4,103 4, Capital expenses for construction In BGN thousand Mashstroy PLC ZMM Sliven AD 20 - Dockyard Port-Bourgas AD ZMM Nova Zagora AD - 1 Elprom ZEM PLC Bulyard Shipbuilding Industry AD 5, Bulgarian Register of Shipping AD Emona ship number 288 6,738-12,947 1, Expenses for materials In BGN thousand Primary materials 83,782 68,735 Supplementary materials 2,436 2,930 Energy 3,170 2,710 Repair parts Others 2,936 1,256 92,938 75,993 89

92 Consolidated Financial Statements 12. Expenses for hired services In BGN thousand Hired services 24,206 12,263 Repairs 1,237 1,107 Communications Security Naval fee registration and technical documentation 775 1,017 Provided guarantees Insurance 1,267 1,058 Intermediation commissions Advertisements Rents Other 3,274 2,660 33,048 21, Personnel expenses In BGN thousand Wages and salaries 25,110 21,742 Compulsory social security contributions 6,336 5,931 31,446 27,673 The average staff number for the Group in 2007 was 2,818 employees (2006: 2,917 employees). 14. Cost of assets sold In BGN thousand Bulyard Shipbuilding Industry AD 1, Mashstroy PLC Leyarmash AD 19 3 ZMM Sliven AD Augusta Mebel AD 2 10 Dockyard Bourgas AD ZMM Nova Zagora AD 9 6 Elprom ZEM PLC 2 81 ZMM Bulgaria Holding , Other operating expenses In BGN thousand Note Impairment 15a Legal obligations and warranties 458 1,504 Business trip expenses Other expenses 2,289 1,273 3,567 3,519 15a Impairment losses In BGN thou1sand Impairment of receivables Impairment of inventory

93 Consolidated Financial Statements 16. Net finance income/(expenses) In BGN thousand Finance income Interest income 746 1,280 Dividend income Net foreign exchange difference Unrealised profit/(loss) from revaluation of financial assets held for trade Net profit resulting from trade with financial assets 262 1,215 Recognized negative goodwill ,687 3,618 Finance expenses Interest expense (1,163) (628) Net foreign exchange difference (134) - Other financial profit /(loss), net (507) (323) (1,804) (951) (117) 2, Income tax expense Recognised in the income statement In BGN thousand Note Current tax expense Current year 1,204 1,403 1,204 1,403 Deferred tax expense Origination and reversal of timing differences (153) 320 Decrease in the tax rate - 84 Benefit of tax losses recognised - (18) 33 (153) 386 Total income tax expense in income statement 1,051 1,789 Current income tax expense has been calculated using a rate of 10% (2006:15%), applied to the tax base. Deferred taxes are recognized applying the income tax rate for 2008 of 10% (2007: 10%). Reconciliation of effective tax rate In BGN thousand Profit for the period 13,338 11,036 Total income tax expense 1,051 1,789 Profit excluding income tax 14,389 12,825 Income tax using the tax rate: (10%) (1,459) (15%) (1,935) Non-deductible expenses 0% (52) (3%) (368) Reduction of tax rate 0% - (1%) (84) Tax exempt income sales of shares 0% 17 1% 105 Tax exempt income dividends 3% 461 3% 314 Other 0% (31) 1% 161 Utilized tax losses from previous periods 0% 13 0% 18 (7%) (1,051) (14%) (1,789) 91

94 Consolidated Financial Statements Income tax recognized directly in equity In BGN thousand Property, plant and equipment 5, , Including: for the Group 3, for the Minority interest 1, , Property, plant and equipment In BGN thousand Land and buildings Plant and equipment Other fixed assets Assets Under construction Cost Balance at 1 January ,207 29,317 2, ,112 Additions 2,300 1, ,295 9,005 Disposals (583) (373) (163) (1,510) (2,629) Transfers 106 2, (2,734) - Balance at 31 December ,030 33,346 3, ,488 Balance at 1 January ,030 33,346 3, ,488 Additions 99 1,623 1,014 18,939 21,675 Disposals (2,586) (1,405) (231) - (4,222) Transfers 3,187 4, (7,606) (188) Revaluation 47,682 2, ,616 Offset of accumulated depreciation to book value (3,815) (5,056) (116) - (8,987) Impairment (27) (27) Transfers to assets held for sale (933) (476) (137) - (1,546) Balance at 1 December ,637 34,968 4,038 12, ,809 Depreciation and impairment losses Balance at 1 January ,394 6,942 1,442-10,778 Depreciation charge for the year 834 2, ,775 Depreciation for assets written-off (106) (230) (120) - (456) Balance at 31 December ,122 9,279 1,696-14,097 Balance at 1 January ,122 9,279 1,696-14,097 Depreciation charge for the year 844 3, ,322 Depreciation for assets written-off (23) (453) (157) - (633) Offset of accumulated depreciation to book value (3,815) (5,056) (116) - (8,987) Depreciation of assets transferred to assets held for sale (116) (71) (21) - (208) Balance at 1 December ,735 1,844-8,591 Carrying amount At 1 January ,813 22,375 1, ,334 At 31 December ,908 24,067 1, ,391 At 1 January ,908 24,067 1, ,391 At 31 December ,625 28,233 2,194 12, ,218 Total Part of machines, plant and equipment with book value of BGN 39,793 thousand serve as collateral for the Group bank loans. The Group management periodically reviews the fair values of its land, buildings, plant and equipment. Such reviews were made as at 1 January 2003 and 31 December 2007 and the assets were revalued to their fair values, based on estimates performed by an independent registered valuer. Based on the valuation, performed by the independent registered valuer as at 31 December 2007, the carrying amounts of land and buildings; machines, plant and equipment; and other assets were increased by BGN 47,682 thousand, BGN 2,898 thousand and BGN 36 thousand respectively. The effect of the revaluation is recorded in the revaluation reserve (see note 28 Share capital and reserves). 92

95 Consolidated Financial Statements 19. Intangible assets In BGN thousand Patents and trade-marks Software Other intangible assets Carrying amount At 1 January At 31 December At 1 January At 31 December ,471 The depreciation charge for the intangible non-current assets for the year ending 31 December 2007 amounts to BGN 178 thousand (2006: BGN 128 thousand). Due to the fact that the intangible non-current assets owned by the Group are immaterial, no detailed note has been prepared on their movement during 2007 and Total (i) Goodwill In thousands of BGN Goodwill Balance at 1 January ,520 Increases through business combinations 798 Balance at 31 December ,318 Balance at 1 January ,318 Increases through acquisition of minority interest 1,522 Balance at 31 December ,840 (ii) Negative goodwill The negative goodwill which arose as a result of acquisitions in subsidiaries for both reporting periods can be analysed as follows: In BGN thousand ZMM Nova Zagora AD - 29 ZMM Sliven AD Total negative goodwill, recognised in the Income statement Goodwill is due to acquisition of 15.38% of the equity of Bulyard Shipbuilding Industry AD, 3.09% - of ZMM Sliven and 23% of the equity of Hydro Power Bulgaria AD. (iii) Acquisition of subsidiaries and minority interest Acquisition of minority interest During the year the Group acquired additional shares in the following subsidiaries and the relative net identified assets and liabilities: In BGN thousand Net assets % Net assets % ZMM Nova Zagora AD ZMM Sliven AD Hydro Power Bulgaria AD Bulyard AD, Bulyard Shipbuilding Industry AD 3, , ,172 2,460 In January a company from the Group purchased 11,500 shares, representing 23% of the equity of the subsidiary Hydro Power Bulgaria AD for the amount of BGN13 thousand. As a consequence the Group became the sole owner of Hydro Power Bulgaria AD. Because of the acquisition, goodwill in the amount of BGN 5 thousand is recognized. 93

96 Consolidated Financial Statements In March 2007, Bulyard AD increased its share capital by issuing 8,600 thousand ordinary voting shares with par value BGN 1. Industrial Holding Bulgaria participated in the capital increase proportionately to its shareholding in Bulyard AD and acquired 5,289 ordinary voting shares. Bulyard AD used the capital contribution to acquire 25% of the equity shares of Bulyard Shipbuilding Industry AD from Navigation Maritime Bulgare. As a consequence Industrial Holding s shareholding in Bulyard Shipbuilding Industry AD increased to 61.5% from 46.13% in During the period ZMM Bulgaria Holding AD purchased 8,832 shares of ZMM Sliven AD increasing its shareholding in the company to 95.98%. Because of the acquisition, negative goodwill in the amount of BGN 136 thousand is recognized. ZMM Bulagria Holding AD sold 500 shares, representing % of its shareholding in Elprom Zem PLC, at a profit of BGN 7 thousand. (iv) Share increases of subsidiaries In April, Bulyard Shipbuilding Industry AD increased its share capital by BGN 5,000 thousand with an issue of 5,000 thousand ordinary voting shares with par value BGN 1 each. All issued shares are subscribed by the parent company Bulyard AD. Industrial Holding Bulgaria PLC participated proportionately to its shareholding in the second increase of the capital of Bulyard AD and acquired 2,875 thousand ordinary voting shares. Privat Engineering AD, a wholly owned subsidiary of the Group, increased its share capital twice by issuing 140 thousand ordinary voting shares with par value BGN 1 and issue price BGN 7 and 160 thousand ordinary voting shares with par value BGN 1 and issue price BGN 10. All new shares are subscribed and paid by another subsidiary of the Group. In April Leyarmash AD increased its share capital. The issued shares were subscribed by Mashstroy PLC 150 thousand shares and ZMM Sliven AD 350 thousand shares with par value and issue price BGN 1 each. As a consequence, the subsidiary remains fully controlled by the Group. In November the share capital of Dockyard Port-Burgas AD was increased by an issue of 500 thousand ordinary voting shares. Shares issued were subscribed by Industrial Holding Bulgaria PLC and its shareholding increased from 91.72% to 98.24%. (v) New subsidiaries The subsidiary of Industrial Holding Bulgaria PLC, Privat Engineering AD invested in a new company, IHB Shipping Co EAD, which has registered capital of BGN 200 thousand consisting of 200 thousand shares with par value BGN 1. Operations of the new subsidiary include maritime business and all related production, transportation and intermediation activities, ship brokerage and agency and others. It was created in order to control the building of ships, ordered by Group companies, to manage them and to provide crews. The new company is created with court decision of the Varna regional court from and Investments in equity accounted associates The Group has the following investments in associates: Country Ownership Dunav Tours AD Bulgaria 48.45% % VIK-Sandvik-IHB Design AD Bulgaria 50.00% - Istrum Travel Cyprus 50.00% 50.00% Odessos PBM AD Bulgaria 30.00% 30.00% VIK-Sandvik-IHB Design AD, Varna, was created jointly by Industrial Holding Bulgaria and a Norwegian company with intended activity ship design. Each company owns 50% of the registered share capital of BGN 250 thousand. More than 40 highly qualified employees are working in the new company. 94

97 Consolidated Financial Statements Summary financial information for equity accounted investees, not adjusted for the percentage ownership held by the Group: In BGN thousand Current assets Ownership Noncurrent assets Total assets Current liabilities Noncurrent liabilities Total Revenues Expenses Profit / liabilities (loss) 2006 Dunav Tours AD % ,298 42,158 18,254 11,336 29,590 11,996 (10,163) 1,833 Istrum Travel 50.00% 3, ,860 1,047-1,047 19,764 (17,710) 2,054 Odessos PBM AD 30.00% 622 4,792 5, (703) 86 5,260 46,172 51,432 19,418 11,336 30,754 32,549 (28,576) 3, Dunav Tours AD 48.45% 1,370 38,489 39,859 7,161 15,842 23,003 19,955 (15,667) 4,288 Istrum Travel 50.00% 4,354-4,354 1,286-1,286 26,705 (26,449) 256 Odessos PBM AD 30.00% 398 5,265 5, ,452 (1,212) 240 VIK-Sandvik-IHB 50.00% , (254) 296 Design AD 7,083 43,865 50,948 9,099 15,842 24,941 48,662 (43,582) 5,080 The movements in the investment in associates can be presented as follows: In BGN thousand Dunav Tours AD At 1 January 6,082 5,157 Share of increase in net assets 2, At 31 December 8,159 6,082 Istrum Travel At 1 January 1, Share of increase in net assets 128 1,027 At 31 December 1,534 1,406 Odessos PBM AD At 1 January 1,589 1,570 Share of increase of net assets At 31 December 1,661 1,589 VIK-Sandvik-IHB Design AD At 1 January - - Investment Share of increase of net assets At 31 December Total investments in associates at 31 December 11,627 9,077 During 2007, the group share of net assets in equity accounted investments has increased by BGN 2,424 thousand (2006: BGN 1,972 thousand). 95

98 Consolidated Financial Statements 21. Other investments In BGN thousand Meteko AD 7 7 Other Long term receivables In BGN thousand Mak Gabrovo Chimremontstroy Engineering AD Elpo AD - 37 Other long term receivables , Inventories In BGN thousand Note Raw materials and consumables 30,167 27,145 Work in progress 23a 22,649 17,950 Finished goods 1,947 2,795 Supplies - 1,639 Merchandise ,765 49,559 23a. Work in progress Work in progress includes: In BGN thousand Work in progress from shipbuilding 14,733 11,836 Work in progress from shiprepair Work in progress from machine-building 7,039 5,967 Other ,649 17, Trade and other receivables In BGN thousand Note Trade receivables 11,210 22,808 Court receivables Related party receivables ,298 Tax receivables 2,632 2,188 Other receivables Prepayments and deferred expenses 16,387 1,228 30,942 33,032 Related party receivables as at refer to a loan given to the minority interest Dunav Tours AD. The latter repaid fully its loan in As at related party receivables refer to prepayments to VIK-Sandvik-IHB Design AD for construction services. 96

99 Consolidated Financial Statements 25. Non current assets held for sale As at non current assets, amounting to BGN 1,338 thousand, are reclassified as assets held for sale. Reclassification is made after management decisions in two Group companies to recover the carrying amount of these assets through their sale and not through their continuing use. The carrying amount of these assets is as follows: In thousands of BGN Land and Buildings Plant and equipment 521-1, Financial assets held for trade In thousands of BGN Shares at purchase cost 1,361 1,310 Disposals (1,361) (230) Revaluation / (Impairment) Cost at 31 December - 1,361 During the year 38,555 shares are sold at an average price of BGN 41,77 per share. The net income from the sale amounts to BGN 253 thousand and results from deducting the shares value and the sale expenses from the revenue amount. 27. Cash and cash equivalents In BGN thousand Cash at bank 53,463 12,391 Cash in hand Cash as per cash flow 53,556 12,593 Blocked cash 32,700 4,717 Cash and cash equivalents presented in the Balance sheet 86,256 17,310 Cash at bank include cash reserved for shipbuilding at the amount of BGN 5,640 thousand. Blocked cash include: BGN 3,411 thousand for collateral of letter of credits, opened in favour of suppliers in relation to activities for shipbuilding and ship repair; BGN 29,270 thousand to secure the issued bank guarantees in favour of third parties; BGN 19 thousand other blocked cash. 28. Share capital and reserves Share capital is stated at nominal value as per court registration. As at 31 December 2007 the authorised share capital comprised BGN 43,756 thousand ordinary shares (2006: BGN 21,003 thousand) with a par value of BGN 1. In July 2007 after conversion of debenture loan in 5,251 thousand ordinary voting shares with par value BGN 1 each, the Sofia City Court registered the capital increase of Industrial Holding Bulgaria PLC from BGN 21,003 thousand to BGN 26,254 thousand. In December 2007, the capital of Industrial Holding Bulgaria was increased from BGN 26,254 thousand to BGN 43,756 thousand with a new issue of 17,502 thousand shares with par value BGN 1 and issue price BGN Share premium reserve in the amount of BGN 24,503 thousand is recognized. The registered capital is stated at par value and is fully paid in. There are no preference or bearer shares. The holders of ordinary shares are entitled to receive dividends as declared after each year end and are entitled to one vote per share at meetings of the Group. All shares rank equally with regard to the Group s residual assets. 97

100 Consolidated Financial Statements Shareholders Number of shares 31 December % Number of shares 31 December % Venside Enterprises Ltd 13,472, % 7,626, % Bulls AD 5,493, % - - DZH AD 2,440, % 1,422, % Chimimport AD 4,011, % - - Others 18,338, % 11,953, % 43,756, % 21,003, % The second capital increase is registered in the Sofia City Court on 27 December 2007 and in the Central Depository on 7 January The number of shares presented reconciles to the shareholders register on 7 January Additional and statutory reserves The additional and statutory reserves are formed by allocation of 10% of profit in accordance with the requirements of the Trade Act, and by allocating additional reserves from the retained profit. These reserves comprise additional and statutory reserves of the parent company as well as the share of reserves of the subsidiaries formed after the date of acquisition. Revaluation reserve The revaluation reserve was formed as a result of the revaluation of property, plant and equipment less the deferred tax liabilities arising in respect of the revaluation. 29. Earnings per share (i) Basic earnings per share The calculation of basic earnings per share as at 31 December 2007 was based on the net profit attributable to ordinary shareholders of BGN 12,258 thousand (2006: BGN 9,647 thousand) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2007 of 35,770 thousand (2006: 21,003 thousand), calculated as follows: Net profit attributable to ordinary shareholders In BGN thousand Net profit for the year 13,338 11,036 Net profit attributable to ordinary shareholders 12,258 9,647 Weighted average number of ordinary shares In thousands of shares Issued ordinary shares at 1 January 21,003 21,003 Effect of conversion of debenture loan 2,618 - Effect of exercised rights 10,902 - Effect of shares issued in December 1,247 - Weighted average number of shares at 31 December 35,770 21,003 Earnings per share for 2006 are recalculated to include the effect of the rights issue in Loans and borrowings This note provides information about the contractual terms of the Group s interest-bearing loans and borrowings. For more information about the Group s exposure to interest rate and currency risk, refer to note 35. In BGN thousand Non-current liabilities Secured bank loans 7,250 6,757 Lease liabilities 101-7,351 6,757 98

101 Consolidated Financial Statements Current liabilities Current portion of secured bank loans 4,897 2,892 Lease liabilities 37-4,934 2,892 Debenture loan Current part - 5,244 Current part interest liabilities ,402 In 2007 the debenture loan was converted into shares (See note 28). Terms and debt repayment schedule 2007 In BGN thousand Total 1 year or less Over 1 year Secured bank loans: EUR 205 thousand 3- month - EURIBOR - +2,3%-investment loan EUR 100 thousand 3- month - EURIBOR - +2,3%-working capital loan BGN 200 thousand flexible BIR +2,7% - working capital loan EUR 430 thousand 3- month - EURIBOR +2,3%- investment loan EUR 450 thousand monthly- EURIBOR +2,3%- investment loan BGN 250 thousand flexible BIR +3,5% - investment loan EUR 690 thousand 3 - month - EURIBOR +2,4%- investment loan EUR 314 thousand 3 - month - EURIBOR +2,3% - investment loan Overdraft 3 - month - EURIBOR +2,0% - working capital loan BGN 75 thousand flexible BIR +6,2% - working capital loan BGN 125 thousand flexible BIR +4,3% - investment loan BGN 108 thousand flexible BIR +4,98% - investment loan BGN 50 thousand flexible BIR +5,24% - credit line BGN 42 thousand flexible BIR +4,40% - credit line EUR 1,000 thousand monthly -EURIBOR+3% 1, EUR 5,000 thousand 6 month EURIBOR+2,15% 6,244 1,355 4,889 Finance leases: BGN 44 thousand finance lease -3 month EURIBOR BGN 15 thousand finance lease no interest EUR 47 thousand finance lease interest rate 6,70% ,285 4,934 7, In BGN thousand Total 1 year or less Over 1 year Secured bank loans: EUR 205 thousand monthly - LIBOR+3.25% EUR 300 thousand 3-month - LIBOR +2.6% BGN 75 thousand variable around 9.28% EUR 100 thousand 3-month - LIBOR +3.2% EUR 450 thousand 3-month - LIBOR +2.5% USD 400 thousand 3-month - LIBOR +3.75% EUR 150 thousand 3-month - LIBOR +3.25% BGN 200 thousand fixed 10.5% EUR 1,000 thousand monthly - EURIBOR+3% 1, EUR 5,000 thousand 6-month - EURIBOR+2.15% 5,630-5,630 BGN 15 thousand finance lease no interest 8 8-9,649 2,892 6,757 Bank loans are secured with a pledge on property, plant and equipment with book value of BGN 39,793 thousand as at 31 December 2007 (2006: BGN 4,909 thousand). Dockyard Port-Burgas AD is also pledged as a company. 99

102 Consolidated Financial Statements 31. Other long-term payables In BGN thousand Financing Other long-term payables The amount of BGN 79 thousand is received as a financing under project Development of a procedure for inspection and acquisition of a ship class and internet based system for management of the inspection activity. In 2007, Elprom Zem PLC received financing from National Investment Fund of the Executive agency for support for small and medium enterprises in the amount of BGN 91 thosuand. 32. Provisions In BGN thousand Retirement Warranties Law suites compensations Balance at 1 January ,110 2,922 Provisions accrued during the year ,302 1,684 Used provisions (141) (95) (3,375) (3,611) Balance at 31 December Balance at 1 January Provisions accrued during the year Used provisions (250) (250) - (500) Balance at 31 December Including: Non-current Current Retirement compensations The Group has made an estimate of the due retirement compensations in accordance with the Labor Code and the Collective Labor Contracts, where there are such, on a company by company basis. The provision for retirement compensations is presented as a long term liability in the Group s balance sheet. Warranties The provision for warranties relates mainly to engines sold by Elprom ZEM and shipbuilding contracts of Bulyard Shipbuilding Industry AD. The calculations of the provision are based on estimations based on historical warranty data associated with similar products and services and based on estimates by technical experts. Warranties, expected to be realized in more than 1 year from the balance sheet date, are presented as long-term liabilities. Lawsuits provisions The estimated provision, amounting to BGN 37 thousand relates to lawsuits against companies in the Group. 33. Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following items: Assets Liabilities Net In BGN thousand Property, plant and equipment (36) - 6,395 1,469 6,359 1,469 Trade and other receivables (100) (90) - - (100) (90) Provisions (27) (35) - - (27) (35) Provision for retirement compensations (38) (41) - - (38) (41) Other payables (151) (126) 3 - (148) (126) Tax value of loss carry-forwards recognised - (41) (41) Net tax (assets)/liabilities (352) (333) 6,398 1,469 6,046 1,136 Total 100

103 Consolidated Financial Statements The applicable tax rates used for calculation of the deferred tax liabilities are 10 % for 2007 and 15% for Movements in timing differences during the year 2007 In BGN thousand Balance Recognised Recognised 1 January 2007 in income in equity Balance 31 December 2007 Property, plant and equipment 1,469 (172) 5,062 6,359 Trade and other receivables (90) (10) - (100) Provisions (35) 8 - (27) Provisions for retirement compensations (41) 3 - (38) Other payables (126) (22) - (148) Recognised tax asset from loss carried-forward from previous periods (41) ,136 (152) 5,062 6, In BGN thousand Balance Recognised Recognised 1 January 2006 in income in equity Balance 31 December 2006 Property, plant and equipment 1, (598) 1,469 Trade and other receivables (87) (3) - (90) Impairment of current financial assets (31) Provisions (66) 31 - (35) Provisions for retirement compensations (31) (10) - (41) Other payables (159) 33 - (126) Recognised tax asset from loss carried-forward from previous periods (232) (41) 1, (598) 1, Trade and other payables In BGN thousand Trade payables 17,800 12,592 Related party payables Payables to employees 2,447 2,270 Social security due Payables to the budget 1, Advance payments received 54,328 26,607 Short term part of debenture loan Other ,205 44, Financial instruments The exposure to credit, interest rate and foreign currency risk arises in the normal course of the Group s business. The Group does not use derivatives to reduce exposure to fluctuations in interest rates. Credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date is: In BGN thousand Cash and cash equivalents 86,256 17,310 Financial assets held for sale - 1,361 Guarantees 104,741 57,125 Trade and other receivables 11,210 22,808 Related party receivables 326 6,298 Long-term receivables 884 1, , ,

104 Consolidated Financial Statements The maximum exposure to credit risk for trade receivables at the reporting date by geographic region is: In BGN thousand Domestic 2,702 9,661 Euro-zone countries ,807 Non-euro zone countries 8,151 2,340 11,210 22,808 Impairment losses The aging of trade receivables at the reporting date is: In BGN thousand 31 December December 2006 Gross Impairment Gross Impairment amount amount Not past due 8,913-20,385 - Past due days 1,590-1,266 - Past due days 387 (31) 1,117 - More than 360 days 1,337 (986) 1,014 (974) 12,227 (1,017) 23,782 (974) The movement in the allowance for impairment in respect of trade receivables during the year was as follows: In BGN thousand 31 December December 2007 Impairment at 1 January (974) (697) Uncollectible receivables written-off (407) (277) Impairment loss recognized in the year Impairment at 31 December (1,017) (974) Liquidity risk 31 December 2007 In BGN thousand Carrying Contractual amount cash flows 6 months or less 6-12 months 1-2 years 2-5 years Non-derivative financial liabilities Loans and borrowings 12,285 12,389 1,490 3,536 1,910 5,453 Related party payables Trade and other payables 17,800 17,800 17, ,194 30,298 19,399 3,536 1,910 5, December 2006 In BGN thousand Carrying Contractual amount cash flows 6 months or less 6-12 months 1-2 years 2-5 years Non-derivative financial liabilities Loans and borrowings 9,649 9, ,303 1,127 5,630 Debenture loan and interest 5,402 5, , Trade and other payables 12,592 12,592 12, ,643 27,668 13,364 7,547 1,127 5,

105 Consolidated Financial Statements Currency risk Exposure to currency risk of the Group at was as follows: BGN EUR USD JPY BGN EUR USD In BGN thousand 31 December December 2006 Cash and cash equivalents 48,581 21,574 16,101-9,933 1,838 5,539 Trade and other payables 2,617 3, ,225 13,846 4,259 4,703 Related party receivables , Long-term receivables Loans and borrowings (1,254) (11,031) - - (283) (9,233) (133) Debenture loan (5,402) - - Related party payables (109) Trade and other payables (9,751) (8,049) - - (8,564) (4,028) - 40,678 6,395 16,184 5,225 16,104 (6,255) 10,109 Financial instruments denominated in euro are not exposed to currency risk because of the fixed exchange rate of the Bulgarian lev and the Euro. The following significant exchange rates were applied during the year: Average rate Reporting date spot rate U.S dollars Japanese yen Sensitivity analysis A 10 percent strengthening of the BGN against the following currencies at 31 December would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for December 2007 In BGN thousand Equity Profit or loss U.S dollars - (1,618) Japanese yen - (523) - (2,141) 31 December 2006 In BGN thousand Equity Profit or loss U.S dollars - (1,011) A 10 percent weakening of the BGN against the above currencies at 31 December would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. 103

106 Consolidated Financial Statements Interest rate risk At the reporting date the interest rate profile of the Group s interest-bearing financial instruments was: In BGN thousand Fixed rate instruments Financial assets 87,140 24,760 Financial liabilities - (5,444) 87,140 19,316 Variable rate instruments Financial assets - - Financial liabilities (12,283) (9,441) (12,283) (9,441) Sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore a change in interest rates at the reporting date would not affect profit or loss. Sensitivity analysis for variable rate instruments A change of 1 percent in interest rates at 31 December would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for December 2007 In BGN thousand Equity Profit and loss Financial assets - - Financial liabilities - (123) 31 December 2006 In BGN thousand Equity Profit and loss Financial assets - - Financial liabilities - (94) 36. Related parties The Group has controlling related party relationship with its shareholders. The Group also has related party relationship with its associates (refer to note 20) and with its directors and executive officers. Transactions with directors and executive officers In BGN thousand Salaries and social security of the Executive Directors, Management Boards and Supervisory Boards, 989 1,009 and Board of Directors 989 1,009 Related party receivables In BGN thousand VIK-Sandvik-IHB Design AD /prepayment for design services/ Dunav Tours AD loan receivable - 6,265 Dunav Tours AD interest receivable ,298 VIK-Sandvik-IHB Design AD /liabilities for performed design services/

107 Consolidated Financial Statements Other related party transactions Associates The transactions with associates in the year, ended 31 December 2007 are as follows In BGN thousand Income from services of Dunav Tours AD Income from services of Dunav Tours Hotels AD - 16 Interest income from loan given to Dunav Tours AD Income from sale of materials and services to VIK-Sandvik-IHB Design AD 26 - Expenses for design services performed by VIK-Sandvik-IHB Design AD (475) - (278) 80 Significant subsidiaries Country of incorporation Ownership interest % % Privat Engineering AD Bulgaria Augusta Mebel AD Bulgaria Hydro Power Bulgaria AD Bulgaria ZMM Bulgaria Holding AD Bulgaria ZMM Sliven AD Bulgaria ZMM Nova Zagora AD Bulgaria Leyarmash AD Bulgaria Mashstroy PLC Bulgaria Elprom ZEM PLC Bulgaria Dockyard Port-Burgas AD Bulgaria KLVK AD Bulgaria International Industrial Holding Bulgaria AG Switzerland Maritime Holding AD Bulgaria Bulgarian Register of Shipping AD Bulgaria Bulyard AD Bulgaria Bulyard Shipbuilding Industry AD Bulgaria Bulcari EAD Bulgaria Emona Shipping Ltd Malta Marciana Shipping Ltd Malta IHB Shipping Co EAD Bulgaria Emona Ltd Marshall Islands Karvuna Ltd Marshall Islands Marciana Ltd Marshall Islands Subsequent events The Central Depository registered the share issue of the second capital increase of Industrial Holding Bulgaria PLC with a registration certificate on 7 January The Financial supervision commission registered a new share issue from Industrial Holding Bulgaria PLC, Sofia of 17,502 thousand shares with par value BGN 1 in the public register with a decision from 23 January The new share issue was registered for trading on the Bulgarian stock exchange - Sofia AD on 30 January The payment of funds, received from the auction of unexercised share rights issued by Industrial Holding Bulgaria PLC for the share increase in 2007, started on 4 February The funds, received from the unused rights of shareholders, amount to BGN 22,264 thousand and were transferred to Industrial Holding Bulgaria PLC from the Central Depository in January Because of that, theses funds are not recorded in the Industrial holding s balance sheet as at 31 December 2007 as cash and cash equivalents and liability for payments to shareholders, who have not exercised their rights. A third corporate guarantee, issued by Industrial Holding Bulgaria PLC to guarantee a shipbuilding contract between Bulyard Shipbuilding Industry and Navigation Maritime Bulgare, was released on 4 February The released corporate guarantee 105

108 Consolidated Financial Statements amounts to EUR 4,212 thousand and USD 3,595 thousand. It guaranteed the third installment for a ship with construction number 515 and was released after the contractual obligations were fulfilled. That was the third and last corporate guarantee related to the building of ships with construction numbers 516, 457 and 515. Industrial Holding Bulgaria PLC starts the construction of two new ships in Bulyard Shipbuildings Industry AD of the type Future 56, DWT, for a total amount of EUR 60,000 thousand. The investment will be financed by the subsidiary KLVK AD. The ships are due to be completed in may 2010 and The first installment of EUR 3,000 thousand was transferred on 3 April Contingent liabilities Industrial Holding Bulgaria PLC secured the issue of bank guarantees from Bank DSK EAD in the amount of EUR 671 thousand to guarantee Elprom ZEM PLC s payables to a client. An agreement is made for receiving a revolving credit for issuing bank guarantees and working capital financing with a limit of BGN 4,500 thousand. These are secured by a special pledge of Dockyard Port-Bourgas AD, a subsidiary of the holding company. As at 31 December 2007 BGN 763 thousand and BGN 969 thousand are utilized to issue bank guarantees and letters of credits to Bulyard Shipbuilding Industry AD respectively. Industrial Holding Bulgaria PLC issued first corporate guarantee of the third installment for ship with construction number 515 in the amount of EUR 4,212 thousand and USD 3,595 thousand. The corporate guarantees are secured with a mortgage on property, plant and equipment of Bulyard Shipbuilding Industry AD. Bulyard AD has guaranteed the promissory notes, issued by its subsidiary Bulyard Shipbuilding Industry AD in the amount of USD 4,006 thousand and EUR 20,074 thousand in front of Raiffeisenbank Bulgaria EAD. The bank will provide credits to be used for multiple issue of bank guarantees of the advance payments for building of ships with construction numbers 515, 457, 190, 191, 459 and 103 and for working capital to finance the building of the ships. Bulyard Shipbuilding Industry AD has a frame agreement with Allianz Bank Bulgaria AD for bank guarantees and letters of credit issue with a credit limit of UDS 43,500 thousand. As at 31 December 2007 the Company has used the credit line to issue four guarantees amounting to EUR 7,312 thousand and USD 16,440 thousand (approximately BGN 35,413 thousand). Bulyard AD has guaranteed the liabilities of Bulyard Shipbuilding Industry AD from a promissory note on behalf of SG Expressbank Sofia in the amount of EUR 1,500 thousand, which secures an investment loan, granted to Bulyard Shipbuilding Industry AD. As at 31 December 2007 ZMM Bulgaria AD has guaranteed by promissory notes loan liabilities of its subsidiaries in the amount of BGN 3,124 thousand /ZMM Sliven AD BGN 1,794 thousand and Leyarmash AD BGN 1,330 thousand) and by bank guarantee from TB Unicredit Bulbank AD to NSK Polska BGN 59 thousand. As at 31 December 2007 ZMM Bulgaria AD has issued guarantees in the amount of BGN 918 thousand to NEK on behalf of Elprom ZEM PLC for performance under a public tender. Additionally Elprom ZEM PLC has issued guaranteed on behalf of third parties in the amount of BGN 304 thousand. The Group management does not expect that the promissory notes will be paid and no provisions have been booked. According to a court decision from 11 July 2007, the Varna appellate court decided that the Central Cooperative Union, Sofia and the Regional Cooperative Union, Shumen owned 13.69% of the non-current assets of Avgusta Mebel AD, Shumen. The Company legal adviser has informed the Company that the decision is appealed in front of the Supreme Court. The proceedings are to be held on 8 December 2008 and it is expected that the claim will be discarded as unjustified. Consequently, no provision is booked in the financial statements for a potential liability. 106

109 IHB GOVERNANCE 107

110 Corporate governance In October 2007 the National Corporate Governance Code was adopted. On 26 October 2007 IHB Plc signed a declaration on adoption of the National Corporate Governance Code and will carry out its activity in compliance with its provisions. The document was published by BSE. The compliance with the Code is based on the comply with or explain principle. 108

111 Comply or explain report on the Bulgarian National Corporate Governance Code of October 2007 Industrial Holding Bulgaria PLC Content Intoduction Chapter One CORPORATE BOARDS Two-tier System Chapter Two AUDIT AND INTERNAL CONTROL Chapter Three PROTECTION OF SHAREHOLDERS RIGHTS Chapter Four DISCLOSURE OF INFORMATION Chapter Five CORPORATE GOVERNANCE AND STAKEHOLDERS

112 Introduction IHB complies with the regulatory requirements of the Bulgarian legislation. Since 2003 IHB prepares a Corporate Governance Program and makes report on the corporate governance activities in its Annual Management Reports since In October 2007 National Corporate Governance Code was accepted in Bulgaria. The Code was accepted by the Bulgarian Stock Exchange-Sofia. BSE-Sofia requires that the companies listed on the Official market should comply with the Code. On 26 October 2007 IHB signed a declaration where IHB states that accepts the National Corporate Governance Code and will make its activities in compliance with its regulations. The compliance of the Code is reported on the comply or explain principle, which means that the Company complies with the Code s recommendations or the management explains the reasons when the activities depart from or do not comply with the recommendations. In this Report information on the applying the recommendations of the Code in IHB corporate governance is presented. The actions of IHB management and employees are in direction of confirming the principles for good corporate governance, increasing the trust of the shareholders, investors and the stockholders and for encouraging the successful business activities of IHB. The IHB management took a decision for developing a new up-to-day corporate governance strategy for IHB in conjunction with the latest international best practices. Now, after the acceptance of the National Corporate Governance Code, IHB will take actions in this direction. 110

113 Comply or explain report Chapter One CORPORATE BOARDS IHB has a two-tier management system. That is why the recommendations for one-tier management system of the Code are not applicable and are excluded from this document. Two-tier System The Management Board and the Supervisory Board jointly act in the interest of all the company shareholders and take into consideration the interests of the company s stakeholders. 1. Management Board 1.1. Functions and Tasks The Management Board manages the company in accordance with the company s visions, goals and strategies established by the Supervisory Board in the best interest of all shareholders. IHB applies this practice The Management Board should implement the strategy of the company in accordance with the directions of the Supervisory Board. IHB applies this practice The Management Board should develop the company s risk management and internal audit policy. It must implement the company s risk management system and report on implementation to the Supervisory Board. IHB will apply this practice The Management Board must ensure that the company meets its contractual obligations. IHB applies this practice The Management Board should set up the company s financial information system and ensures it is efficiently working in accordance with the directions set by the Supervisory Board. IHB applies this practice The Management Board should work in cooperation with the Supervisory Board on developing the company s business plan; carrying out extraordinary and material transactions; and implementing any other operations and actions required by the company s bylaws. IHB applies this practice The Management Board must inform and report to the Supervisory Board on its actions. Management Board should provide information in the format and within the established deadlines required by the Supervisory Board. IHB applies this practice During their mandate the members of the Management Board should act in a professional and diligent manner and conduct themselves according to the commonly accepted principles of integrity and duty of care. IHB applies this practice. Management Board should adopt and follow a professional ethical code of conduct. IHB will apply this practice. At present IHB does not have a Code of Ethics Structure and Competence The structure and the number of members on the Management Board should guarantee the effective performance of the company. IHB applies this practice The responsibilities, tasks, duty of care and duty of loyalty of members of the Management Board to the company, as well as the criteria and level of remuneration and the conditions for removal from the Board should be stipulated by contract. IHB applies this practice The required skills, rights and responsibilities of the members of the Management Board must comply with the law and the company s by-laws, and follow good professional standards and practice. IHB applies this practice Remuneration The amount and criteria for the remuneration of the members of the Management Board should in accordance with the law and good corporate governance practices be based on the following criteria: The responsibilities and the contributions of the member of the Management Board to the company s performance and results; The ability to attract, select and retain qualified and loyal managers; The need to have the interests of the members of the Management Board aligned with the long-term interest of the company; IHB applies this practice The remuneration of members of the Management 111

114 Board should consist of two parts: fixed compensation and variable incentives In addition to a fixed compensation, the Company can offer to the Management Board member shares, options on shares, and other appropriate financial instruments The guidelines and procedures for the issue and use of additional incentives to the members of the Management Board are set out in the company by-laws. IHB applies this practice. Until now no shares, share options or other suitable financial instruments have been given to the members of the MB The remuneration of the members of the Board of Directors must be disclosed in accordance with the law and the company s by-laws. Shareholders should have easy access to information concerning the remuneration of Management Board members. IHB applies this practice. Information about the remuneration of the MB is presented in the Annual Report Conflict of Interests The members of the Management Board should prevent any real or potential conflict of interests. IHB applies this practice The procedures for preventing and disclosing conflicts of interests should be provided for in the company s by-laws. IHB applies this practice The members of the Management Board should immediately disclose any conflicts of interests to the Supervisory Board and provide shareholders access to information about transactions concluded between the company and members of the board or any related party. IHB applies this practice Each conflict of interests should be disclosed to the Supervisory Board. IHB applies this practice A potential conflict of interests exists when the company intends to realize a transaction that involves: (à) a party related to or with financial interest linked to a member of the Management Board; (b) Board members that are either members of the Supervisory Board or the Management Board. 2. Supervisory Board 2.1. Functions and Tasks In accordance with the division of functions within the two-tier governance system, the Supervisory Board must appoint the Management Board of the company, provide it with strategic guidance, oversee and control its activities. IHB applies this practice The Supervisory Board should define and oversee the implementation of the vision, goals and strategy of the company. It should provide adequate guidance to the Management Board for implementation. IHB applies this practice The Supervisory Board should provide adequate guidance to the Management Board concerning the effective development and implementation of the company s risk management and internal audit systems and the proper functioning of financial information systems. IHB applies this practice The Supervisory Board must ensure the compliance of the company with legal, normative and contractual obligations, as well as with the rules embedded in the company by-laws. IHB applies this practice In carrying out its tasks, the Supervisory Board should ensure that an effective and proper functioning information exchange system with the Management Board is in place. IHB applies this practice At least once a year the Supervisory Board should evaluate the performance of the Management Board as a whole and the work of each of its individual members. IHB will apply this practice The Supervisory Board must perform its tasks and carry out its obligations in compliance with the law, the company s by-laws and according to the commonly accepted principles of integrity and duty of care. IHB applies this practice Appointment and Removal of Management Board Members The Supervisory Board should appoint and remove the members of the Management Board in compliance with the company s by-laws and in accordance with good corporate governance standards, while 112

115 Comply or explain report respecting the principles of continuity and ensuring the stability of the Management Board s work. IHB applies this practice The compensation policy of the Supervisory Board should guarantee effective performance of the company in the best interest of its shareholders. IHB applies this practice Structure and Competence The members of the Supervisory Board should carry out their tasks independently and impartiality in the best interest of the company. IHB applies this practice.one of the three members of the SB is independent according to the requirements of the Public Offering of securities Act The number of members of the Supervisory Board, including the number of independent members and the proper division of tasks among them, should be provided in the company s by-laws. IHB applies this practice The independent members of the Supervisory Board should be impartial and act in the best interest of the company and all its shareholders. IHB applies this practice The members of the Supervisory Board should have appropriate knowledge and experience to inform the decisions and actions they take. At least one of the members should have financial competences. IHB applies this practice After their election, the new members of the Supervisory Board should attend an induction programme including legal and financial issues related to their task and the company s activities and performance. IHB will apply this practice Continued professional training of members of the Supervisory Board should be encouraged. IHB will apply this practice The members of the Supervisory Board should be able to devote sufficient time to carry out their tasks and duties. The company s by-laws should limit the number of board positions the members of the Supervisory Board is allowed to hold. IHB does not apply this practice. IHB is not able to limit the activities of the members of SB The procedures for selecting new Supervisory Board members should take into account the principles of continuity and ensure the stability of the Supervisory Board s work. IHB applies this practice Remuneration of Members of Supervisory Board The amount and criteria for the remunerations of the members of the Supervisory Board must be approved by the General Meeting of Shareholders. IHB applies this practice The amount and criteria for the remuneration of the members of the Supervisory Board should be based on their responsibilities and contribution but should not be tied to the company s results. IHB applies this practice. The remuneration is a constant monthly payment for each member of the SB The remunerations of Supervisory Board members should be determined so as to reflect their individual participation in Board meetings, their performance level in regard with their assigned tasks, their ability to oversee and control the operations of executive management. Independent directors should not receive any additional remuneration in any form from the company. IHB applies this practice The members of the Supervisory Board should not be compensated for their activity with shares or options. IHB applies this practice The remuneration of the members of the Supervisory Board must be disclosed in accordance with the law and the company s by-laws. Shareholders should have easy access to information concerning the remuneration of Supervisory Board members. IHB applies this practice. Information about the remuneration of the SB is presented in the Annual Report Conflicts of Interests The members of the Supervisory Board should prevent any real or potential conflict of interests. IHB applies this practice The procedures for preventing and disclosing conflicts of interests should be provided for by the company s by-laws. IHB applies this practice The members of the Supervisory Board should immediately disclose any conflicts of interest and provide shareholders access to information about transactions concluded between the company and members of the 113

116 board or any related party. IHB will apply this practice A potential conflict of interests exists when the company intends to realize a transaction that involves: (à) a party related to or with financial interest linked to a member of the Supervisory Board; (b) Board members that are either members of the Supervisory Board or the Management Board Committees The work of the Supervisory Board should be assisted by committees. The Supervisory Board should determine the need for setting up committees in accordance with the specific operations of the company The Supervisory Board should establish at a minimum an audit committee, which should be comprised of independent directors and experts The committees should be set up according to pre-established and adopted written terms of reference which should include the scope, tasks, modalities and reporting procedures of the committee. IHB will apply this practice. Until now no committees have been founded because of lack of such practice in Bulgaria and recommendations for its foundation. Chapter Two AUDIT AND INTERNAL CONTROL 1. In accordance with the established professional standards and requirements, the Board of Directors (in the one tier system) and the Supervisory Board (in the two tier system) should - assisted by the audit committee - present in writing at the General Meeting of Shareholders a motivated proposal for the selection of an external auditor. IHB will apply this practice. Until now the proposal had been motivated orally. 2. The principle of rotation should be applied in selecting and appointing an external auditor. IHB will apply this practice. Each year the Management examines and discusses offers from different auditors and after careful assessment, the best candidate is offered for election to the General Meeting of Shareholders. The auditors are elected for each financial year. 3. The company should set up an internal control system that guarantees effective reporting and disclosure of information. 4. The internal control system should be developed and operate in order to ensure the early identification of any material risks the company may face and to effectively manage those risks. IHB has a system for internal control which is constantly improved according to the legislation requirements and the best practices. Chapter Three PROTECTION OF SHAREHOLDERS RIGHTS 1. Protection of Shareholders Rights The Board of Directors or the Supervisory Board should ensure the equitable treatment of all shareholders, including minority and foreign shareholders, and should be responsible for the protection of their rights. IHB applies this practice. 2. General Meeting of Shareholders 2.1. All shareholders must be able to participate in the General Meeting of Shareholder and to express their opinion. IHB applies this practice Shareholders who have the right to vote should have the opportunity to exercise their voting rights through the use of a proxy at the General Meeting of Shareholders. IHB applies this practice The Board of Directors or the Supervisory Board should exercise effective oversight and ensure that necessary arrangements are made for the voting by authorised representatives (proxies) in accordance with the instructions of the shareholders and in accordance with the law. IHB applies this practice The Board of Directors or the Supervisory Board must establish rules for the organisation and conduct of regular and extraordinary General Meeting of Shareholders. These rules must guarantee the equitable treatment of all shareholders and the right of each shareholder to express his/her opinion about the items on the agenda of the General Meeting of Shareholders. IHB applies this practice The Board of Directors or the Supervisory Board should establish the rules and procedures for the conduct of the General Meeting of Shareholders in a manner which does not make voting procedure unnecessarily difficult or expensive. IHB applies this practice The Board of Directors or the Supervisory Board should take action to encourage the participation of all 114

117 Comply or explain report shareholders at the General Meeting, including those who cannot make it physically by allowing the use of information technology (including Internet) when ever possible and necessary, and in accordance with item of the present Code. IHB will apply this practice when there is a legislative requirement and a safe and reliable technical opportunity All members of the Board should attend the General Meeting of Shareholders. IHB applies this practice The preparation of written materials for the General Meeting of Shareholders should comply with the following: Documentation and reference materials related to the agenda of the General Meeting of Shareholders must be clear, accurate and to the point in order not to mislead the shareholders. All proposals concerning the major corporate events should be presented as separate items on the agenda of the General Meeting of Shareholders, including the proposal for the distribution of dividends. IHB applies this practice The company should maintain a special section on its website describing the rights of shareholders and the rules and procedures for their participation in the General Meeting of Shareholders. IHB applies this practice The Board of Directors or the Supervisory Board should ensure court-authorized shareholders [shareholders with 5% or more shares] can place additional items on the agenda of the General Meeting of Shareholders. IHB applies this practice The Board of Directors or the Supervisory Board must guarantee the right of all shareholders to be informed on a timely basis about the decisions that have been made at the General Meeting of Shareholders. IHB applies this practice. Chapter Four DISCLOSURE OF INFORMATION 1. The Board of Directors or the Supervisory Board must establish the company s information disclosure policy in compliance with legal requirements and the company s by-laws. IHB applies this practice. 2. In accordance with established policies, the Board of Directors or the Supervisory Board oversee the implantation and ensure proper support for an effective system for disclosure of information. IHB applies this practice. 3. The system for disclosure of information should guarantee equal access to information to shareholders, investors, and other stakeholders and should not allow for any abuse of internal information or insider trading. IHB applies this practice. 4. The Board of Directors or the Supervisory Board should guarantee that the system for information disclosure provide for comprehensive, timely, true and understandable information to allow for objective and well-informed decision making and assessments. IHB applies this practice. 5. The Board of Directors or the Supervisory Board should establish internal rules for the production and dissemination of mid-term and annual reports. The Board of Directors or the Supervisory Board should ensure that these rules are implemented and should oversee the proper disclosure of the information in a way that guarantees compliance with provision # 3 of this chapter. IHB applies this practice. 6. As a part of a well functioning system for the disclosure of information, the Company should to set up and maintain a company website. This website should be operated in accordance with approved policies on the content, scope and regularity of information disclosure. The official information posted on the website should include at minimum: Information about the company Information about the joint-stock structure The company s by-laws Information about the governing bodies Financial reports covering at least the previous 3 years Materials for upcoming General Meeting of Shareholders Minutes of the General Meeting of Shareholders of the last 3 years Information about external auditors Information about up-coming corporate events Any information that is material to the company s activities IHB applies this practice. The whole information about IHB and its current development is published in Bulgarian and in English on its website: com 115

118 7. The company should regularly disclose information about its corporate governance. The disclosure of corporate governance information should state the company s level of compliance with the present Code in accordance with the comply or explain principle. This principle requires companies to comply with the recommendations of the present Code or to explain the reasons for not complying with individual provisions of the Code. IHB applies this practice since The Board of Directors or the Supervisory Board should support effective stakeholder participation in accordance with the law and international good practices in matters of non-financial information disclosure and reporting. The company should disclose information about economic, social and environmental issues of concern to stakeholders, for example: anti-corruption policies; labor policies, policies regulating supplier and client relations; the company s corporate social responsibility policies; environmental protections and nature preservation policies. IHB applies this practice. Since 2005 IHB makes a Corporate Social Responsibility Report. The Report is prepared in accordance with the best international practices for reporting the company s corporate social responsibility and is part of the Annual Consolidated Report. IHB is the first listed company in Bulgaria which started to prepare and publish CSR report. Chapter Five CORPORATE GOVERNANCE AND STAKEHOLDERS 1. Corporate governance should ensure effective interaction with the company s stakeholders. To this category fall certain interested parties and groups of individuals who are directly influenced by the company and who influence and/or are in a position to influence the company, including for example: suppliers, clients, employees, creditors, civil society groups, and others. The company should identify the stakeholders who are interested in its activities, on the base of their scale and sphere of influence and impact, as well as their role and relationship to sustainable development. IHB applies this practice. 2. The company s stakeholder policy must be in compliance with existing laws. Good corporate governance practices should require taking into consideration the interests of stakeholders in accordance with the principles of transparency, accountability and business ethics. IHB applies this practice. 3. The Board of Directors or the Supervisory Board should establish specific rules for addressing the interests of stakeholders. These rules should ensure appropriate stakeholder engagement when decisions requiring their input are made. These rules should also balance the interests of the company and the interests of the economic, social and ecological environment in which the company operates. IHB will apply this practice. 116

119 Information about the members of the MB and the SB Information about the members of the Management Board and the Supervisory Board In 2007 no changes were made in the composition of the Management Board and the Supervisory Board. By a decision of the General Meeting of Shareholders dated 29 August 2007 the following members of the management bodies were reelected: Reelection of Konstantin Kouzmov Zografov, a member of the Supervisory Board, for another mandate; Reelection of all members of the Management Board Bozhidar Vasilev Danev, Daneta Angelova Zheleva, Angel Stoyanov Katsarov, Borislav Emilov Gavrilov and Boyko Nikolov Noev; Reelection of Daneta Angelova Zheleva and Angel Stoyanov Katsarov, Executive Directors. These particulars were registered by Decision No 22 of 27 December 2007 Sofia City Court. The remunerations received by the members of the Management Board and the Supervisory Board of IHB include amounts received and non-monetary benefits, contingent or deferred remuneration arising during the year, even if the remuneration is owed at a later date. The 2007 total amount of social security contributions paid by IHB in favour of the members of the Management Board and the Supervisory Board, including obligatory pension insurance contributions, is BGN IHB and its subsidiaries do not set aside or accrue other amounts for pensions, pension compensations or other similar compensations. The members of the boards received no non-monetary benefits, contingent or deferred remunerations. IHB and its subsidiaries owe no pension, pension compensations or other similar benefits to the members. Contracts under Art. 240b of the Law on Commerce signed in 2007 The Company signed no contracts with the members of the Board of Directors or their related parties, which are out of its usual operations or materially deviates from market conditions. Remunerations paid to the members of the Management Board and the Supervisory Board Remunerations received in 2007 Members of the Supervisory Board DZH AD, through Representative Elena Kircheva Snezhana Hristova Konstantin Zografov Members of the Management Board Bozhidar Danev Daneta Zheleva Angel Katsarov Borislav Gavrilov Boyko Noev From IHB From IHB subsidiaries Information about the shares held by the members of IHB Plc Supervisory and Management Boards as at 31 December 2007: As at 31 December 2007 no options on securities of IHB were granted to the members of the Management Board and the Supervisory Board. Members of the Supervisory Board Acquired over the 4th quarter of 2007 Transferred over the 4th quarter of 2007 Number of shares held directly Number of shares held through related parties Total number of shares held directly and through related parties % of the votes in the General Meeting of Shareholders, directly and through related parties DZH AD Snezhana Hristova Konstantin Zografov Members of the Management % 0.039% 0.002% Board Bozhidar Danev Daneta Zheleva Angel Katsarov Borislav Gavrilov Boyko Noev % 5.64% 0.005% 0.002% 0 117

120 Investor relations director s activities report for 2007 Bogomila Hristova, Investor Relations Director Dear Shareholders, In 2007 we continued our aspiration for maintaining high professionalism in investor relations activities. The IHB s shares again were one of the most liquid positions on the Bulgarian Stock Exchange (BSE) among the shares of 350 companies. The IHB shares kept their place in the international indexes of Dow Jones: Dow Jones STOXX EU Enlarged Total Market Index and the indexes of Dow Jones Wilshire Global Total Market IndexSM, as well as in the two indexes of BSE-Sofia. In 2007 IHB shares were included in the new index of BSE-Sofia BGTR30 and in one new index of Dow Jones - Dow Jones STOXX Balkan 50 Equal Weighted Index, the latest presenting the movements of the 50 biggest and most liquid shares, traded on the Balkans Stock Exchanges. Following the accession of Bulgaria to EU, a number of other legislative amendments have come into force as of 1 January Most of them are new to the old EU member states as well for example: the Transparency Directive. Amendments were adopted in many legal regulations: the Law on Public Offering of Securities, the Ordinance on the Prospectuses and Information Disclosure. The Law on Measures against Market Abuse with Financial Instruments and the Law on Financial Instruments Markets are in action. There are other amendments in the capital market legislation. The continuous introduction of new higher requirements makes the investor relation activities more complex. This imposes the necessity of thorough study of the obligations of public companies, as well as ensuring proper mechanisms for meeting these obligations. Bulgarian companies have no related experience and a lot of work is to be done so as efficient solutions for organization of operations and information flows may be provided. 118

121 Investor Relations Director`s report Investor relations of IHB in 2007 In 2007 IHB continued to pursue a good investor relations policy. Ïðåç 2007 ã. The effective communication between IHB and its investors, the regulatory authorities, the stock exchange, the Central Depository and the media has been always the main objective of these activities. The communication success is measured by the reputation in the circles of the investors society, and we are glad to announce that IHB enjoys a very good reputation. The positive assessment by the investors society is also supported by the fact that IHB has always been named as an example for good public company. The operations in 2007, as well as in the last several years, were mainly related to: Maintenance of effective communication with the investors society Provision of sufficient information on the operations of IHB Organization of sessions of the General Meeting of Shareholders Administrative support and cooperation to the shareholders Assistance to the managing bodies in their functions performance Maintenance of effective communication within the Group of IHB Effective communication with the investors comunity We, at IHB, have always tried to maintain effective communication with investors and the investors society and considered it a two-way exchange of information from IHB to the investors society and vice versa. We respect the opinion of the investors society about us and seek to receive feedback so as we may act adequately on the market. We used the latest means in the field to achieve effective communication printed annual reports, webpage, meeting with investors and financial analysts and maintenance of good relations with the media. IHB took the lead in the rankings for information discloser to investors IHB registered best results in two online information surveys of PFS Program and the Economic Policy Institute. Both surveys focus on the 40 largest companies based on market capitalization as at 1 March The first survey has been directed at determination of the extent to which the leading companies in Bulgaria disclose information to present and potential investors, required for investment decision-making purposes. IHB is ranked first. Together with this, IHB is the best company in online reporting corporate social responsibility: corporate governance, environmental policy and social policy based on the results of the second survey made by PFS Program and the Economic Policy Institute. The whole survey may be found at the following website: It is worth noting that these results are based on the old website IHB launched in October In October 2007 IHB launched a new website and the novelty is in: Restructured and additional information in Investors Center on IHB and its results, latest news and events, reports, share price and useful information; New section Corporate Governance where the principles of IHB corporate governance are presented; New section Corporate Responsibility where the main aspects determining the social responsibility policy of IHB Group companies are presented. The website presents also the whole activities of IHB as management, activities and portfolio. The new website meets all the world requirements for presenting comprehensive information to the investors and shareholders of IHB. The information about IHB - thorough, accessible and timely provided In 2007, we continued to traditionally provide detailed information in the report on operations and share price sensitive information (the so called ad hoc information). All regular reports of the Company required under the Law on Public Offering of Securities and the legislative acts on its implementation, i. e. quarterly and annual reports and consolidated quarterly and 119

122 annual reports, were timely presented. The reports were prepared so as precise and reliable information about the Company may be provided and full compliance with the applicable legal provisions may be ensured. All reports were published on the webpage of IHB immediately upon their publishing in the bulletin of BSE. The reports were published in English in short terms. The 2006 consolidated annual report of IHB was published in English in August Traditionally, it was prepared in compliance with the international practices and the latest trends in the sphere of annual closure and it, once again, enjoyed a high evaluation. Information about the events related to the operations of IHB and the Group s companies, considered sensitive to share price, was provided within the legal terms on regular basis. The legal framework regarding the operations of public companies and information disclosure is constantly followed up and the new provisions are complied with. Organization of the General Meeting of Shareholders In 2007 two GMS were held. The regular General Meeting of Shareholders of IHB was held on The GMS accepted the Activities Report, The Auditors Report and the Financial Statements for 2006, exonerated of responsibility the members of the Managing and Supervisory Board for their activity in the year 2006, voted remuneration to the members of Supervisory Board and selected KPMG Bulgaria OOD for a registered auditor for 2007 and distributed the profit for Because of the maturity on 2 July 2007of the issue convertible bonds issued by IHB, the GMS held on 1 June 2007 accepted a decision to increase the capital of the Company by virtue of Article 195 of the Commerce Act through conversion of convertible bonds ISIN code BG into shares with up to BGN the issue size. At the maturity date, all the convertible bonds were converted. On 29 August 2007 and extraordinary GMS was held and it took a decision for increase of the capital of the company through issue of up to number new ordinary dematerialized voting shares with nominal value BGN 1 and issue value BGN The Meetings were convened in compliance with the provisions of the Law on Commerce, the Law on Public Offering of Securities and the Company s Statutes. The materials were prepared and timely presented to the Financial Supervision Commission, the Bulgarian Stock Exchange, the Central Depository and all shareholders who have requested them and were published on the webpage of IHB. The results from the Meeting proceedings were disclosed in compliance with the applicable provisions and within the legally required terms on the Holding s webpage as well. Always at shareholders disposal IHB maintains loyal relations with its shareholders through due notification and assistance in relation to certain issues and problems. In 2007, the interest and inquiries on behalf of institutional investors, financial analysts and financial media continued. Foreign investors continued to show even greater interest in meeting investors on their initiative or on the initiative of financial analysts and brokers. The number of meetings between professional and institutional investors and the management, during which information about the operations of the Group s companies and the results of IHB was presented, increased. The interest on behalf of small investors remained almost unchanged as compared to the preceding year and most of the issues raised were about dividend distribution, share trading, decisions made by the General Meeting, the results and operations of IHB and the debenture issue. IHB maintains good relations with the media and always give detailed responses to their inquiries. I am glad to say that IHB is assessed by the investors society and the media as one of the most transparent and accessible public companies in Bulgaria. Administrative support to the managing bodies In 2007, all sessions of the Management Board and the Supervisory Board were convened in compliance with the applicable legal provisions and the internal rules and regulations of 120

123 Investor Relations Director`s report the Holding. The invitations, containing the agendas and accompanied by relevant materials, were timely sent to all members. The session minutes taken are duly kept. Cooperation for good corporate governance In 2007, as usual, the Investor Relations Director assisted in the realization of the objectives and tasks of the Good Corporate Governance Program of IHB and provided support to the Holding s Management in the realization of most events envisaged under the Program for Effective communication within the IHB Group The communication process accompanying the investor relations also includes exchange of information within the Group. One of my duties, in the capacity of Investor Relations Director, is ensuring an optimal information flow from the IHB s subsidiaries to IHB regarding the regular and ad hoc information on their operations. The organization and control of the information flow is still a great challenge with a view to timely provision of share price sensitive information by IHB to BSE firstly and prevention of information outflow from the subsidiaries. This activity requires constant improvement and will remain a priority in 2007 in consideration of the ongoing introduction of higher requirements on information disclosure as well. I would like to thank all Members of the managing and controlling bodies, the Executive Directors and all Colleagues who contribute to the implementation of the loyal and effective investor relations policy Outlook The activities related to investor relations will be directed to maintenance of honest relations with the investors society and be kept in full compliance with the best and latest international practices in the sphere of investor relations. April 2008 Bogomila Hristova Investor Relations Director 121

124 IHB TEAM Kristian Velikov Expert Administration and Logistics Toshka Vassileva Chief Accountant Lachezar Valkov Internal audit Gergana Atanasova Expert Financial Analyses and Investment Projects Bogomila Hristova Investor Relations Director Georgi Yankov Innovation and technology 122

125 IHB team Eli Tuechka Accountant Ivelin Georgiev Construction Director Zlatomir Dimitrov Cheef legal advisor Galina Deneva Head of Internal audit department Rositza Nikolova Accountant Nelly Kercheva Head of Financial Analyses and Investment Projects Zlatka Ganeva Office manager 123