Table ofContents

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                                    |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2009** |
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                               |
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                            |

 

Commissionfile number 1-31232

 
| **WIMM-BILL-DANN FOODS OJSC**                                                                                                           |
|-----------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                                                                  |
|                                                                                                                                    |
| **RUSSIAN FEDERATION**                                                                                                                  |
| (Jurisdiction of incorporation or organization)                                                                                         |
|                                                                                                                                    |
| **16 Yauzsky Boulevard, Moscow 109028, Russian  Federation**                                                                            |
| (Address of principal executive offices)                                                                                                |
|                                                                                                                                    |
| **Natalya Belyavskaya, tel. +7 (495) 925-58-05,  e-mail: ir@wbd.ru, address: 16 Yauzsky Boulevard, Moscow 109028, Russian  Federation** |
| (Company Contact Person)                                                                                                                |

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act.

 

| Title of each  class                   |   | Name of each  exchange on which  registered |
|----------------------------------------|--------|---------------------------------------------|
| FOUR AMERICAN DEPOSITARY SHARES, EACH  |   | NEW YORK STOCK EXCHANGE                     |
| REPRESENTING ONE SHARE OF COMMON STOCK |   |                                        |
| COMMON STOCK, PAR VALUE                |   | NEW YORK STOCK EXCHANGE(1)                  |
| 20 RUSSIAN RUBLES PER SHARE            |   |                                        |

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act.

 
| **NONE**         |
|------------------|
| (Title of Class) |

 

Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 
| **NONE**         |
|------------------|
| (Title of Class) |

 

----

(1)Listed, not for trading or quotation purposes, but only in connection with theregistration of ADSs pursuant to the requirements of the Securities and ExchangeCommission.

 

----

Table ofContents

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

 

41,846,022shares of common stock, par value 20 Russian rubles each, as of December 31,2009.

 

65,045,688American Depositary Shares, each four representing one share of common stock,as of December 31, 2009

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

x Yes   o No

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes   x No

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

x Yes   o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).

x Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

| U.S. GAAP x |   | International Financial Reporting Standards as issued  by the International Accounting Standards Board o |   | Other o |
|-------------|--------|----------------------------------------------------------------------------------------------------------|--------|---------|

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

----

Table of Contents

 
| **CAUTIONARY  STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**                         | 3   |
|----------------------------------------------------------------------------------------|-----|
| **PART I**                                                                        | 4   |
| Item  1.Identity of Directors, Senior Management and Advisors                          | 4   |
| Item  2. Offer Statistics and Expected Timetable                                  | 4   |
| Item 3. Key Information                                                                | 4   |
| Item 4.  Information on Our Company                                                    | 46  |
| Item 4A.Unresolved Staff Comments                                                      | 78  |
| Item 5.Operating and Financial  Review and Prospects                                   | 78  |
| Item  6.Directors, Senior Management and Employees                                     | 115 |
| Item 7.  Major Shareholders and Related Party Transactions                             | 124 |
| Item 8. Financial  Information                                                         | 125 |
| Item 9. Offer and  Listing Details                                                     | 127 |
| Item  10.Additional Information                                                        | 128 |
| Item  11. Quantitative and Qualitative Disclosures about Market Risk              | 151 |
| Item 12.  Description of Securities Other than Equity Securities                       | 154 |
| **PART II**                                                                       | 155 |
| Item  13. Defaults, Dividend Arrearages and Delinquencies                         | 155 |
| Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds | 155 |
| Item 15.Controls  and Procedures                                                       | 155 |
| Item 16A.Audit  Committee Financial Expert                                             | 159 |
| Item 16B.Code of Ethics                                                                | 159 |
| Item 16C. Principal  Accountant Fees and Services                                      | 159 |
| Item 16D.  Exemption from the Listing Standards for Audit Committees                   | 160 |
| Item  16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 160 |
| Item 16F. Change  in Registrant’s Certifying Accountant                           | 162 |
| Item 16G.  Corporate Governance                                                        | 162 |
| **PART III**                                                                      | 166 |
| Item 17.Financial  Statements                                                          | 166 |
| Item 18.Financial  Statements                                                          | 166 |
| Item 19. Exhibits                                                                 | 167 |

 

Unless the contextotherwise requires, references to “WBD,” “Company,” “we,” “us,” or “our” referto Wimm-Bill-Dann Foods OJSC and its subsidiaries. “Lianozovsky Dairy Plant”was renamed “Wimm-Bill-Dann” in 2006. References to “Lianozovsky” and “LianozovskyDairy Plant” are to “Wimm-Bill-Dann”.

 

----

 

In this annual report,references to “U.S. dollars” or “$” are to the currency of the United States,references to “rubles” or “RUR” are to the currency of the Russian Federation,and references to “€” or “euro” are to the lawful currency of the member statesof the European Union that adopted a single currency in accordance with theTreaty of Rome establishing the European Economic Community, as amended by thetreaty on the European Union, signed at Maastricht on February 7, 1992.

 

2

----

Table of Contents

 

**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS**

 

Mattersdiscussed in this document may constitute forward-looking statements within themeaning of Section 27A of the U.S. Securities Act of 1933, or the U.S.Securities Act, and Section 21E of the U.S. Securities Exchange Act of1934, or the U.S. Exchange Act. The Private Securities Litigation Reform Act of1995 provides safe harbor protections for forward-looking statements in orderto encourage companies to provide prospective information about theirbusinesses. Forward-looking statements include statements concerning plans,objectives, goals, strategies, future events or performance, and underlying assumptionsand other statements, which are other than statements of historical facts.

 

Wedesire to take advantage of the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995 and are including this cautionarystatement in connection with this safe harbor legislation and other relevantlaws. This document and any other written or oral statements made by us or onour behalf may include forward-looking statements, which reflect our currentviews with respect to future events and financial performance. The words “believe,”“expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “predict,”“plan,” “may,” “should,” “will,” “could” and similar expressions identifyforward-looking statements. Forward-looking statements appear in a number ofplaces including, without limitation, “Item 3. Key Information—D. Risk Factors,”“Item 4. Information on Our Company” and “Item 5.”

 

Operatingand Financial Review and Prospects,” and include statements regarding: ourstrategies, outlook and growth prospects; future plans and potential for futuregrowth; our liquidity, capital resources and capital expenditures; our capitalstructure, including our indebtedness amounts; our ability to generatesufficient cash flow to meet our debt service obligations; growth in demand forour services; economic outlook and industry trends; developments of ourmarkets; the impact of regulatory initiatives; and the strength of ourcompetitors.

 

Theforward-looking statements in this document are based upon various assumptions,many of which are based, in turn, upon further assumptions, including withoutlimitation, management’s examination of historical operating trends, datacontained in our records and other data available from third parties. Althoughwe believe that these assumptions were reasonable when made, because theseassumptions are inherently subject to significant uncertainties andcontingencies which are difficult or impossible to predict and are beyond ourcontrol, we may not achieve or accomplish these expectations, beliefs orprojections. In addition to these important factors and matters discussedelsewhere herein and in the documents incorporated by reference herein,important factors that, in our view, could cause actual results to differmaterially from those discussed in the forward-looking statements, includingthe achievement of the anticipated levels of profitability, growth, cost andsynergy of our recent acquisitions, the timely development and acceptance ofnew products, changes in consumer preferences, the impact of competitivepricing, the ability to obtain necessary regulatory approvals, availability ofexternal financing on commercially acceptable terms, the condition of theRussian economy, the impact of general business and global economic conditionsand other important factors described from time to time in the reports filed byus with the U.S. Securities and Exchange Commission (the “SEC”).

 

Exceptto the extent required by law, neither we, nor any of our respective agents,employees or advisors intend or have any duty or obligation to supplement,amend, update or revise any of the forward-looking statements contained orincorporated by reference in this document.

 

3

----

Table of Contents

 

**PART I**

 

## ***Item1.Identity of Directors, Senior Management and Advisors***

Notapplicable.

 

## ***Item2. Offer Statistics and Expected Timetable***

Notapplicable.

 

## ***Item3. Key Information***

**A. SelectedFinancial Data**

 

Theselected consolidated financial data set forth below at December 31, 2009,2008, 2007, 2006 and 2005 and for the years then ended have been derived fromour audited financial statements prepared in accordance with U.S. GAAP. Theselected consolidated financial data should be read in conjunction with ourConsolidated Financial Statements included under “Item 18. FinancialStatements” and “Item 5. Operating and Financial Review and Prospects.”

 
| ** **                                                      | ** ** | **For the years ended ****December**** 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **In thousands of U.S. Dollars, except share and per  share data**    | ** ** |
| **Statement of Income Data:**                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Sales                                                           |       | $                                                                     | 2,181,062  |   | $ | 2,823,564 |   | $ | 2,438,328 |   | $ | 1,762,127 |   | $ | 1,394,590 |   |
| Cost of  sales                                                  |       | (1,452,737                                                            | )          | (1,910,528 | ) | (1,654,879 | ) | (1,194,159 | ) | (999,006 | ) |
| Gross  profit                                                   |       | 728,325                                                               |       | 913,036 |   | 783,449 |   | 567,968 |   | 395,584 |   |
| Selling  and distribution expenses                              |       | (379,659                                                              | )          | (488,110 | ) | (387,853 | ) | (246,054 | ) | (191,990 | ) |
| General  and administrative expenses                            |       | (137,440                                                              | )          | (171,400 | ) | (180,922 | ) | (134,481 |   | (109,642 | ) |
| Other  operating expenses                                       |       | (9,552                                                                | )          | (8,383 | ) | (704 | ) | (31,812 | ) | (6,457 | ) |
| Operating  income                                               |       | 201,674                                                               |       | 245,143 |   | 213,970 |   | 155,621 |   | 87,495 |   |
| Financial  income and expenses, net                             |       | (43,224                                                               | )          | (101,504 | ) | (16,851 | ) | (15,480 | ) | (22,868 | ) |
| Income  before provision for income taxes and minority interest |       | 158,450                                                               |       | 143,639 |   | 197,119 |   | 140,141 |   | 64,627 |   |
| Provision  for income taxes                                     |       | (40,678                                                               | )          | (39,898 | ) | (54,302 | ) | (41,560 | ) | (30,712 | ) |
| Consolidated  net income                                        |       | 117,772                                                               |       | 103,741 |   | 142,817 |   | 98,581 |   | 33,915 |   |
| Net  income attributable to noncontrolling interests            |       | (1,237                                                                | )          | (2,029 | ) | (2,769 | ) | (3,197 | ) | (3,649 | ) |
| Net  income attributable to WBD Foods shareholders              |       | $                                                                     | 116,535    |   | $ | 101,712 |   | $ | 140,048 |   | $ | 95,384 |   | $ | 30,266 |   |
| Earnings  per share - basic and diluted (1)                     |       | $                                                                     | 2.73       |   | $ | 2.31 |   | $ | 3.18 |   | $ | 2.17 |   | $ | 0.69 |   |
| Dividends  per share (2)                                        |       | $                                                                     | —     |   | $ | — |   | $ | 0.12 |   | $ | 0.55 |   | $ | — |   |
| Weighted  average number of shares outstanding                  |       | 42,763,668                                                            |       | 43,993,827 |   | 44,000,000 |   | 44,000,000 |   | 44,000,000 |   |
| **Other Data:**                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                           |       | $                                                                     | 121,838    |   | $ | 195,252 |   | $ | 192,662 |   | $ | 129,963 |   | $ | 75,110 |   |
| Cash  provided by operating activities                          |       | $                                                                     | 312,296    |   | $ | 321,190 |   | $ | 96,804 |   | $ | 169,954 |   | $ | 113,937 |   |
| Cash  used in investing activities (3)                          |       | $                                                                     | (125,262   | ) | $ | (181,681 | ) | $ | (183,481 | ) | $ | (218,409 | ) | $ | (124,107 | ) |
| Cash  provided by (used in) financing activities (3)            |       | $                                                                     | (187,336   | ) | $ | 162,499 |   | $ | 71,869 |   | $ | (11,660 | ) | $ | 81,569 |   |

 

----

(1)          Earnings per share is calculated dividing net income,attributable to WBD Foods shareholders by the weighted average number of sharesoutstanding over the reporting period.

 

(2)          No dividends were paid in 2009 and 2008. Dividendspaid in 2007 are attributable as follows: $0.17 per share — for the years 2002,2003 and 2004, $0.08 per share — for the three months ended March 31, 2006and $0.30 per share for the nine months ended September 30, 2006.

 

(3)          Cash paid for acquisition from noncontrollinginterests in the amount of $2,280, $3,723, $19,560, $9,749 and $1,050, wasincluded in cash used in financing activities for the years ended December 31,2009, 2008, 2007, 2006 and 2005, respectively.

 

4

----

Table of Contents

 
| ** **                    | ** ** | **At December 31,**    | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **In thousands of U.S. Dollars** | ** ** |
| **Balance Sheet Data:**       |       |                             |       |   |   |   |   |   |   |   |   |
| Total  assets                 |       | $                                | 1,488,804  |   | $ | 1,576,965 |   | $ | 1,533,102 |   | $ | 1,175,936 |   | $ | 920,557 |   |
| Total  net assets (1)         |       | 703,276                          |       | 656,300 |   | 686,986 |   | 516,471 |   | 411,662 |   |
| Total  debt (2)               |       | 523,940                          |       | 673,190 |   | 578,930 |   | 442,999 |   | 371,646 |   |
| Total  liabilities            |       | 785,528                          |       | 920,665 |   | 846,116 |   | 659,465 |   | 508,895 |   |
| Total  liabilities and equity |       | $                                | 1,488,804  |   | $ | 1,576,965 |   | $ | 1,533,102 |   | $ | 1,175,936 |   | $ | 920,557 |   |

 

----

(1)           Net assets represent net amount of total assets andtotal liabilities. Total net assets include equity attributable tononcontrolling interests in the amount of $9,396, $11,863, $13,862, $18,997 and$24,619 as of December 31, 2009, 2008, 2007, 2006 and 2005.

 

(2)           Total debt represents long-term and short-term loans,including the current portion of long-term loans, notes payable and vendorfinancing obligations.

 

**ExchangeRates and Inflation**

 

Thefollowing tables show, for the periods indicated, certain information regardingthe exchange rate between the ruble and the U.S. dollar, based on datapublished by the Central Bank of Russia or the CBR. These rates may differ fromthe actual rates used in the preparation of our financial statements and otherfinancial information appearing herein.

 
| ** **                       | ** ** | **Rubles per U.S. dollar** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **High**                                  | ** ** | **Low** | ** ** | **Average (1)** | ** ** | **Period********End** | ** ** |
| **Year ended December 31,** |       |                                      |       |   |   |   |   |   |   |
| 2009                             |       | 36.43                                     |       | 28.67 |   | 31.93 |   | 30.24 |   |
| 2008                             |       | 29.38                                     |       | 23.13 |   | 24.98 |   | 29.38 |   |
| 2007                             |       | 26.58                                     |       | 24.26 |   | 25.49 |   | 24.55 |   |
| 2006                             |       | 28.48                                     |       | 26.18 |   | 27.09 |   | 26.33 |   |
| 2005                             |       | 29.00                                     |       | 27.46 |   | 28.31 |   | 28.78 |   |

 

----

(1)The average of the exchange rates on the lastbusiness day of each full month during the relevant period.

 

OnApril 20, 2010, the exchange rate between the ruble and the U.S. dollarwas 29.17 rubles per one U.S. dollar.

 
| ** **         | ** ** | **Rubles per U.S. dollar** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| ** **         | ** ** | **High**                                  | ** ** | **Low** | ** ** |
| April 2010    |       | 29.50                                     |       | 28.93 |   |
| March 2010    |       | 29.98                                     |       | 29.19 |   |
| February 2010 |       | 30.52                                     |       | 29.88 |   |
| January 2010  |       | 30.43                                     |       | 29.43 |   |
| December 2009 |       | 30.72                                     |       | 29.06 |   |
| November  2009     |       | 29.82                                     |       | 28.67 |   |

 

Thefollowing table shows the rates of inflation in Russia for the years indicated:

 
| ** **                       | ** ** | **Inflation rate** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| **Year ended December 31,** |       |                    |       |
| 2009                             |       | 8.80                    | %          |
| 2008                             |       | 13.30                   | %          |
| 2007                             |       | 11.50                   | %          |
| 2006                             |       | 9.70                    | %          |
| 2005                             |       | 10.90                   | %          |

 

----

Source: Central Bank of Russia.

 

5

----

Table of Contents

 

Effectivefrom January 1, 2003, Russia no longer met the criteria for a highlyinflationary economy. However, the Russian economy has nonetheless beencharacterized by high rates of inflation.

 

Ouroperational results are affected by the rate of inflation and the nominal rateof appreciation/ depreciation of the ruble against the U.S. dollar (*i.e.,* by the real appreciation ordepreciation of the ruble against the U.S. dollar). In 2009, 2008 and 2007, theruble appreciated in real terms against the U.S. dollar as follows:

 
| ** **                                                                      | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Inflation  (1)                                                                  |       | 8.80     | %          | 13.3     | %          | 11.5     | %          |
| Nominal  appreciation of the rubles relative to the U.S.dollar (1)              |       | 3.1      | %          | 3.1      | %          | 6.3      | %          |
| Real  appreciation/ (depreciation) of the ruble relative to the U.S. dollar (1) |       | (2.9     | )%         | (19.9    | )%         | 6.7      | %          |

 

----

(1) Source:Central Bank of Russia.

 

**B.Capitalization and Indebtedness**

Notapplicable.

 

**C.Reasons for the Offer and Use of Proceeds**

Notapplicable.

 

**D. RiskFactors**

 

*An investment in our shares and ADSs involves a high degreeof risk. You should carefully consider the following information about theserisks, together with the information contained in this document, before youdecide to buy our shares or ADSs. If any of the following risks actuallyoccurs, our business, financial condition, results of operations or prospectscould be materially adversely affected. In that case, the value of our sharesand ADSs could also decline and you could lose all or part of your investment.*

* *

*We have described the risks and uncertainties that ourmanagement believes are material, but these risks and uncertainties may not bethe only ones we face. Additional risks and uncertainties, including those wecurrently are not aware of or deem immaterial, may also result in decreasedoperating revenues, increased operating expenses or other events that couldresult in a decline in the value of our ADSs.*

* *

**RisksRelating to Business Operations in Emerging Markets**

 

***Emerging markets such as the Russian Federation and otherCIS countries are subject to greater risks than more developed markets,including significant legal, economic, tax and political risks.***

 

Investorsin emerging markets such as the Russian Federation and other CIS countriesshould be aware that these markets are subject to greater risks than in moredeveloped markets, including in some cases significant legal, economic, tax andpolitical risks. Investors should also note that emerging economies, such asthe economy of the Russian Federation and other CIS countries, are subject torapid change and that the information set out herein may become outdatedrelatively quickly. Furthermore, in doing business in various countries of theCIS, we face risks similar to (and sometimes greater than) those that we facein Russia. See also “—Risks Relating to the Russian Federation.” Accordingly,investors should exercise particular care in evaluating the risks involved andmust decide for themselves whether, in light of those risks, their investmentis appropriate. Generally, investment in emerging markets is suitable for sophisticatedinvestors who 

 

6

----

Table of Contents

 

fully appreciate thesignificance of the risks involved and investors are urged to consult their ownlegal and financial advisors before making an investment in our securities.

 

**RisksRelating to Our Business and Industry**

 

***Economic downturns could hurt our turnover and materiallyadversely affect our strategy to increase our sales of premium brands.***

 

Demandfor dairy and certain beverage products depends primarily on demographicfactors and consumer preferences, as well as factors relating to discretionaryconsumer spending, including the general condition of the economy and generallevels of consumer confidence in the markets where we sell our products. Thewillingness of consumers to purchase branded food and beverage productsdepends, in part, on local economic conditions. In periods of economicuncertainty, such as the recent economic downturn, consumers tend to purchasemore economy brands and, to the extent that our business strategy depends onthe expansion of the sales of premium brands and value-added products, ourresults of operations could suffer. Reduced consumption of our products in anyof our key markets could reduce our turnover and profitability.

 

***The failure of our geographic expansion strategy couldhamper our continued growth and profitability.***

*** ***

Ourexpansion strategy depends, in part, on funding growth in additional markets,on our ability to identify attractive opportunities in markets that will growand on our ability to manage the operations of acquired or newly establishedbusinesses. Should growth decline in our existing markets, not increase asanticipated in markets in which we have recently acquired or establishedbusinesses, or not increase in markets into which we subsequently expand, ourgeographic expansion strategy may not be successful and our business andprofitability may suffer.

 

Inaddition, we currently have production facilities in Ukraine, Georgia,Kyrgyzstan and Uzbekistan and trade operations in Kazakhstan, and our strategycontemplates the acquisition of additional operations in other countries. Aswith Russia, these countries are emerging markets subject to greater legal, economic,social, tax and political risks than in more developed markets. In manyrespects, the risks inherent in transacting business in these countries aresimilar to those in Russia, especially those risks set out below in “—RisksRelating to the Russian Federation.”

 

Forexample, in August through September 2009, our subsidiary inUzbekistan, Vimm-Bill-Dann Toshkent, was inspected by the local authorities,who thereafter suspended the plant’s operations commencing in December 2009.The plant’s production activities remain suspended as of the date of thisreport. We are cooperating with the local authorities to resolve this matter.However, we cannot predict with any certainty if or when it will be resolved.

 

***Our growth strategy relies on acquisitions and establishingnew businesses, and our future growth, results of operations and market sharewould be adversely affected if we fail to identify suitable targets, outbidcompeting bidders or finance acquisitions on acceptable terms.***

*** ***

Ourstrategy depends on us being a large manufacturer in the dairy, babyfood andbeverages segments so that we can benefit from economies of scale, bettersatisfy customer needs and compete effectively against other producers. Ourgrowth will suffer if we are unable to implement our acquisition strategy,whether because we fail to identify suitable targets, outbid competing biddersor finance acquisitions on acceptable terms or for any other reason.Furthermore, any acquisitions or similar arrangements may harm our business ifwe are unsuccessful in our integration process or fail to achieve the synergiesand savings we expect.

 

Ourgrowth strategy may require additional external financing. Should the currenteconomic downturn persist, or deteriorate further, we may be unable to secureadditional financing on commercially favorable terms or at all. If we areunable to pursue additional expansion 

 

7

----

Table of Contents

 

opportunities due to thelack of financing or otherwise, our future growth, results of operations andmarket share would be materially adversely affected.

 

***We cannot guarantee the successful integration of existingor newly acquired businesses. If we fail to integrate our businessessuccessfully, our rate of expansion could slow and our financial condition,results of operations and prospects could be materially adversely affected.***

 

Wehave grown through numerous acquisitions and are in the process of integratingand restructuring some of our businesses. We may make additional acquisitionsin the future. Achieving the benefits of our acquisitions and our restructuringefforts will depend, in part, on integrating our businesses in an efficientmanner. We cannot assure you that such integration will happen or that it willhappen in a timely manner.

 

Theintegration of our businesses, as well as of any businesses we may acquire inthe future, requires significant time and effort from our senior management,who are also responsible for managing our existing operations. The integrationof new businesses may be difficult for a variety of reasons, includingdiffering cultures, management styles, systems and infrastructure, poor recordsor internal controls. In addition, integrating new acquisitions may requiresignificant initial cash investments. Furthermore, even if we are successful inintegrating our existing and new businesses, expected synergies and costsavings may not materialize, resulting in lower than expected profit margins.We cannot assure you that we will be successful in realizing any of the anticipatedbenefits of the companies that we are now in the process of integrating or thatwe may acquire in the future. If we do not realize these benefits, ourfinancial condition, results of operations and prospects could be materiallyadversely affected.

 

Wealso may acquire or establish businesses in countries that may represent newoperating environments for us and which may be located a great distance fromour headquarters in Moscow. We may thus have less control over the activitiesof these companies and may face more uncertainties with respect to theoperational and financial needs of these businesses, and this may hinder our integrationefforts.

 

***Rapid growth and expansion may cause us difficulty inobtaining adequate managerial and operational resources, restricting ourability to successfully expand our operations.***

 

Wehave experienced substantial growth and development in a relatively shortperiod of time, and we believe that our businesses will continue to grow forthe foreseeable future. The operating complexity of our business and theresponsibilities of management have increased as a result of this growth,placing significant strain on our managerial and operational resources. Ourfuture operating results depend, to a significant degree, upon the continuedcontributions of our management and technical personnel.

 

Wewill need to continue to improve our operational and financial systems andmanagerial controls and procedures to keep pace with our growth. We will alsohave to maintain close coordination among our logistical, technical,accounting, finance, marketing and sales personnel. Management of growth willrequire, among other things:

·                  the ability to integratenew acquisitions into our operations;

 

·                  continueddevelopment of financial and management controls and IT systems and theirimplementation in newly acquired businesses;

 

·                  increased marketingactivities;

 

·                  hiring and training ofnew personnel; and

 

·                  the ability to adapt tochanges in the markets in which we operate, including increased competition anddemand for our services.

 

8

----

Table of Contents

 

Ourinability to manage our growth successfully could have a material adverseeffect on our business, financial condition, results of operations andprospects.

 

***There is a material weakness in our internal control overfinancial reporting and we may not be able to remedy this material weakness orprevent future material weaknesses. If we fail to do so there is a reasonablepossibility that a material misstatement of the annual or interim statementswill not be prevented or detected on a timely basis.***

 

Thematerial weakness in our internal control over financial reporting asidentified by our management for the year ended December 31, 2009 issummarized below.

 

Ourfinancial statement closing process, including the transformation of ourstatutory financial statements into U.S. GAAP consolidated financial statementshas not reduced to an acceptably low level the risk that material errors mayoccur and may not be detected on a timely basis by management in the normal courseof business.

 

Notwithstandingthe steps we have taken and continue to take that are designed to remediate thematerial weakness identified above, we may not be successful in remediatingthis material weakness in the near or long term and we may not be able toprevent other material weaknesses in the future. Any failure to maintain orimplement required new or improved internal control over financial reporting,or any difficulties we encounter in their implementation, could result inadditional significant deficiencies or additional material weaknesses, failureto meet our periodic reporting obligations or result in material misstatementsin our financial statements. Any such failure could also adversely affect theresults of periodic management evaluations and annual auditor attestationsregarding the effectiveness of our internal control over financial reportingrequired under Section 404 of the Sarbanes-Oxley Act of 2002.

 

Theexistence of a material weakness could result in errors in our financial statementsthat could result in a restatement of financial statements, cause us to missour reporting deadlines and cause investors to lose confidence in our reportedfinancial information, leading to a decline in the price of our shares andADSs. See “Item 15. Controls and Procedures” for additional information.

 

***Increased competition among juice producers in Russia maymaterially adversely affect our results of operations.***

 

Althoughour beverages sales volume increased year-on-year by 10.4% in 2007, 3.7%****in 2008 and 5.0% in 2009, continued and/orincreased competition among juice and bottled water producers in Russia maycause future volatility or decline in the sales volumes of our beveragesproducts, as well as affect our beverages prices and profit margins, andmaterially adversely affect our results of operations. “See Item 4. Informationon Our Company—B. Business—Business Overview—Beverage products andbrands—Market trends and competition” for additional information regarding ourcompetitors.

 

***Consumer preferences for low-price juice products and thevolatility of certain raw materials required for juice production may cause ourprofit margins to decline and have a material adverse effect on our results ofoperations.***

 

Thejuice market in Russia is very competitive, with over 20 significant brands inthree fairly distinct price tiers, and various private label offerings. Thiscompetition can sometimes cause downward pressure on the prices of juiceproducts. With the exception of price adjustments made to compensate for rawmaterial inflation, price increases in rubles are relatively rare.

 

In terms of raw materials, most juice concentrate andsugar are international commodities that are normally denominated in U.S.dollars or euro. Over 2005, 2006, and 2007, in line with general

 

9

----

Table of Contents

 

international economic growth, prices for thesecommodities increased significantly year on year. Prices stabilized towards theend of 2008, and the price of juice concentrates slightly declined in 2009.However, as many national economies are showing signs of a return to economicgrowth, we believe that raw material prices are more likely to increase in thenear term. While a return to economic growth may favorably affect revenue, itcould also lead to sustained increases in raw material prices, which could putpressure on the gross profit margins of our juice products and, consequently,adversely affect our results of operations.

 

***Increasing tariffs and restructuring in the transport sectorcould have a material adverse effect on our business and results of operations.***

 

Railwayand ground transportation are our principal means of transporting supplies andjuice and water products to our facilities and customers. Currently, theRussian government sets rail tariffs and may further increase these tariffs asit did in 2007, 2008 and 2009. In addition, the uncertainty surrounding oilprices has lead to increased instability and unpredictable fluctuations in fueland transportation costs.

 

TheRussian government is actively considering plans to reorganize and/or privatizethe nation’s railway system. Any such reorganization or privatization mayresult in increased charges and tariffs while failing to generate the anticipatedcapital investment needed to repair, maintain and improve the railway system.Any significant increases in railway transport costs may lead to a decrease inour profit margins and have a material adverse effect on our business,financial condition and results of operations.

 

***Our inability to develop and maintain awareness of newbrands, products and product categories could significantly inhibit our futuregrowth and profitability.***

 

Ourbusiness strategy contemplates our entry into new product categories, thedevelopment of new products and marketing new brands in existing product lineswith the aim of increasing our market share and revenues. The success of thisstrategy depends, in part, on our ability to anticipate the tastes and dietaryhabits of consumers and to introduce and offer products that appeal to theirpreferences. Our failure to anticipate, identify or react to changes inconsumer preferences or to successfully develop new brands, products andproduct categories could negatively affect our expansion strategy and couldsignificantly inhibit our future growth and profitability.

 

In addition, developing and maintaining awareness ofour brands in a cost effective manner is critical to informing and educatingthe public about our current and future product offerings and is an importantelement in attracting new consumers. The successful promotion of our brandswill depend largely on the effectiveness of our marketing efforts and on ourability to provide reliable and useful products at competitive prices. Brandpromotion activities may not yield increased operating revenues, and even ifthey do, such operating revenues may not offset the operating expenses we incurin building our brands. Our failure to successfully and efficiently promote andmaintain our brands may limit our ability to attract new consumers and retainour existing consumers and materially adversely affect our business, financialcondition, results of operations and prospects.

 

Furthermore,our ability to attract new consumers and retain existing consumers depends, inpart, on our ability to maintain what we believe to be our favorable brandimage. Negative publicity or rumors regarding our company, our shareholders andaffiliates or our products could negatively affect this brand image, whichcould lead to loss of market share and revenues.

 

10

----

Table of Contents

 

***If we do not continue to be an efficient producer in ahighly competitive environment, particularly in relation to purchases of ourpackaging and raw materials, or an effective advertiser in a highlyinflationary media advertising environment, our operational results willsuffer.***

 

Oursuccess depends, in part, on our continued ability to be an efficient producerin a highly competitive industry. If we cannot continue to control coststhrough productivity gains or by eliminating redundant costs resulting fromacquisitions, our results of operations will suffer. In particular, priceincreases or shortages of packaging and raw materials could have a material adverseeffect on our results of operations. We are substantially dependent upon onesupplier of packaging materials, Tetra Pak, which may make us more vulnerableto changes in global supply and demand and their effect on price andavailability of these materials. Additionally, weather conditions and otherfactors beyond our control significantly influence the price and availabilityof our raw materials. A number of our raw materials, such as juice concentrateand sugar, are international commodities and are subject to international pricefluctuations, and we experienced significant increases in raw milk, sugar andconcentrate prices during 2006, 2007 and 2008. While raw milk prices declinedfor most of 2009, they increased significantly at the end of the year. Sugarprices increased in 2009 and although juice concentrate prices decreased in2009, we cannot guarantee them not to increase in the future. A substantialamount of our packaging and raw materials are denominated in euro and/or U.S.dollars. As a vast majority of our revenues are denominated in rubles,depreciation in the ruble against the euro and/or U.S. dollar cause ourpackaging and raw material expenses to increase.

 

Oursuccess also depends on our continued ability to be an effective advertiser inthe Russian market. We experienced significant media inflation over severalyears through 2008. As a result of the economic downturn, media inflationdecreased in 2009 by 14% on national television channels and by 20% on regionaltelevision channels and we do not expect any significant increase of mediainflation in 2010. However, we believe that future improvement in the economicclimate will lead to a general increase in advertising and a return to growthin media inflation.

 

Asubstantial increase in the prices of any of packaging, raw materials oradvertising, which we may not be able to pass on to customers through priceincreases, or a protracted interruption in supply with respect to packaging orraw materials, could have a material adverse effect on our business, financialcondition and results of operations. See “Item 4. Information on Our Company—B.Business—Business Overview.”

 

***We may be unable to continue to add products and greaterproduction capacity in faster growing and more profitable categories.***

 

Thefood industry’s growth potential is constrained by population growth andchanges in personal income levels. Our success depends, in part, on our abilityto expand our business faster than populations are growing in the markets thatwe serve, or notwithstanding declines in the populations in those markets. Oneway to achieve such growth is to enhance our portfolio by adding products andgreater production capacity in faster growing and more profitable categories.In the past, we have experienced delays in the installation of new productionequipment due to internal technical integration issues as well as delays byvendors and other third-party suppliers in installing and testing newproduction lines.

 

Depreciationof the ruble may also hamper our ability to acquire new equipment, as thisequipment is often priced in U.S. dollars or euros and, as a result, may becomeprohibitively expensive. Future delays in new equipment installation couldinhibit our ability to add products and expand our production capacity, causeour output volume to suffer and, consequently, have a material adverse effecton our results of operations.

 

11

----

Table of Contents

 

***Our inability to address the seasonal difference between thedemand for dairy products and the supply of raw milk and the increasing pricesof raw milk could result in a significant increase in our production costs,reducing our profitability.***

 

Thedemand for our dairy products is significantly higher during the winter months,when Russian raw milk production is at its lowest. Conversely, during thesummer months we generally experience depressed demand for dairy products inmany markets, while raw milk production is at its peak. If we are unable tomitigate this inverse relationship successfully, either through the purchase ofraw milk during the winter at commercially competitive prices or through theuse of powder milk, our production costs will increase significantly in thewinter, reducing our profitability.

 

In2007, we experienced significant increases in the raw-milk purchase price. Theaverage weighted raw-milk purchase price paid by us increased in ruble terms byapproximately 14% in 2005, 7% in 2006 and 64.8% in 2007. The price increaseswere due, in part, to droughts in Australia and New Zealand, the world’slargest suppliers of dry powder milk, and due to an increase in demand for milkproducts in such densely populated countries as China, Indonesia, Algeria and anumber of other countries in Asia and Africa. The unprecedented increase in theprice of raw and dry milk adversely affected our dairy profit margin in 2007,and continued increases in raw milk prices could further reduce ourprofitability. Throughout 2008, however, raw milk prices remained relativelystable. In 2009 the average raw milk price decreased by 12% compared to 2008.However, towards the end of 2009 we saw a sharp increase in the price of rawmilk compared to the latter part of 2008. The shortage of high quality rawmilk, coupled with raw milk price increases, may also limit our ability toexpand our production of high margin value-added dairy products. See “Item 5.Operating and Financial Review and Prospects—D. Trend Information” foradditional information.

 

***The Russian government has the power to regulate the prices for goodsof social significance, including food products that we make.***

 

TheRussian government has established a list of basic food products that aredeemed to have “social significance,” and federal and regional authorities havethe authority to regulate the prices of these products.  The list includes dairy products such ascertain types of milk and kefir. Following the rapid growth of raw-milk pricesduring 2007, the Russian government entered into a voluntary agreement withvarious food producers and large retail chains in October 2007 in order to“lock-in” prices for certain types of milk, kefir and sour cream. In January 2008,this agreement was extended with prices fixed at the January 2008 leveluntil May 1, 2008 and was not thereafter extended. In February 2010 anew trade law came into force stipulating that in cases where the price of aproduct of social significance increases by 30% or more within a 30 day period,the federal government has the right to set a maximum price for such productfor a 90 day period. Although the voluntary agreement with the Russiangovernment in 2007 and 2008 did not significantly impact our results ofoperations as we were still able to freely set the prices for the vast majorityof our products, and we have not yet been affected by the new trade law any futureprice regulations by the Russian government of milk or food products that weproduce may materially adversely affect our business, financial condition andresults of operations.

 

***In the event that the Moscow City Government was to reducesignificantly the prices or the amount of products it purchases from ourbabyfood business, then our revenues and profits from this business could bereduced.***

 

In2007, 2008 and 2009, babyfood purchases by the Moscow City Government comprisedapproximately 26.0%, 18.3% and 17.3% of the total sales of our babyfoodsegment, respectively. We supply these products to the Moscow City Governmentpursuant to a tender held on a yearly 

 

12

----

Table of Contents

 

basis. In the event thatwe were to lose a tender, or the Moscow City Government was to reducesignificantly the purchase price or the amount of products it purchases fromour babyfood business, and we were unable to find alternative purchasers, thenour revenues and profits from this business would suffer, which could have amaterial adverse effect on our financial condition and results of operations.

 

***Our substantial reliance on independent retailers andindependent distributors for the distribution of our products could lower ourturnover and reduce our competitiveness.***

 

Wesell our products either directly to retailers, including supermarkets, grocerystores and restaurants, or to independent distributors for resale to retailoutlets. We expect sales to retailers and independent distributors to continueto represent a significant portion of our revenues. Our operations anddistribution costs could be affected by the increasing consolidation of these entities,particularly as these customers become more sophisticated and attempt to forcelower pricing levels and seek an increase in promotional programs. For example,in the spring of 2001, several Russian supermarket chains formed a loosealliance which publicly announced its intention not to purchase our products.Although these supermarket chains now purchase our products, they may notcontinue to do so, and they or other supermarket chains may attempt a similarconsolidation of market power in the future. In addition, there has beenincreased merger activity among some of Russia’s supermarket chains in recentyears, which further strengthens the negotiating leverage in their dealingswith us. Although we have not yet experienced any material adverse effect onour business, financial condition and results of operations as a result ofthese mergers, we cannot guarantee that we will not experience adverseconsequences in the future. A number of large Western retailers, such as Germanretailer Metro and French retailer Auchan, have also opened stores in ourmarkets, which will put further pressure on prices.

 

We also compete with other brands for shelfspace in retail stores. Retailers also offer other products, including theirprivate labels that compete directly with our products. The recent economicdownturn may change consumer spending patterns and lead to an increase in theconsumption of private-label brands and to a decline in the consumption ofhigher margin national and regional brands, and this may negatively affect ourrevenues.

 

On February 1, 2010, the Federal Law “Onthe framework of state regulation of trading activities in the RussianFederation,” or the Trade Law, came into force. The Trade Law introduces anumber of new requirements in respect of manufacturers, distributors and chainretailers in the sphere of food products that may significantly affect ouroperations. These requirements include, among other things, a prohibition onunfair competition and other discriminatory activities, requirements relatingto the content and terms of supply agreements, as well as provisions regardingthe regulation of prices and retail margins by Russian governmentalauthorities. In particular, according to the Trade Law, the federal governmentcan, under certain circumstances, set the maximum retail prices for foodproducts of “social significance” within the territory of one or more regionsof Russia for up to 90 days.  See “—TheRussian government has the power to regulate the prices for goods of socialsignificance, including food products that we make.”

 

Provisions of the Trade Law may alsonecessitate the revision of our agreements with distributors and chainretailers on conditions that may be less favorable to us. For example, theTrade Law limits the remuneration paid under supply contracts by suppliers todistributors or retail chains in the form of bonuses for marketing, promotionaland similar activities to a maximum 10% of the price of the acquired foodproducts and prohibits the payment of bonuses for products of socialsignificance altogether. These new restrictions will require us to revise ourremuneration structure, although we do not expect it to affect our companysignificantly. The Trade Law also requires that we, retailers and distributorsdisclose on our websites, or make available on demand our main supplyconditions, including the material terms of supply contracts. Theserequirements may hinder our ability to negotiate with retailers which, in turn,could lead to increased costs 

 

13

----

Table of Contents

 

and/or a reduction in our turnover, competitivenessand profitability and have a material adverse effect on our business, financialcondition and results of operations.

 

Although the Trade Law also contains provisionsthat may positively affect our relations with chain retailers, including newrestrictions on retailers’ ability to charge suppliers for the opportunity tosupply new store locations and modifying the range of products supplied, it istoo soon to predict the overall impact of the new law.

 

***Independent distributors may export our products tocountries where such products do not meet the requirements of applicablelegislation.***

 

Inexporting our products, we attempt to meet the standards and requirements ofapplicable legislation governing the import of food products into the importingcountry. However, we do not have control over independent distributors, whohave, in some cases, attempted to export our products to countries where suchproducts did not meet the requirements of applicable legislation. Anyconsequent recalls of our products and the associated negative publicity mayadversely affect our reputation and materially adversely affect our results ofoperations.

 

***We do not carry the types of insurance coverage customary inmore economically developed countries for a business of our size and nature,and a significant event could result in substantial property loss and inabilityto rebuild in a timely manner or at all.***

 

Wemaintain insurance against some, but not all, potential risks and lossesaffecting our operations. We cannot provide assurance that our insurance willbe adequate to cover all of our losses or liabilities. We also can provide noassurance that insurance will continue to be available to us on commerciallyreasonable terms. Should a significant event affect one of our facilities, wecould experience substantial property loss and significant disruptions inproduction, for which we would not be compensated. Additionally, depending onthe severity of the property damage, we may not be able to rebuild damagedproperty in a timely manner or at all. We do not maintain separate funds orotherwise set aside reserves for these types of events. Any such loss orthird-party claim for damages may have a material adverse effect on ourbusiness, results of operations and financial condition.

 

Weare also exposed to product liability claims in the event that consumption ofour products results in illness, injury or death, and we cannot assure you thatwe will not experience any material product liability losses in the future.Although we maintain insurance coverage for product liability, such coveragemay be insufficient in the event of a claim. In addition, if any of the productswe have produced are determined to be unsuitable for consumption, we may berequired to participate in a recall involving such products.

 

Additionally,although we have made and will continue to make capital and other expendituresto comply with environmental requirements, in 2008 and 2009 we did not incurmaterial capital expenditures for environmental controls. For a more detaileddiscussion of our insurance coverage see “Item 4. Information on Our Company—B.Business Overview—Insurance.”

 

***If transactions of members of our group of companies andtheir predecessors-in-interest were to be challenged on the basis ofnon-compliance with applicable legal requirements, the remedies in the event ofany successful challenge could include the invalidation of such transactions orthe imposition of other liabilities on such group members.***

 

Membersof our group, or their predecessors-in-interest, at different times took avariety of actions relating to share issuances, share disposals andacquisitions, mandatory buy-out offers, valuation of property, interested partytransactions, major transactions, meetings of the group members’ governingbodies, other corporate matters and anti-monopoly issues that, if successfully 

 

14

----

Table of Contents

 

challenged on the basisof non-compliance with applicable legal requirements by competent stateauthorities, counterparties in such transactions or shareholders of therelevant group members or their predecessors-in-interest, could result in theinvalidation of such transactions and our corporate decisions, restrictions onvoting control or the imposition of other liabilities. Because applicableprovisions of Russian law are subject to many different interpretations, we maynot be able to defend successfully any challenge brought against suchtransactions, and the invalidation of any such transactions or imposition ofany such liability may, individually or in the aggregate, have a materialadverse effect on our business, financial condition and results of operations.

 

***Our management information system may be inadequate tosupport our future growth.***

 

Ourmanagement-information system is less developed in certain respects than thoseof food producers in more developed markets and may not provide our managementwith as much or as accurate information as those in more developed markets. Inaddition, we may encounter difficulties in the ongoing process of implementingand enhancing our management-information system.

 

Ourinability to maintain an adequate management information system may have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***Our competitive position and future prospects depend on oursenior managers and other key personnel.***

 

Ourability to maintain our competitive position and to implement our businessstrategy is dependent to a large degree on the services of our seniormanagement team and other key personnel. Moreover, competition in Russia forpersonnel with relevant expertise is intense due to the small number ofqualified individuals and, as a result, we attempt to structure ourcompensation packages in a manner consistent with the evolving standards of theRussian labor market. We are not insured against the detrimental effects to ourbusiness resulting from the loss or dismissal of our key personnel. The loss ordecline in the services of members of our senior management team or aninability to attract, retain and motivate qualified key personnel could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***We may not be able to adequately protect our intellectualproperty rights.***

 

Given the importance of brand recognition to ourbusiness, we have invested considerable effort in protecting our portfolio ofintellectual property rights, including trademark registration. However, thesteps we have taken may not be sufficient and third parties may infringe ormisappropriate our proprietary rights. Moreover, Russia and the other countriesof the CIS in which we operate generally offer less intellectual propertyprotection than in Western Europe or North America. If we are unable to protectour proprietary rights against infringement or misappropriation, our business,financial condition and results of operations could be materially adverselyaffected. See “Item 4. Information on Our Company—B. Business Overview—CurrentOperations—Trademarks and Patents.” In addition, litigation may be necessary toenforce our intellectual property rights, to determine the validity and scopeof the proprietary rights of others, or to defend against claims ofinfringement. Any such litigation may result in substantial costs and diversionof resources, and, if decided unfavorably to us, could have a material adverseeffect on our business and results of operations.

 

***Failure to receive trademark protection for several of ourbrand names and images could negatively affect our marketing plans, resultingin increased advertising expenses and a material adverse effect on ourfinancial results.***

 

15

----

Table of Contents

 

Asof April 20, 2010, we had 81 pending trademark applications in Russia and 28pending trademark applications abroad. We are also in the process of contestingthe rejection of the registration of a number of our trademarks in countriesoutside of Russia. If trademark status is not granted to the brands included inour pending applications, we will have limited ability to defend these brandnames or images from use by others, significantly reducing the value of anyadvertising using these brand names or images. This will negatively affect ourmarketing plans for the products that utilize these brand names or images, andmay require us to develop a different marketing approach for these products,resulting in increased advertising expenses and materially adversely affectingour financial results. See “Item 4. Information on Our Company—B. Business Overview—CurrentOperations—Trademarks and Patents.”

 

***If we are unable to obtain adequate funding, we may have tolimit our operations substantially, which could have a material adverse effecton our business, financial condition, results of operations and prospects.***

 

Wecontinue to make significant capital expenditures, particularly in connectionwith the expansion of our existing operations, upgrades of existing facilities,enhancing our infrastructure, including building new warehouses andacquisitions of new companies. For the fulfillment of our capital investmentplans, excluding expenditures for acquisitions, we invested approximately$192.7 million in 2007, $195.3 million in 2008 and $121.8 million in 2009. Wespent approximately $21.8 million in 2007 on acquisitions andapproximately $3.3 million in 2008 and $2.3 million in 2009 in order to buy outnoncontrolling interests. However, we may not be able to meet our plannedcapital spending needs in the future in the event of the following potentialdevelopments:

·                  a lack ofexternal financing sources;

 

·                  changes in theterms of existing financing arrangements;

 

·                  slower thananticipated growth in demand for our products;

 

·                  slower thananticipated revenue growth;

 

·                  regulatorydevelopments; or

 

·                  a global economicslowdown and, in particular, deterioration in the Russian economy and economiesof other countries we operate in, particularly Ukraine and Kazakhstan.

 

Tomeet our financing requirements, we may need to attract additional equity ordebt financing. Russian companies are limited in their ability to issue sharesin the form of ADSs or other depositary receipts due to Russian securitiesregulations, which, until 2005, generally provided that no more than 40% of aRussian company’s shares may be circulated abroad through depositary receiptprograms. This limitation was subsequently decreased to 30% in 2008 and furtherdecreased to between 5% and 25% (depending on the type of issuer) in 2009. OurADS and GDS programs together account for 40% of our outstanding shares (thisamount was approved by the Russian securities regulator based on the priorlimit and is not required to be reduced). As a result, we are currently unableto raise additional equity financing through the issuance of depositaryreceipts. If we cannot obtain adequate funds to satisfy our capitalrequirements, we may need to limit our operations significantly, which couldhave a material adverse effect on our business, results of operations andprospects.

 

***We are controlled by a group of shareholders whose interestscould conflict with those of the holders of our securities.***

 

Asof April 20, 2010, to our knowledge, approximately 43.0% of ouroutstanding common stock was owned by our founding shareholders**.**This group has acted in concert since ourestablishment and, since 1997, pursuant to a Partnership and CooperationAgreement, amended and 

 

16

----

Table of Contents

 

restated on January 16,2002, which requires the parties to vote the same way. This group continues tobe bound by this agreement to vote as a block until any member of the groupelects to withdraw from the agreement. This agreement gives them control overus and the ability to elect a majority of the directors, appoint management andapprove certain actions requiring the approval of a majority of ourshareholders.

 

Ifnot otherwise required by law, resolutions at a shareholders’ meeting will beadopted by a simple majority in a meeting at which shareholders holding morethan half of the issued share capital are present or represented. Accordingly,as long as the group continues to hold, directly or indirectly, a controllingstake in our shares and act in concert pursuant to the Partnership andCooperation Agreement, they will have the power to control the outcome of mostmatters to be decided by vote at a shareholders’ meeting and the appointment ofa majority of directors and removal of directors. The group will also be ableto control or significantly influence the outcome of any vote on, among otherthings, any proposed amendment to our charter, proposed reorganizations andsubstantial asset sales or other major corporate transactions. Thus, the groupmay be able to take actions that may conflict with the interest of holders ofour ADSs.

 

Membersof our controlling group of shareholders also have interests in othercompanies, some of which conduct business with us. We are not aware of anyrelated-party transactions that are being carried out on preferential terms,but cannot exclude the possibility of related-party transactions that maypotentially result in the conclusion of transactions on terms less favorablethan could be obtained in arm’s length transactions.

 

Tothe best of our knowledge, Groupe Danone, together with its subsidiaries, holdsan 18.4% stake in Wimm-Bill-Dann Foods OJSC, which allows Groupe Danone tonominate its candidates to our board of directors. The election of a directornominated by Groupe Danone may present a conflict of interest betweenWimm-Bill-Dann Foods OJSC and Groupe Danone, which is one of our maincompetitors.

 

***Changes in Russian law will limit the amount of advertisingtime permitted on television, which could increase our advertising expenses andhave a material adverse effect on our business, financial condition and resultsof operations.***

 

Thenew Federal Law on Advertising which came into force on July 1, 2006,limits the amount of time that a broadcaster may devote to advertising to 15%of total broadcasting time per day and 20% in any given hour. From January 1,2008, advertising was further limited to no more than 15% in any given hour ofbroadcasting time.

 

Asa result of this law, the amount of available advertising time decreased. Inturn, the reduction in available advertising time led to increased costs toadvertisers for purchasing advertising time due to an increased demand foravailable time slots and a drive by media outlets to recover their losses fromthe decreased volume of advertising time they are permitted to sell. We areamong Russia’s top advertisers.

 

Accordingto Gallup, we were the tenth largest advertiser in 2007 and 2008, and theseventh largest in 2009. In 2007, 2008 and 2009, over 50% of our advertisingexpenditures related to television advertisements. At the same time, mediainflation in Russia has been significant in recent years, exceeding 35% in 2006and 50% in 2007 and 2008. Although media inflation decreased in 2009 and we donot expect significant increases in 2010 due to the recent economic downturn,any substantial increase in the future may lead us to decrease our televisionadvertising which, consequently, could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

17

----

Table of Contents

 

***In the event that deficiencies or ambiguities inprivatization legislation are successfully exploited to challenge our ownershipin our privatized subsidiaries and we are unable to defeat these challenges, werisk losing our ownership interest in the subsidiaries or their assets, whichcould materially adversely affect our business, financial condition, results ofoperations and prospects.***

 

Ourbusiness includes a number of privatized companies in Russia and othercountries of the former Soviet Union, and our acquisition strategy will likelyinvolve the acquisition of additional privatized companies. To the extent thatprivatization legislation is vague, inconsistent or in conflict with otherlegislation, including conflicts between federal and local privatizationlegislation, many privatizations are vulnerable to challenge, includingselective challenges. For instance, a series of presidential decrees issued in1991 and 1992, that granted to the Moscow City Government the right to adoptits own privatization procedures, were subsequently held to be invalid by theConstitutional Court of the Russian Federation, which ruled, in part, that thepresidential decrees addressed issues that were the subject of federal law.While this court ruling, in theory, did not require any implementing actions,the presidential decrees were not officially annulled by another presidentialdecree until 2000. In the event that any title to, or our ownership stakes in,the privatized companies acquired by us, are subject to challenge as havingbeen improperly privatized and we are unable to defeat this claim, we risklosing our ownership interest in the company or its assets, which could materiallyaffect our business and results of operations. In particular, we own asubstantial number of our other subsidiaries through Wimm-Bill-Dann (formerly LianozovskyDairy Plant), which was privatized in 1995. As Wimm-Bill-Dann constitutes themajority of our production capacity, its loss would materially adversely affectour, business, financial condition, results of operations and future outlook.

 

Inaddition, under Russian law, transactions in shares may be invalidated on manygrounds, including a sale of shares by a person without the right to dispose ofsuch shares, breach of interested-party and/or major transactions rules andfailure to register the share transfer in the securities register. As a result,defects in earlier transactions in shares of our subsidiaries (where suchshares were acquired from third parties) may cause our title to such shares tobe subject to challenge. Additionally, of the 98.6% of Wimm-Bill-Dann which weown, 15% was acquired in a separate investment tender held by the Department ofState and Municipal Property of the Moscow City Government. Under thelegislation governing such tenders, a tender is not valid unless at least twoparticipants submit bids. In the investment tender for Wimm-Bill-Dann, the onlytwo participants were entities which were under common control, an arguable violationof this requirement. In the event that the Russian government authorities weresuccessfully to maintain that this tender was not duly held since theparticipants were under common control, we could lose 15% of our stake in theLianozovsky Dairy Plant, materially adversely affecting our results ofoperations.

 

***Russian companies can be forced into liquidation on thebasis of formal non-compliance with certain requirements of Russian law.***

 

Certainprovisions of Russian law may allow a court to order the liquidation of aRussian legal entity on the basis of its formal non-compliance with certainrequirements during formation, reorganization or during its operation. Therehave been cases in the past in which formal deficiencies in the establishmentprocess of a Russian legal entity or non-compliance with provisions of Russianlaw have been used by Russian courts as a basis for the liquidation of a legalentity. Weaknesses in the Russian legal system create an uncertain legalenvironment, which makes the decisions of a Russian court or a governmentalauthority difficult, if not impossible, to predict. If involuntary liquidationwere to occur, such liquidation could lead to significant negative consequencesfor our group.

 

18

----

Table of Contents

 

For example,in Russian corporate law, if the net assets of a Russian joint stock companycalculated on the basis of Russian accounting standards are lower than itscharter capital as at the end of its third or any subsequent financial year,the company must either decrease its charter capital or liquidate. If thecompany fails to comply with these requirements, governmental or localauthorities can seek the involuntary liquidation of such company in court, andthe company’s creditors will have the right to accelerate their claims ordemand early performance of the company’s obligations as well as compensationof any damages.

 

The existenceof negative assets may not accurately reflect the actual ability of a companyto pay debts as they come due. Many Russian companies have negative net assetsdue to very low historical asset values reflected on their Russian accountingstandards balance sheets; however, their solvency, *i.e.*, their ability to pay debts as they come due, is nototherwise adversely affected by such negative net assets. Some Russian courts,in deciding whether or not to order the liquidation of a company for havingnegative net assets, have looked beyond the fact that the company failed tofully comply with all applicable legal requirements and have taken into accountother factors, such as the financial standing of the company and its ability tomeet its tax obligations, as well as the economic and social consequences ofits liquidation. Nonetheless, creditors have the right to accelerate claims,including damages claims, and governmental or local authorities may seek the liquidationof a company with negative net assets. Courts have, on rare occasions, orderedthe involuntary liquidation of a company for having net assets less than theminimum charter capital required by law, even if the company had continued tofulfill its obligations and had net assets in excess of the minimum chartercapital at the time of liquidation.

 

Theamount of net assets of some of our subsidiaries is below the minimum legalrequirements. Although we are currently taking steps to remedy this and thesesubsidiaries continue to meet all of their obligations to creditors, there is aminimal risk of their liquidation.

 

***Our inability to register property in a timely manner maylead to fines and temporarily restrict our expansion plans.***

 

Wehave grown both organically and through numerous acquisitions. As a result, weare routinely required to register property that we have acquired and/orconstructed. Russian property laws, particularly municipal laws in Moscow, arecomplicated and ambiguous. Among other things, these laws require a registrantto provide the property registration authority with numerous documents fromvarious state authorities, including from construction authorities, landregister authorities, tax authorities and fire safety authorities, amongothers. Each of these entities exercises considerable discretion in matters ofenforcement and interpretation of applicable laws, regulations and standards,the issuance and renewal of permits and in monitoring compliance with the termsthereof. Consequently, a considerable amount of effort, time and money isrequired to register property in Russia, and notwithstanding these efforts,there is no assurance we will be able to register all of our property on atimely basis. Our failure to timely register our property may result in ourinability to properly reflect such real estate in our accounting and taxfilings, which, in turn, may lead to the imposition of fines. In addition, wemay be restricted on our ability to use unregistered real estate.

 

***Implementation of new federal or local government policiesor selective application of existing policies, affecting the food industrycould substantially and negatively affect our turnover and operating margin.***

 

Theimplementation of new federal or local government policies or selective applicationof existing policies, affecting the food industry could have a significantimpact on our business. For example, the federal and local governments havebeen known to implement trade barriers, subsidies and other policies favoringcertain producers. Additionally, customs regulations in Russia 

 

19

----

Table of Contents

 

are unclear, subject tofrequent change and are applied inconsistently. The imposition of highercustoms duties on products we import would increase the costs of our productsand reduce our profits, while the implementation of price controls on productswe produce would reduce our operating margin. For example, federal customsregulations enacted in 2001 subjected juice concentrate imports to the highestlevel of customs duties allowed for that particular category of imports. Inaddition, federal customs regulations enacted in 2002 stipulate minimumdeclaration amounts for imported goods. As a result of such regulations, we maybe forced to declare a higher value for imported goods than the amount actuallypaid and, consequently, pay a higher tariff on such goods.

 

Anotherexample of a government regulation that has affected our business is GovernmentRegulation No. 988, which requires food producers intending to develop andoffer a new food product to the public to file an application to obtain stateregistration for the product and its inclusion in the State Register ofPermitted Food Products. Failure to comply with Regulation No. 988 couldcause delays in introducing new food and beverage products, as well as thedisallowance of certain tax benefits otherwise available to producers ofcertain food products, such as baby food. The implementation of this regulationin June 2004 has caused delays in our introduction of certain new productsand has increased production costs. We may continue to experience similar delaysand increased costs in connection with Regulation No. 988 in the future.

 

Inaddition, the Sanitary Rules on Children’s Food Products, which becameeffective on June 1, 2005, disallow certain tax benefits we formerlyenjoyed in relation to some of our baby food products.

 

InDecember, 2008, new technical regulations for all dairy products, includingdrinking milk, fermented dairy products, cheese, butter, margarine, yogurts anddairy desserts came into force. The legislation mandates that products labeledas “milk” should not contain any dry milk, vitamins, or minerals. Any drinkingmilk that contains these ingredients must be labeled as “milk product” or “milkdrink”. We have sought to comply with the new rules and have changed oursupply and production processes in accordance with them. For example, weincluded clauses in our supply contracts that the milk supplied must be incompliance with all of the requirements of these new regulations. Accordingly,we have also made changes to our packaging labels. While we believe that we arein compliance with these new requirements, we cannot guarantee that therelevant regulatory authorities will judge us to be in compliance with thesenew labeling requirements. In addition, as the regulation applies stricterrequirements to raw milk, this may lead to price increases in our raw-milksupply costs which we may not be able to pass on to our customers andconsequently have an adverse effect on our results.

 

Inaddition, a new federal law, “On the technical regulation of juice productionfrom fruits and vegetables,” came into force in April 2009. The newregulations provide a definition for juices and nectars, define the level ofconcentration of juice in finished products, define types of juices andnectars, establish a list of food supplements that can be added into juiceproducts and indicate the maximum permissible concentration of thesesupplements in juice products. The law also sets requirements for the packagingof juice products and information that is required to be disclosed on thepackaging of juice products as well as other requirements for juice producersand equipment. All juice products must now be certified according to Russianstandards and it is prohibited to sell juice products in Russia without suchcertification. While we believe that we are in compliance with these newrequirements, we cannot guarantee that the relevant regulatory authorities willjudge us to be in compliance with these new requirements. We also cannotpredict how these new requirements will influence prices on the juice marketand, consequently, any potential negative effect on our results.

 

We are also subject to the Trade Law that cameinto force in February 2010, which increases the regulation ofmanufacturers and retailers and their pricing policies.  See “—Our substantial 

 

20

----

Table of Contents

 

reliance on independent retailers and independentdistributors for the distribution of our products could lower our turnover andreduce our competitiveness.”

 

From February 15, 2010, food producers areno longer required to obtain certification of their food products, and caninstead notify the relevant government regulators regarding their products andproduction process.

 

Weare also subject to regional legislation and regulations. For example, in February 2007,the Moscow government enacted regulations on the voluntary labeling of foodscontaining genetically modified organisms, or GMO. While GMO labeling is notobligatory, it may be treated as such by the regional authorities in Moscow. Inthis case, we will be required to label our products as not geneticallymodified and incur additional expenses in relation to this requirement.

 

***Increased domestic production by our foreign competitorscould reduce our competitive advantages and have a material adverse effect onour market share and results of operations.***

 

Anumber of our foreign competitors, such as Danone, Parmalat, Lactalis, Campina,Ehrmann and Onken, have been investing and continue to invest in domesticproduction facilities, while others, such as Coca-Cola and Pepsi, have acquireddomestic producers. These investments and acquisitions reduce the competitiveadvantages that we have over foreign competitors without domestic productioncapability and could have a material adverse effect on our market share. Acontinuation of this trend may result in increased competition for qualifiedpersonnel and higher labor costs, and would have a material adverse effect onour business and results of operations. See “Item 4. Information onOur Company—B. Business Overview” for a further description of the recentinvestments by some of our foreign competitors in Russian productionfacilities.

 

***If the Federal Antimonopoly Service were to conclude that weacquired or created a new company in contravention of antimonopoly legislation,it could impose administrative sanctions and require the divestiture of thiscompany or other assets, which could have a material adverse effect on ourbusiness and results of operations.***

 

Ourbusiness has grown substantially through the acquisition and founding ofcompanies, many of which required the prior approval or subsequent notificationof the Federal Antimonopoly Service, or FAS, or its predecessor agencies. Inpart, relevant legislation restricts the acquisition or founding of companiesby groups of companies or individuals acting in concert without this approvalor notification. While we believe that we have complied with the applicablelegislation for our acquisitions and founding of new companies, thislegislation is sometimes vague and subject to varying interpretations.Additionally, although the common ownership by our shareholders of a number ofcompanies which are now our subsidiaries was generally made known to FAS andits predecessors, the existence of the shareholders’ agreement among ourcurrent shareholders was not disclosed. If FAS were to conclude that anacquisition or creation of a new company was done in contravention ofapplicable legislation, it could impose administrative sanctions and requirethe divestiture of this company or other assets, which could have a materialadverse effect on our business and results of operations.

 

***Further restrictions on our babyfood business which iscategorized as a monopoly, the extension of monopoly status to our otherbusinesses, or a finding that we or our distributors have violated antimonopolylaws could result in further regulation of our prices and restriction on our commercialactivities.***

 

UnderRussian legislation, FAS may categorize a company controlling over 50% of amarket, or otherwise able to control the market conditions, as a dominant forcein such market. Companies controlling over 35% are listed by FAS in a specialregister and may become subject to monitoring 

 

21

----

Table of Contents

 

and reportingrequirements with respect to such markets. Current Russian legislation does notclearly define “market” in terms of the types of services or the geographicarea.

 

Our babyfood business is categorized as a monopoly inMoscow and the Moscow region, placing restrictions on our ability to increaseour profit margins for that business. Our Moscow-based subsidiary, Moscow BabyFood Plant was included on the list of entities holding dominant position inthe Moscow region baby food market. In 2007, we merged Moscow Baby Food Plantinto our Moscow-based subsidiary Wimm-Bill-Dann and received all requisiteapprovals from FAS for such merger. Although Moscow Baby Food Plant no longerexists, it remains on the list of entities holding dominant position in theMoscow region baby food market. Wimm-Bill-Dann, however, has not beencategorized by FAS as entity holding dominant position in the Moscow regionbabyfood market. Any future ruling that Wimm-Bill-Dann or any of our otherbusinesses are a monopoly could result in the regulation of our prices andrestrictions on our commercial activities, which could have a material adverseeffect on our business, financial condition, results of operations andprospects.

 

***Any finding by FAS that our businesses have acted in violation of theantimonopoly laws may result in the imposition of substantial fines and theimposition of government-determined prices, restrictions on our activities orexpansion, or government-mandated withdrawal from regions or markets where wecurrently operate, which could have a material adverse effect on our business,financial condition, results of operations and prospects.***

 

Followingthe sudden and, in some cases, substantial increases in food prices in 2007,FAS initiated inspections of food producers, including us, as well asdistributors and retail chains throughout Russia in order to determine whetherthese price increases were caused by price collusion among producers andretailers. While we strongly believe that we have not violated and are notcurrently violating any antimonopoly regulations, it is possible that FAS andits regional divisions will nonetheless determine otherwise.

 

Regionaldivisions of FAS have undertaken inspections of our operations in Omsk,Voronezh, St. Petersburg, Krasnoyarsk, Ufa and Moscow.

 

InOmsk, FAS ended its investigation after finding no violations. In Voronezh, theregional division of FAS found us to be in violation of antimonopolylegislation and assessed us with a fine, although no factual or legal basis wasgiven for this finding. We successfully appealed this decision to the higherFAS body and, as a result, this decision was declared invalid and a newinvestigation was initiated. This new investigation resulted in a decisionaccording to which we, along with certain other regional producers, wererecognized as holding a dominant position in the Voronezh regional market. Thisfinding did not result in any fines and/or any other sanctions.

 

The investigation in St. Petersburg resulted ina number of antimonopoly and administrative proceedings in which the St. Petersburgregional FAS alleged that we were engaging in unwarranted price increases forour finished products and purchasing raw milk at below-market levels, and wewere assessed fines totaling $1.0 million. The investigation in St. Petersburgresulted in four antimonopoly litigations and four administrative litigationsbased on two of the abovementioned antimonopoly proceedings. One of theantimonopoly proceedings was ended by the St. Petersburg regional FAS. Wesuccessfully contested these claims and, as of the date of this document, thereare no remaining FAS claims pending in St. Petersburg.

 

In Krasnoyarsk, the regional FAS requested thatwe provide information on the price at which we purchased raw milk. However,this request did not result in any further investigation or proceedings againstus. In March 2009, the regional FAS in Ufa initiated a claim against ourlocal branch following an investigation alleging that certain terms of our formdistribution contract 

 

22

----

Table of Contents

 

violated anti-competition provisions of Russianantimonopoly legislation. We successfully contested this claim.

 

In July 2009, the regional FAS in Moscowinitiated two claims against us and our competitors Ehrmann, Danone and Campinaalleging collusion among the producers to drive down the prices for raw milk inthe Moscow region. These claims are currently pending.

 

In addition, in 2009, the Moscow NorthernAdministrative District commenced a social support program under which itsought to set prices for certain food products of social significance. In November 2009,Moscow FAS initiated a claim against us alleging that we acted in concert withthe Moscow Northern Administrative District to establish monopoly prices. Webelieve these claims to be without merit, as we did not take part in the socialsupport program, nor did we sell our products to the retail stores that tookpart in this program or influence the pricing policy of these stores. Thelitigation is currently pending.

 

We have also been subject to investigations byfederal FAS.

 

InJune 2008, FAS initiated an investigation into dairy producers, includingus, connected with a decline in raw milk prices seeking to determine whetherthere was any collusion among milk producers to drive down the prices paid tosuppliers. We believe this decline was due to seasonal factors and weanticipate that we will be requested by FAS to disclose detailed informationregarding our raw milk purchasing prices. Although we believe that we havecomplied with regulations on the procurement of raw milk, FAS may findotherwise, and our business and financial condition could be adverselyaffected.

 

InNovember 2007, FAS also initiated investigations of food distributors inconnection with the rise in food prices, and several distributors of ourproducts were investigated. Six of our distributors in Voronezh wereinvestigated, and FAS imposed a fine on one of these distributors based, amongother things, on a provision in our standard distribution contracts indicatinga recommended price for our products, which FAS found to be in violation of theantimonopoly laws. Distributors do not always adhere to our recommended price,and the contract provision was not intended to hamper competition, but, rather,to provide our distributors with guidelines in setting prices for our products.As a result of this ruling, in October 2007, we submitted our templatedistributor contract, which includes the recommended price provision, to FASfor their approval and confirmation that the contract does not violateantimonopoly laws. FAS approved the contract in March 2008, and we arehopeful that this will mitigate any risk that we or our distributors will befound in violation of the antimonopoly laws in the future based on ourdistribution contracts.

 

Anyfinding by FAS that our businesses have acted in violation of the antimonopolylaws may result in the imposition of substantial fines and the imposition ofgovernment-determined prices which could, in turn, lead to a decline in ourprofit margins. Additionally, restrictions on our activities or expansion, orgovernment-mandated withdrawal from regions or markets where we currentlyoperate, could have a material adverse effect on our business, financialcondition, results of operations and prospects.

 

***In the event that our minority shareholders or minorityshareholders of our subsidiaries were to challenge successfully past or futureinterested-party transactions, or do not approve interested-party transactionsor other matters in the future, the invalidation of such transactions orfailure to approve such matters could have a material adverse effect on ourbusiness, financial condition, results of operations or prospects or the valueof the shares and ADSs.***

 

Weown less than 100% of the equity interests in some of our subsidiaries. Inaddition, certain of our wholly owned subsidiaries have had other shareholdersin the past. We and our subsidiaries 

 

23

----

Table of Contents

 

in the past have carriedout, and continue to carry out, transactions which may be considered to be “interested-partytransactions” under Russian law, requiring approval by disinterested directors,disinterested independent directors or disinterested shareholders depending onthe nature of the transaction and parties involved. See “Item 10. AdditionalInformation—B. Charter and Certain Requirements of RussianLegislation—Interested Party Transactions.” The provisions of Russian lawdefining which transactions must be approved as “interested-party transactions”are subject to different interpretations. We cannot assure you that our and oursubsidiaries’ applications of these concepts will not be subject to challengeby former and current shareholders. Any such challenges, if successful, couldresult in the invalidation of transactions, which could have a material adverseeffect on our business, financial condition, results of operations or prospectsand the value of the shares and ADSs.

 

Inaddition, Russian law requires a three-quarters majority vote of the holders ofvoting stock present at a shareholders’ meeting to approve certain transactionsand other matters, including, for example, charter amendments, majortransactions involving assets in excess of 50% of the assets of the company,repurchase by the company of shares and certain share issuances. In some cases,minority shareholders may not approve interested party transactions requiringtheir approval or other matters requiring approval of minority shareholders orsupermajority approval. In the event that these minority shareholders were tochallenge successfully past interested party transactions, or do not approveinterested party transactions or other matters in the future, we could belimited in our operational flexibility and our business, financial condition,results of operations or prospects could be materially adversely affected.

 

Overthe past several years, we have sought and continue to seek to acquire minoritystakes in our subsidiaries with the aim of acquiring 100% interests in each ofour key subsidiaries.

 

Aswe continue to make these acquisitions and consolidate our businesses, we mayat times reach ownership thresholds triggering a legal requirement to engage intender offers. According to the Federal Law on Joint Stock Companies a personpurchasing a 30%, 50% or 75% or greater stake in an open joint-stock company isrequired to undertake a tender offer for the remaining shares at a price notless than the acquisition price of the respective stake. Pursuant to thisrequirement, in 2007 we bought a 4.71% stake in Ochakovo Dairy Plant for a cashconsideration of $3.3 million and 0.60% of ordinary shares and 1.16% ofpreferred shares in Nazarovo Dairy Plant for a cash consideration ofapproximately $0.4 million for both stakes, a 33.51% stake in Obninsk DairyPlant for a cash consideration of $11.9 million and a 13.24% stake in AngarskDairy Plant for cash consideration of $0.8 million.

 

Althoughwe are and strive to be in compliance with all regulations related toconsolidation, we cannot guarantee that some of our minority shareholders maynot bring claims against us. See “Item 4. Information on Our Company—A.History and Development” for a description of our subsidiary mergers in 2009and 2010.

 

***Failures or allegedfailures to comply with quality regulations may adversely affect our resultsand harm our reputation of high quality food and beverages producer***

 

Product safety is an inherent risk for all food andbeverage producers. We pay additional attention to safety given the short shelflife of our dairy products and given our target consumers, especially babiesand infants. Our key subsidiaries are ISO certified. Nevertheless, we cannotalways foresee hidden defects of our production equipment or raw materials,gross negligence, acts of violence or other occurrences beyond our control. Weare also exposed to product liability claims should the consumption of ourproducts result in illness, injury or death. Hence, we cannot guarantee thatnever in the future will we be the subject to material product liabilitylosses. Although we are insured against product liability, such coverage may beinsufficient at the event of the claim. In addition, should any of our productsbe found unsuitable for consumption, we may be required to 

 

24

----

Table of Contents

 

recall them. Any problems linked to quality of ourproducts may adversely affect our reputation and operating results.

 

***Although we aredoing our best to comply with all environmental regulations we can notguarantee that we may not breach any of such regulation in the future.***

 

Russia has many environmental laws, howevercurrent enforcement is lax.  This is a growing area of regulation andconcern in many countries based upon both governmental action andnon-government organizational (NGO’s) pressure.   WBD has reducedsignificantly water usage in production and today generates significantly lesswaste water per unit produced.   We are also exposed to environmentalliability claims in the event that we will not comply with environmentalregulations; we cannot assure you that we will not experience any materialenvironmental liability losses in the future. Any breach of environmentalregulations may lead to fines or suspension of our activities that may lead toadverse affect on our results. Moreover breach of environmental regulations maylead to reputational risks.

 

***We do not carry thetypes of insurance coverage customary in more economically developed countriesfor a business of our size and nature, and a significant event could result insubstantial property loss and inability to rebuild in a timely manner or atall.***

 

We maintain insurance against some, but notall, potential risks and losses affecting our operations. We cannot provideassurance that our insurance will be adequate to cover all of our losses orliabilities. We also can provide no assurance that insurance will continue tobe available to us on commercially reasonable terms. Should a significant eventaffect one of our facilities, we could experience substantial property loss andsignificant disruptions in production, for which we would not be compensated.Additionally, depending on the severity of the property damage, we may not beable to rebuild damaged property in a timely manner or at all. We do notmaintain separate funds or otherwise set aside reserves for these types ofevents. Any such loss or third-party claim for damages may have a materialadverse effect on our business, results of operations and financial condition.

 

We are also exposed to product liability claimsin the event that consumption of our products results in illness, injury ordeath, and we cannot assure you that we will not experience any materialproduct liability losses in the future. Although we maintain insurance coveragefor product liability, such coverage may be insufficient in the event of aclaim. In addition, if any of the products we have produced are determined tobe unsuitable for consumption, we may be required to participate in a recallinvolving such products.

 

We do not carry any special type of insurancecoverage of such liabilities as ammonia leakage and/or explosion. Although we maintain insurance coverage for such risks, such coverage may beinsufficient in the event of a claim. For more detailed discussion of ourinsurance coverage see “Item 4. Information on Our Company—B. BusinessOverview—Insurance.”

 

**RisksRelating to Our Financial Condition**

 

***We may beadversely affected by the current economic environment.***

 

As a result of the recenteconomic downturn, decreased prices for major export commodities (including oiland metals) and other macro-economic challenges currently affecting many of theeconomies in which we operate, our consumers’ disposable incomes and ourvendors’ cash flows may be adversely impacted. Consequently, customers maymodify or decrease their consumption of our products and our equipment, rawmaterial and packaging material vendors may significantly increase theirprices. A decline in consumption or material changes in pricing or financingterms 

 

25

----

Table of Contents

 

for our purchases of equipment, raw material andpackaging may have a material adverse effect on our business, financialcondition, results of operations and prospects.

 

***Continuedturmoil in the credit markets could cause our business, financial condition,results of operations and the price of our shares and ADSs to suffer.***

 

Over the past few yearsturmoil in the international credit markets, the recession in the United Statesand several major European economies and the collapse or near collapse ofseveral large banks and financial services companies in the United States and UnitedKingdom have resulted in increased volatility in the securities markets in theUnited States and across Europe, including Russia. In addition, many financialmarket indices in Russia and other emerging markets, as well as developedmarkets, have declined significantly since the summer of 2008.Although thesemarkets returned to growth in 2009 and thus far in 2010, they have not yetreached pre-crisis levels. Continued volatility in the United States, Europeanand/or Russian securities markets stemming from these or other factors maycontinue to adversely affect the price of our shares and ADSs.

 

The downturn in the globalfinancial markets has also caused some companies to experience difficultiesaccessing their cash equivalents, trading investment securities, drawing onrevolving credit facilities, issuing debt and raising capital generally. Thesedifficulties may negatively impact our ability to obtain financing oncommercially reasonable terms and the level and volatility of the trading priceof our shares and ADSs, and could have a material adverse effect on ourbusiness, financial condition, results of operations and prospects.

 

***Inflation could increase our costs and decrease ouroperating margins.***

 

TheRussian economy has been characterized by high rates of inflation and theRussian Ministry for Economic Development has forecasted inflation to reachbetween 6.5% and 7.5% in Russia in 2010*. As we may experience inflation-drivenincreases in certain of our costs, including salaries and rents, which are sensitiveto rises in the general price level in Russia, our costs in U.S. dollarterms will rise. In this situation, due to competitive pressures, we may not beable to raise the prices we charge for our products and services sufficientlyto preserve operating margins. Accordingly, high rates of inflation in Russiacould increase our costs and decrease our operating margins.

 

***Covenants in our debt agreements restrict our ability toborrow, invest and engage in various activities, which could impair our abilityto expand or finance our future operations.***

 

Ourshort-term and long-term debt agreements, including our $250 million syndicatedloan that we received in 2008, contain covenants that impose operating andfinancial restrictions on us and our subsidiaries. These restrictionssignificantly limit, and in some cases prohibit, among other things, our andcertain of our subsidiaries’ ability to incur additional debt, provide guarantees,create liens on assets or enter into business combinations. Failure to complywith these restrictions would constitute a default under our debt agreements,including our $250 million syndicated loan agreement and any of our othersenior-debt containing cross-default provisions could become immediately dueand payable, which would materially adversely affect our business, financialcondition and results of operations. In addition, some of our debt agreementscontain provisions which permit our lenders to accelerate our debt repayment inthe event of deterioration in our financial condition.

 

----

*According to the Russian Ministry of Economic Development updated forecast for2010.

 

26

----

Table of Contents

 

***We may not have the ability to raise the funds necessary tofinance a prepayment of certain of our outstanding indebtedness in case of achange of control event.***

 

Theterms of our $250 million syndicated loan agreement as well as some of ourother debt agreements require that we prepay the outstanding debt upon theoccurrence of certain change of control events. A change of control event willgenerally be triggered at such time as any person acting alone or together withother persons (excluding several of our major shareholders acting individuallyor as a group as well as their successors, and inherits): (i) has oracquires, directly or indirectly, in aggregate more than 25% ofour voting shares (whether by virtue of any issuance, sale or otherdisposition of such shares, any merger or other transaction having a similareffect or any voting trust or other agreement), or (ii) has or acquiresthe right to appoint or remove a majority of our Board of Directors or ourchief executive officer, or (iii) has or acquires the power to cast orcontrol the casting of more than 25% of our voting rights.

 

Ifa change in control occurs, and we are required to prepay our debt, such eventcould have a material adverse effect on our business, financial condition,results of operations and business prospects. It is also possible that wewill not have sufficient funds at the time of the change of control to satisfysuch prepayment obligations, or to refinance the debt on commercially reasonableterms.

 

***Mergers of our subsidiaries may cause their indebtedness tobe accelerated, and our inability to effect certain mergers within our group ofcompanies may prevent us from optimizing our tax rate and result in increasedtaxes.***

 

AsRussian tax regulations do not allow Russian companies to pay taxes on aconsolidated basis, *i.e.*, tooffset the losses of one subsidiary against the profits of another subsidiary,we are seeking to merge certain companies within each of our segments in aneffort to optimize the tax rates applicable to us. Under Russian law, suchmergers would be considered reorganization and the merged subsidiaries would berequired to notify their creditors of this reorganization. Russian law alsoprovides that, for a period of 30 days after the notice, these creditorswould have a right to accelerate the merged subsidiaries’ indebtedness anddemand reimbursement for applicable losses. In the event that all or part ofcertain of our subsidiaries’ indebtedness is accelerated in connection with themergers, we and such subsidiaries may not have the ability to raise the fundsnecessary for repayment and our business and financial condition could bematerially adversely affected. In addition, our inability or failure toconsummate the mergers may prevent us from optimizing our tax ratesand our effective tax rate may increase as our operations continue to expand.

 

***Servicing and refinancing our indebtedness will require asignificant amount of cash. Our ability to generate cash or obtain financingdepends on many factors beyond our control.***

 

Wehave outstanding indebtedness primarily consisting of our $250.0 millionsyndicated loan agreement, bank loans and obligations under equipmentfinancing. As of December 31, 2009, our consolidated total debt wasapproximately $523.9 million, of which $21.6 million was secured by equipment.Our interest expense for the year ended December 31, 2009 wasapproximately $33.5 million, net of amounts capitalized.

 

Amongother things, increased levels of indebtedness, and particularly increases inthe level of secured indebtedness, could potentially: (1) limit ourability to obtain additional financing; (2) limit our flexibility inplanning for, or reacting to, changes in the markets in which we compete; (3) placeus at a competitive disadvantage relative to our competitors with superiorfinancial resources; (4) lead to a partial or complete loss of controlover our key subsidiaries or properties; (5) render us more vulnerable togeneral adverse economic and industry conditions, (6) require us todedicate all or a substantial part of our cash flow to service our debt; and (7) limitor eliminate our ability to pay dividends.

 

27

----

Table of Contents

 

Ourability to service, repay and refinance our indebtedness, and to fund plannedcapital expenditures and research and development efforts, will depend on ourability to generate cash in the future. This, to a certain extent, is subjectto general economic, financial, competitive, legislative, regulatory and otherfactors that are beyond our control. If we are unable to generate sufficientcash flow or otherwise obtain funds necessary to make required payments, we maydefault under the terms of our indebtedness, thereby allowing the holders ofour indebtedness to accelerate the maturity of such indebtedness, andpotentially causing cross-defaults under and acceleration of our otherindebtedness. We may also need to refinance all or a portion of ourindebtedness on or before maturity, sell assets, reduce or delay capitalexpenditures or seek additional capital. Refinancing or additional financingmay not be available on commercially reasonable terms, and we may not be ableto sell our assets or, if sold, the proceeds therefrom may not be sufficient tomeet our debt-service obligations. The recent global financial crisis and thehighly volatile financial markets may materially adversely affect our abilityto access the capital and credit markets at a time when we would like or needto do so, which could have an impact on our ability to refinance maturing debtsand/or react to changing economic and business conditions. See also “—Continued turmoilin the credit markets could cause our business, financial condition, results ofoperations and the price of our shares and ADSs to suffer.”

 

Ourinability to generate sufficient cash flow to satisfy our debt service obligations,or to refinance debt on commercially reasonable terms, would have a materialadverse effect on our business, financial condition, results of operations andprospects. See “Item 5. Operating and Financial Review and Prospects—Liquidityand Capital Resources.”

 

***Rubledepreciation could increase our hard-currency-denominated costs, decrease ourcash reserves, or make it more difficult for us to comply with financial ratiosand to repay our debts and will affect the value of dividends received byholders of ADSs***.

 

Over the past 15 years, the ruble hasfluctuated, at times substantially over short periods of time, against the U.S.dollar. The ruble significantly depreciated against the U.S. dollar in 2008 asa result of the global financial crisis, depreciating from 24.55 rubles per oneU.S. dollar on January 1, 2008 to 29.38 rubles per one U.S. dollar as of December 31,2008. The ruble/U.S. dollar exchange rate continued to be volatile in 2009,with a low of 36.43 rubles per one U.S. dollar on February 19, 2009 and ahigh of 28.67 rubles per one U.S. dollar on November 17, 2009. Althoughthe exchange rate has been more stable in 2010, generally trading within arange of 29-30 rubles per one U.S. dollar, it may return to greater volatilityin the future. The ruble has also depreciated against the euro. The euro/rubleexchange rate on January 1, 2009 was 41.43 rubles per one euro, ascompared to 43.46 rubles per one euro on January 1, 2010.

 

The CBR from time to timehas imposed various currency-trading restrictions in attempts to support theruble. The ability of the government and the CBR to maintain a stable rublewill depend on many political and economic factors. These include their abilityto finance the budget without recourse to monetary emissions, to controlinflation and to maintain sufficient foreign currency reserves to support theruble.

 

A majority of our capitalexpenditure and liabilities and borrowings are denominated in various foreigncurrencies. Conversely, a majority of our revenues are denominated in rubles.As a result, devaluation of the ruble against the U.S. dollar can adverselyaffect us by increasing our costs in rubles, both in absolute terms andrelative to our revenues, and make it more difficult to comply with ourfinancial ratios or timely fund cash payments on our indebtedness. It alsoreduces the U.S. dollar value of tax savings arising from tax incentives forcapital investment and the depreciation of our property, plant and equipment,since their basis for tax purposes is denominated in rubles at the time of theinvestment.

 

28

----

Table of Contents

 

Furthermore, if the rubledeclines against the U.S. dollar and/or euro and price increases cannot keeppace, we could have difficulty repaying or refinancing our U.S. dollar- and/oreuro-denominated indebtedness. The devaluation of the ruble would also resultin losses in the value of assets denominated in rubles, such as ruble cashdeposits.

 

***Russian currency control regulations could hinder ourability to conduct our business.***

 

Inthe past, Russian currency regulations imposed various restrictions onoperations involving foreign currencies in an attempt to support the ruble.Effective from January 1, 2007, most of these restrictions have beenremoved. However, Russian companies currently must repatriate proceeds fromexport sales. Moreover, the foreign currency market in Russia is stilldeveloping and we may experience difficulty in converting rubles into othercurrencies. A majority of our major capital expenditures and payments tovendors and a significant part of our debt are denominated and payable invarious foreign currencies.

 

Russianlegislation currently permits the conversion of rubles into foreign currency.Although we are not aware of any proposals from Russian authorities to imposenew restrictions on ruble convertibility, we cannot guarantee that the Russianauthorities will not, as a result of the global financial crisis, take futureactions to restrict or otherwise hinder the free convertibility of the rubleinto foreign currencies. Any delay or other difficulty in converting rublesinto a foreign currency to make a payment or delay in or restriction on thetransfer of foreign currency could limit our ability to meet our payment anddebt obligations, which could result in the loss of suppliers, acceleration ofdebt obligations and cross-defaults and, consequently, have a material adverseeffect on our business, financial condition and results of operations.

 

***Some of our customers, debtors and suppliers may fail to payus or to comply with the terms of their agreements with us which couldmaterially adversely affect our business and results of operations.***

 

Russia’sinexperience with a market economy relative to more developed economies posesnumerous risks that could interfere with our business. For example, the failureto satisfy liabilities is widespread among Russian businesses and thegovernment. Furthermore, it is difficult for us to gauge the creditworthinessof some of our customers, as there are no reliable mechanisms, such as reliablecredit reports or credit databases, for evaluating their financial condition.As a result of the current economic downturn, we face an increased risk thatour customers and/or debtors may refuse to or to be unable to comply with theirpayment obligations. Consequently, we face the risk that some of our customersor other debtors will fail to pay us or fail to comply with the terms of theiragreements with us, which could materially adversely affect our business andresults of operations.

 

Inaddition, we are limited in our ability to control the conduct of our rawmaterials and equipment suppliers, including their adherence to contractdelivery terms and their compliance with applicable legislation, such ascurrency, tax, customs and environmental regulations and laws relating to theuse of food additives and genetically modified food products. Failure of oursuppliers to adhere to the terms of our contracts with them or the law maynegatively affect our reputation and our business.

 

***If the various initiatives we have used to reduce our taxburden are successfully challenged and/or our ability to recover VAT and takeadvantage of certain tax benefits are disallowed by the Russian taxauthorities, we may face significant losses associated with the assessed amountof tax deemed underpaid and related interest and penalties, which would have amaterial adverse effect on our financial condition and results of operations.***

 

29

----

Table of Contents

 

We have used various initiatives to reduce ourtax burden and several of our tax initiatives have been challenged by theRussian tax authorities. There have also been press reports of instances inwhich the Russian tax authorities have successfully challenged methods similarto those we have used. If any of our initiatives are successfully challenged bythe Russian tax authorities, we would face significant losses associated withthe assessed amount of tax deemed underpaid and related interest and penalties.These losses could have a material adverse effect on our financial conditionand results of operations. See also “—The Russian taxation system isunderdeveloped and any imposition of significant additional tax liabilitiescould have a material adverse effect on our business, financial condition andresults of operations.”

 

***Failures or alleged failures by our suppliers to comply withtheir tax obligations may negatively affect our ability to recover VAT andincrease our tax liabilities.***

 

In2006, the tax authorities found some suppliers dealing with certain of oursubsidiaries (Moscow Babyfood Plant, Trading Company Wimm-Bill-Dann,Wimm-Bill-Dann and Ochakovo Dairy Plant) to be negligent in complying withtheir tax obligations. Specifically, the tax authorities claimed, among otherthings, that these suppliers were, in some cases, not registered as taxpayers,have not provided tax returns and/or not paid their taxes in full or at all.Although our subsidiaries perform extensive due diligence on each of theirsuppliers, they are not able to scrutinize thoroughly every aspect of eachsupplier’s business, including whether the supplier is in full compliance withrespect to its tax duties. As a result of these alleged breaches by certain ofour suppliers, the tax authorities have refused to reimburse VAT paid by oursubsidiaries in an amount totaling approximately $1.0 million for servicesrendered and goods provided by such suppliers. They also refused to discountprofit tax paid by our subsidiaries to the budget from the amounts undertransactions with such suppliers. We challenged the tax authorities’refusal to reimburse VAT to Ochakovo Dairy Plant and Trading CompanyWimm-Bill-Dann in four separate law suits and, in each instance the court ruledin our favor.

 

Failures or alleged failures by our suppliersto comply with their tax obligations may also lead to claims against us fromthe tax authorities. For example in 2007, Trading Company Wimm-Bill-Dannreceived a demand from the tax authorities to pay taxes that were reimbursed tous in the aggregate amount of $0.5 million based on the decision by the taxauthorities that our supplier was negligent in paying its tax obligations. Wefiled a court claim seeking to invalidate this claim. Although the court ruledagainst us in the first two instances, it has partially invalidated the taxclaim. We further appealed the decision to the Constitutional Court of theRussian Federation, which declined consideration of the matter.

 

In2008, the Russian tax authorities carried out an audit of Wimm-Bill-Dann OJSCfor fiscal years 2004 through 2006 and found some of our suppliers negligent inpaying or complying with their tax obligations. As a result, the authoritiesdemanded that we reimburse VAT and income tax in the aggregate amount ofapproximately $7.8 million. In November 2008, we appealed this decision tohigher tax authorities and in the court of first instance. The higher taxauthorities partially invalidated these claims and reduced the total claims toapproximately $2.0 million. In March 2010, the court of first instanceupheld claim of tax authorities in the amount of $2.0 million. We plan toappeal this ruling.

 

The Moscow Regional service of the RussianInterior Ministry launched an investigation against us in December 2008for alleged tax code violations. We believe that this investigation was basedon the audit and assessment by the Russian tax authorities for the fiscal years2004 through 2006, described above. As we believed that there to be no legalbasis for the investigation, we lodged an appeal with the Moscow City Prosecutor’sOffice and the investigation was ended in December 2009 with no chargesbrought. Although we continue to provide the results of due diligence carriedout on our suppliers to the relevant Russian authorities, we cannot exclude thepossibility that some of these suppliers will be found to have been negligentby the tax authorities.

 

30

----

Table of Contents

 

***The Russianbanking system remains underdeveloped, and another banking crisis could placesevere liquidity constraints on our business.***

 

Russia’sbanking and other financial systems are less developed or regulated incomparison with other countries, and Russian legislation relating to banks andbank accounts is subject to varying interpretations and inconsistentapplication. The August 1998 financial crisis resulted in the bankruptcyand liquidation of many Russian banks and almost entirely eliminated thedeveloping market for commercial bank loans at that time. Many Russian bankscurrently do not meet international banking standards, and the transparency ofthe Russian banking sector in some respects still lags far behindinternationally accepted norms. Aided by inadequate supervision by theregulators, certain banks do not follow existing CBR regulations with respectto lending criteria, credit quality, loan loss reserves or diversification ofexposure. Furthermore, in Russia, bank deposits made by corporate entitiesgenerally are not insured. The weak banking infrastructure in Russia alsoexposes us to an increased risk of unauthorized transactions or charges on ouraccounts due to bank error or actions by computer hackers.

 

In recent years, there hasbeen a rapid increase in lending by Russian banks, which many believe has beenaccompanied by deterioration in the credit quality of the borrowers. Inaddition, a robust domestic corporate debt market is leading Russian banks tohold increasingly large amounts of Russian corporate ruble bonds in theirportfolios, which is further deteriorating the risk profile of Russian bankassets. The serious deficiencies in the Russian banking sector, combined withthe deterioration in the credit portfolios of Russian banks, may result in thebanking sector being more susceptible to market downturns or economicslowdowns, including exposure to Russian corporate defaults that may occurduring any such market downturn or economic slowdown. In addition, the CBR hasfrom time to time revoked the licenses of certain Russian banks, which resultedin market rumors about additional bank closures and many depositors withdrawingtheir savings. Recently a number of banks and credit institutions have losttheir licenses due to deficiency of capital and failure to meet the CBRrequirements. If a banking crisis were to occur, Russian companies would besubject to severe liquidity constraints due to the limited supply of domesticsavings and the withdrawal of foreign funding sources that would occur duringsuch a crisis.

 

The recent disruptions inthe global markets have generally led to reduced liquidity and increased costof funding in Russia. Borrowers have generally experienced a reduction inavailable financing both in the inter-bank and short-term funding market, as wellas in the longer term capital markets and bank finance instruments. Thenon-availability of funding to the banking sector in the Russian Federation hasalso negatively affected the anticipated growth rate of the Russian Federation.The Russian government and the CBR provided financial support only to a limitednumber of banks, which may result in the liquidation of other banks andfinancial institutions. This may result in a significant deterioration in thefinancial fundamentals of Russian banks, notably liquidity, asset quality andprofitability.

 

There is currently a limitednumber of sufficiently creditworthy Russian banks and few ruble-denominatedfinancial instruments in which we can invest our excess ruble cash. We hold thebulk of our excess ruble and foreign currency cash in Russian banks, includingsubsidiaries of foreign banks. Another banking crisis or the bankruptcy, orinsolvency of the banks from which we receive or with which we hold our funds,could result in the loss of our deposits or affect our ability to completebanking transactions in Russia, which could have a material adverse effect onour business, financial condition and results of operations.

 

Wehave also experienced problems with transmitting tax payments through certainRussian banks and, as a result, are experiencing difficulties with the Russiantax authorities. In particular, between 1998 and 2007, several of oursubsidiaries received tax assessments from the Russian tax authorities for taxarrears totaling approximately $8.0 million. Each of these tax assessmentsresulted from the failure of the subsidiaries’ banks to transfer tax paymentsto the state budget upon 

 

31

----

Table of Contents

 

receiving the relevantpayment orders. While the Russian Tax Code provides that a taxpayer is deemedto have paid a tax when the corresponding payment order is received by thetaxpayer’s bank, press reports indicate that the Russian tax authorities havebeen actively and often successfully challenging such payments if the taxpayment is not in fact received due to the failure of the bank to transfer suchpayment. Russian courts often rule in favor of the Russian tax authoritiesin such cases.

 

Wechallenged these assessments and, in each instance, the assessments were eitherdeclared invalid by Russian Arbitration Courts or otherwise resolved by us.There are currently no pending lawsuits in respect of our subsidiaries’ failureto transmit tax payments through certain Russian banks. However, it is likelythat the Russian tax authorities will continue to appeal court rulings in ourfavor and issue new assessments based on the same grounds to us and/or oursubsidiaries.

 

Ourmanagement believes that our subsidiaries have complied with their tax paymentobligations, and we intend to challenge any further appeals by the taxauthorities of the foregoing assessments or any additional similar assessmentsin court.  However, if a court were to rule inthe Russian tax authorities’ favor, these subsidiaries and/or other of oursubsidiaries that have faced similar problems would be liable for the amount ofthe assessments and potentially for interest and penalties on such amounts, andcould potentially be liable for significant additional amounts.

 

***Vaguely drafted Russian transfer pricing rules and lackof reliable pricing information may impact our business and results ofoperations.***

 

Russian transfer pricinglegislation became effective in the Russian Federation on January 1, 1999.This legislation allows the tax authorities to make transfer pricingadjustments and impose additional tax liabilities with respect to all “controlled”transactions, provided that the transaction price differs from the market priceby more than 20%. “Controlled” transactions include transactions with relatedparties, barter transactions, foreign trade transactions and transactions withunrelated parties with significant price fluctuations (*i.e*., if the price with respect to suchtransactions differs from the prices on similar transactions conducted within ashort period of time by more than 20%). Special transfer pricing provisions areestablished for operations with securities and derivatives. Russian transferpricing rules are vaguely drafted, generally leaving wide scope forinterpretation by Russian tax authorities and courts. There has been verylittle guidance (although some court practice is available) as to how these rules shouldbe applied.

 

In 2009, a number of draftamendments to the transfer pricing legislation were announced which, ifimplemented, would considerably toughen the existing law and bring it more inline with international transfer pricing rules. The implementation proposedchanges are expected, among other things, to effectively shift the burden ofproving market prices from the tax authorities to the taxpayer, cancel theexisting permitted deviation threshold and introduce specific documentationrequirements for proving market prices. If the tax authorities were to imposesignificant additional tax liabilities as a result of transfer pricingadjustments, it could have a material adverse impact on our business, financialcondition and results of operations.

 

Additionally,in the event that a transfer pricing adjustment is assessed by the Russian taxauthorities, the Russian transfer pricing rules do not provide for anoffsetting adjustment to the related counterparty in the transaction that issubject to adjustment. In addition to the usual tax burden imposed on Russiantaxpayers, these conditions complicate tax planning and related businessdecisions.

 

32

----

Table of Contents

 

**RisksRelating to our Shares and ADSs and the Trading Market**

 

***Government regulations may limit the ability of investors todeposit shares into our ADS facility.***

 

The ability of investors todeposit shares into our ADS facility may be affected by current or futuregovernmental regulations. For example, under Russian securities regulations, nomore than 25% of a Russian company’s shares, and no more than 5% with respectto strategically important companies may be circulated abroad through sponsoreddepositary receipt programs. Prior to December 31, 2005, and at the timeof our initial public offering, this threshold was 40%. Although we believethat the new lower threshold does not apply to our ADSs, in the future, we maybe required to reduce the size of our ADS program or amend the depositaryagreement for the ADSs.

 

Because our ADS program isregularly at or near capacity, purchasers of our shares may not be able todeposit these shares into our ADS facility, and ADS holders who withdraw theunderlying shares from the facility may not be able to re-deposit their sharesin the future. As a result, effective arbitrage between our ADSs and our sharesmay not always be possible. Our shares are listed and trade on the RussianTrading System Stock Exchange, or RTS. Due to the limited public free float ofour common stock, the public market for our shares is significantly less activeand liquid than for our ADSs. The cumulative effect of these factors is thatour shares may from time to time, and for extended periods of time, trade at asignificant discount to our ADSs.

 

***Because the depositary may be considered the beneficialholder of the shares underlying the ADSs, these shares may be arrested orseized in legal proceedings in Russia against the depositary.***

 

Many jurisdictions, such asthe United Kingdom and the United States, recognize a distinction between legalowners of securities, such as the depositary, and the beneficial owners ofsecurities, such as the ADS holders. In these jurisdictions, the shares held bythe depositary on behalf of the ADS holders would not be subject to seizure inconnection with legal proceedings against the depositary that are unconnectedwith the shares.

 

Russian law may not,however, recognize a distinction between legal and beneficial ownership ofsecurities. Russian law generally treats a depositary as the owner of sharesunderlying the ADSs and, accordingly, may not recognize ADS holders’ beneficialownership therein.

 

Thus, in proceedings broughtagainst a depositary, whether or not related to shares underlying the ADSs,Russian courts may treat those underlying shares as the assets of thedepositary, open to seizure or arrest. In the past, a lawsuit was filed againsta depositary seeking the seizure of various Russian companies’ sharesrepresented by ADSs issued by that depositary. In the event that this type ofsuit were to be successful in the future against our depositary, and the sharesunderlying our ADSs were to be seized or arrested, the ADS holders involvedcould lose their rights to such underlying shares and all of the money investedin them.

 

***Voting rights with respect to the shares represented by ourADSs are limited by the terms of the deposit agreement for the ADSs andrelevant requirements of Russian law.***

 

ADSholders will have no direct voting rights with respect to the sharesrepresented by the ADSs. They will be able to exercise voting rights withrespect to the shares represented by ADSs only in accordance with theprovisions of the deposit agreement relating to the ADSs and relevantrequirements of Russian law. Therefore, there are practical limitations uponthe ability of ADS holders to exercise their voting rights due to theadditional procedural steps involved in communicating with them. For example,the Federal Law on Joint Stock Companies and our charter require us to notifyshareholders no less than 30 days prior to the date of any meeting and atleast 70 days prior to the date of an extraordinary meeting to elect ourBoard of Directors. Our 

 

33

----

Table of Contents

 

ordinary shareholderswill receive notice directly from us and will be able to exercise their votingrights by either attending the meeting in person or voting by power ofattorney.

 

AnADS holder, by comparison, will not receive notice directly from us. Rather, inaccordance with the deposit agreement, we will provide the notice to thedepositary. The depositary has undertaken in turn, as soon as practicablethereafter, to mail to the ADS holders the notice of such meeting, votinginstruction forms and a statement as to the manner in which instructions may begiven by holders. To exercise its voting rights, the ADS holder must theninstruct the depositary how to vote its shares. Because of this extraprocedural step involving the depositary, the process for exercising votingrights may take longer for an ADS holder than for holders of shares. ADSs forwhich the depositary does not receive timely voting instructions will not bevoted at any meeting.

 

Inaddition, although securities regulations expressly permit the depositary tosplit the votes with respect to the shares underlying the ADSs in accordancewith instructions from ADS holders, there is little court or regulatoryguidance on the application of such regulations, and the depositary may chooseto refrain from voting at all unless it receives instructions from all ADSholders to vote the shares in the same manner. ADS holders may thus havesignificant difficulty in exercising voting rights with respect to the sharesunderlying the ADSs. There can be no assurance that holders and beneficialowners of ADSs will (i) receive notice of shareholder meetings to enablethe timely return of voting instructions to the depositary, (ii) receivenotice to enable the timely cancellation of ADSs in respect of shareholderactions or (iii) be given the benefit of dissenting or minorityshareholders’ rights in respect of an event or action in which the holder orbeneficial owner has voted against, abstained from voting or not given votinginstructions.

 

***The marketprice of our ADSs has been and may continue to be volatile.***

 

The market price of our ADSs experienced, andmay continue to experience, significant volatility.  The closing price of our ADSs on the New YorkStock Exchange ranged from a low of $13.68 to a high of $144.40 per ADS in2008, and a low of $24.24 to a high of $95.00 per ADS in 2009 (or $6.06 to$23.83 following the ADS split that took effect on November 17, 2009changing our ordinary share to ADS ratio from 1:1 to 1:4).

 

Numerousfactors, including many over which we have no control, may have a significantimpact on the market price of our ADSs, including, among other things:

·                  periodsof regional or global macroeconomic instability;

·                  variations in ouroperating results and those of other food and beverage companies;

·                  changesin financial estimates or other material comments by securities analystsrelating to us, our competitors or our industry in general;

·                  announcementsby other companies in our industry relating to their operations, strategicinitiatives, financial condition or financial performance or to our industry ingeneral;

·                  variations innational and industry growth rates;

·                  actual oranticipated announcements of technical innovations or new products or servicesby us or our competitors;

·                  changes ingovernment legislation or regulatory developments in our target marketsaffecting us, our customers or our competitors;

·                  announcementsof acquisitions or consolidations involving industry competitors or industrysuppliers;

·                  general economicconditions within our business sector or in Russia; and

·                  theimpact and development of any lawsuit, currently pending or threatened, or thatmay be instituted in the future.

 

In addition, the stockmarket in recent years has experienced extreme price and trading volumefluctuations that often have been unrelated or disproportionate to theoperating performance of 

 

34

----

Table of Contents

 

individual companies. These broad market fluctuationsmay adversely affect the price of our ADSs, regardless of our operating performance.

 

***You may be unable to repatriate your earnings from our ADSs.***

 

Weanticipate that any dividends we may pay in the future on the sharesrepresented by the ADSs will be declared and paid to the depositary in rublesand will be converted into U.S. dollars by the depositary and distributed toholders of ADSs, net of the depositary’s fees and expenses. The ability toconvert rubles into U.S. dollars is subject to the availability of U.S. dollarsin Russia’s currency markets. Although there is an existing market withinRussia for the conversion of rubles into U.S. dollars, including the interbankcurrency exchange and over-the-counter and currency futures markets, thefurther development of this market is uncertain. At present, there is a limitedmarket for the conversion of rubles into foreign currencies outside of Russiaand limited market in which to hedge ruble and ruble-denominated investments.

 

***ADS holders may not be able to benefit from the UnitedStates-Russia income tax treaty.***

 

Under Russian law, dividendspaid to a non-resident holder of the shares generally will be subject toRussian withholding tax at a rate of 15%. The domestic tax rate applicable todividends payable by Russian companies to non-resident individuals has beenreduced from 30% to 15% effective from January 1, 2008. This tax maypotentially be reduced to 5% or 10% for legal entities and organizations and to10% for individuals under the Convention between the United States of Americaand the Russian Federation for the Avoidance of Double Taxation and thePrevention of Fiscal Evasion with respect to Taxes on Income and Capital, orthe United States—Russia income tax treaty, provided a number of conditions aresatisfied. However, the Russian tax rules on the application of double taxtreaty benefits to individuals are unclear and there is no certainty thatadvance clearance would be possible. The Russian tax rules applicable toADS holders are characterized by significant uncertainties. In a number ofclarifications, the Ministry of Finance of the Russian Federation expressed aview that ADS holders (rather than the depositary) should be treated as thebeneficial owners of the underlying shares for the purposes of double taxtreaty provisions applicable to taxation of dividend income from the underlyingshares, provided that the tax residencies of the ADS holders are dulyconfirmed. However, in the absence of any specific provisions in the Russiantax legislation with respect to the concept of beneficial ownership andtaxation of income of beneficial owners, it is unclear how the Russian taxauthorities and courts will ultimately treat the ADS holders in this regard.Thus, we may be obliged to withhold tax at standard non-treaty rates whenpaying out dividends and U.S. ADS holders may be unable to benefit from theUnited States—Russia income tax treaty. See also “Item 10. AdditionalInformation —E. Taxation” for additional information.

 

***Capital gains from the sale of ADSs may be subject toRussian income tax.***

 

Under Russian tax legislation,gains realized by non-resident legal entities or organizations from thedisposition of shares and securities of Russian organizations, as well asfinancial instruments derived from such shares, such as the ADSs, may besubject to Russian withholding income tax if immovable property located inRussia constitutes more than 50% of our assets. However, no proceduralmechanism currently exists to withhold and remit this tax with respect to salesmade to persons other than Russian companies and foreign companies with aregistered permanent establishment in Russia. Gains arising from thedisposition of the foregoing types of securities on foreign stock exchanges bynon-resident holders who are legal entities or organizations are not subject totaxation in Russia.

 

The taxation of income ofnon-resident individuals depends on whether this income is received fromRussian or non-Russian sources. The Russian tax laws do not give a definitionof how the “source of income” should be determined with respect to the sale ofsecurities, other than that 

 

35

----

Table of Contents

 

income from the sale of securities “in Russia” shouldbe considered as Russian source income. As there is no further definition ofwhat should be considered to be a sale “in Russia,” the Russian tax authoritieshave a certain amount of freedom to conclude what transactions take place in oroutside Russia, including looking at the place of the transaction, the place ofthe issuer of the shares or other similar criteria.

 

Non-residents who areindividuals are taxable on Russian-source income. Provided that gains arisingfrom the disposition of the foregoing types of securities and derivativesoutside of Russia by U.S. holders who are individuals not resident in Russiafor tax purposes will not be considered Russian source income, then such incomeshould not be taxable in Russia. However, gains arising from the disposition ofthe same securities and derivatives “in Russia” by U.S. holders who areindividuals not resident in Russia for tax purposes may be subject to taxeither at the source in Russia or based on an annual tax return, which they maybe required to submit with the Russian tax authorities. See also “Taxation.”

 

***Foreign judgments may not be enforceable against us.***

 

Ourpresence outside the United States may limit your legal recourse against us. Weare incorporated under the laws of the Russian Federation. Substantially all ofour directors and executive officers named in this document reside outside theUnited States, principally in Russia. All or a substantial portion of ourassets and the assets of our officers and directors are located outside theUnited States. As a result, you may not be able to effect service of processwithin the United States on us or on our officers and directors. Similarly, youmay not be able to obtain or enforce U.S. court judgments against us, ourofficers and directors, including actions based on the civil liabilityprovisions of the federal securities laws of the United States. In addition, itmay be difficult for you to enforce, in original actions brought in courts injurisdictions outside the United States, liabilities predicated upon U.S. securitieslaws.

 

Thereis no treaty between the United States and the Russian Federation providing forreciprocal recognition and enforcement of foreign court judgments in civil andcommercial matters. These limitations may deprive you of effective legal recoursefor claims related to your investment in the ADSs. The deposit agreementprovides for actions brought by any party thereto against us to be settled byarbitration in accordance with the Commercial Arbitration Rules of theAmerican Arbitration Association, provided that any action under the U.S.federal securities laws or the rules or regulations promulgated thereunder may, but need not, be submitted to arbitration. The Russian Federation isa party to the United Nations (New York) Convention on the Recognition andEnforcement of Foreign Arbitral Awards, but it may be difficult to enforcearbitral awards in the Russian Federation due to a number of factors, includingthe inexperience of Russian courts in international commercial transactions,official and unofficial political resistance to enforcement of awards againstRussian companies in favor of foreign investors and Russian courts’ inabilityto enforce such orders and corruption.

 

***The lack of a developed share registration system in Russiamay result in improper recording of the ownership of our shares, including theshares underlying the ADSs.***

 

Ownership of Russian jointstock company shares (or, if the shares are held through a nominee orcustodian, then the holding of such nominee or custodian) is determined byentries in a share register and is evidenced by extracts from that register.Currently, there is no central registration system in Russia. Share registersare maintained by the companies themselves or, if a company has more than 50shareholders or so elects, by licensed registrars. Regulations have been issuedregarding the licensing conditions for such registrars, as well as theprocedures to be followed by both companies maintaining their own registers andlicensed registrars when performing the functions of registrar. In practice,however, these regulations have not been strictly enforced, and registrarsgenerally have relatively low levels of capitalization and inadequate insurancecoverage. 

 

36

----

Table of Contents

 

Moreover, registrars are not necessarily subject toeffective governmental supervision. Due to the lack of a developed shareregistration system in Russia, transactions in respect of a company’s sharescould be improperly or inaccurately recorded, and share registration could belost through fraud, negligence, official and unofficial governmental actions oroversight by registrars incapable of compensating shareholders for theirmisconduct. This creates risks of loss not normally associated with investmentsin other securities markets. Further, the depositary, under the terms of thedeposit agreement, will not be liable for the unavailability of our shares or forthe failure to make any distribution of cash or property with respect theretodue to the unavailability of the shares.

 

InMarch 2007, the Federal Service for the Financial Markets, or the FSFM,terminated the license of three top managers of our registrar, the CentralMoscow Depository. Managers of Russian depositaries and registrars are requiredby law to be licensed by the FSFM, and their failure to do so can result in thedepository or registrar’s own license being terminated. While the FSFM reversedits decision to terminate the Central Moscow Depository managers’ licenses in April 2007,it is possible that the FSFM may take similar action seeking to terminate themanagers’ or our registrar’s licenses in the future.

 

**RisksRelating to the Russian Federation**

 

**EconomicRisks**

 

***Economicinstability in the countries where we operate could adversely affect ourbusiness.***

 

Since the dissolution of theSoviet Union in 1991, the economies of Russia and other CIS countries where weoperate have experienced periods of considerable instability and have beensubject to abrupt downturns. Most notably, following the Russian government’sdefault on its ruble-denominated securities in August 1998, the CBRstopped its support of the ruble and a temporary moratorium was imposed oncertain hard currency payments. These actions resulted in the immediate andsevere devaluation of the ruble and a sharp increase in the rate of inflation,a substantial decline in the prices of Russian debt and equity securities, andan inability of Russian issuers to raise funds in the international capitalmarkets. These problems were aggravated by the subsequent near collapse of theRussian banking sector, with the termination of the banking licenses of anumber of major Russian banks. This crisis had a severe impact on the economiesof Russia and the other CIS countries.

 

While the economies ofRussia and the other CIS countries where we operate have experienced positivetrends in recent years, such as increases in gross domestic product, relativelystable national currencies, strong domestic demand, rising real wages,increased disposable income, increased consumer spending and a relativelyreduced rate of inflation, these positive trends have been supported, in part,by increases in global commodity prices, and may not continue or may abruptlyreverse. In October 2008, Standard & Poor’s revised the outlookon its long-term sovereign credit rating for the Russian Federation from “stable”to “negative,” citing Russia’s risk of recording a deficit by 2009, but revisedthe credit rating to “stable” again in December 2009. The recent economicdownturn, as well as any future economic downturns or slowdowns in Russia orthe other CIS countries where we operate could lead to decreased demand for ourproducts, decreased revenues and negatively affect our liquidity and ability toobtain debt financing, which would have a material adverse effect on ourbusiness, financial condition and results of operations. In particular, therecent economic crisis has led to a managed devaluation of the ruble creating asignificant decline in Russia’s gold and foreign currency reserves.  In addition, the Russian economy isexperiencing decreased production of goods and services, a fall in consumerdemand and a decline in real wages. The decline in global prices for rawmaterials and commodities, especially oil and natural gas, has weakened thegovernment’s finances and may lead to a budget deficit and a decrease in Russia’sGDP.

 

37

----

Table of Contents

 

***The physicalinfrastructure in Russia is in poor condition, which could disrupt our normalbusiness activities.***

 

The physical infrastructure in Russia largelydates back to Soviet times and has not been adequately funded and maintainedover the past two decades. Particularly affected are the rail and roadnetworks, power generation and transmission systems, communication systems andbuilding stock. In May 2005, a fire and explosion in a Moscow powersubstation, built in 1963 caused a major power outage in a large section ofMoscow and some surrounding regions. The blackout disrupted electric groundtransport, including the metro system, led to road traffic accidents andmassive traffic congestion, disrupted electricity and water supply in officeand residential buildings and affected mobile communications. The trading onexchanges and the operation of many banks, stores and markets were also halted.In addition, the road conditions throughout Russia are poor with many roads notmeeting minimum quality standards, causing disruptions and delays in thetransportation of goods to and within these countries. The Russian governmentis actively considering plans to reorganize the nation’s rail, electricity andcommunications systems. Any such reorganization may result in increased chargesand tariffs while failing to generate the anticipated capital investment neededto repair, maintain and improve these systems.

 

Thedeterioration of the physical infrastructure in Russia harms the nationaleconomy, adds costs to doing business and generally disrupts normal businessactivities. Further deterioration of the physical infrastructure in Russia, aswell as the other countries where we operate, could have a material adverseeffect on our business, financial condition and results of operations.

*** ***

***Fluctuationsin the global economy may materially adversely affect the economies of thecountries where we operate and our business in these countries.***

 

The economies of the countries where we operateare vulnerable to market downturns and economic slowdowns elsewhere in theworld. As has happened in the past as well as during the recent financialcrisis, financial problems or an increase in the perceived risks associatedwith investing in emerging economies could dampen foreign investment in Russiaand elsewhere in the CIS, and businesses in these countries could face severeliquidity constraints, further adversely affecting their economies. Additionally,because Russia produces and exports large amounts of oil and gas, the Russianeconomy is especially vulnerable to the price of oil and gas on the worldmarket and a decline in the price of oil and gas could slow or disrupt theRussian economy. Recent military conflicts and international terrorist activityhave also significantly impacted oil and gas prices, and pose additional risksto the Russian economy. Russia is also a major producer and exporter of metalproducts and its economy is vulnerable to world commodity prices and theimposition of tariffs and/or antidumping measures by the United States, theEuropean Union or by other principal export markets.

 

The disruptions recently experienced in theinternational and domestic capital markets have led to reduced liquidity andincreased credit risk premiums for certain market participants and haveresulted in a reduction of available financing. Companies located in emergingmarkets, including us, may be particularly susceptible to these disruptions andreductions in the availability of credit or increases in financing costs. Tothe extent that the current market downturn continues or worsens, it may leadto constraints on our liquidity and ability to obtain debt financing.

 

**Politicaland Social Risks**

** **

***Political and governmental instability could materiallyadversely affect our business, financial condition, results of operations andprospects and the value of the shares and ADSs.***

*** ***

Since1991, Russia has sought to transform from a one-party state with acentrally-planned economy to a democracy with a market economy. As a result ofthe sweeping nature of the reforms, and the failure of some of them, theRussian political system remains vulnerable to

 

38

----

Table ofContents

 

popular dissatisfaction,including dissatisfaction with the results of privatizations in the 1990s, aswell as to demands for autonomy from particular regional and ethnic groups. Theother CIS countries where we operate are similarly vulnerable.

 

Currentand future changes in the Russian government, major policy shifts or lack ofconsensus between various branches of the government and powerful economicgroups could disrupt or reverse economic and regulatory reforms. Any disruptionor reversal of reform policies could lead to political or governmentalinstability or the occurrence of conflicts among powerful economic groups,which could have a material adverse effect on our business, financialcondition, results of operations and prospects and the value of the shares andADSs.

 

***Potential conflict between central and regional authoritiesand other conflicts could create an uncertain operating environment, hinderingour long-term planning ability.***

*** ***

TheRussian Federation is a federation of 83 sub-federal political units,consisting of republics, territories, regions, cities of federal importance andautonomous regions and districts. The delineation of authority and jurisdictionamong the members of the Russian Federation and the federal government is, inmany instances, unclear and remains contested. Lack of consensus between thefederal government and local or regional authorities could result in theenactment of conflicting legislation at various levels and may lead topolitical instability. In particular, conflicting laws have been enacted in theareas of privatization, land legislation and licensing. Some of these laws andgovernmental and administrative decisions implementing them, as well as certaintransactions consummated pursuant to them, have in the past been challenged inthe courts, and such challenges may occur in the future. This lack of consensusmay hinder our long-term planning efforts and creates uncertainties in ouroperating environment, both of which may prevent us from effectively andefficiently implementing our business strategy.

 

Additionally,ethnic, religious, historical and other divisions have, on occasion, given riseto tensions and, in certain cases, military conflict, which can halt normaleconomic activity and disrupt the economies of neighboring regions. Forexample, violence and attacks relating to the Chechen conflict have spread toother parts of Russia, and several terrorist attacks have been carried out inother parts of Russia, including in Moscow. The further intensification ofviolence, including terrorist attacks and suicide bombings, or its spread toother parts of Russia, could have significant political consequences, includingthe imposition of a state of emergency in some or all of Russia. Moreover, anyterrorist attacks and the resulting heightened security measures are likely tocause disruptions to domestic commerce and exports from Russia. These factorscould materially adversely affect our business and the value of the shares andADSs.

 

***Deterioration in relations between Russia and other formerSoviet republics and/or the United States and the European Union couldmaterially adversely affect our business, financial condition, results ofoperations and prospects and the value of the shares and ADSs***

*** ***

Relationsbetween Russia and certain other former Soviet republics are or have in thepast been strained. For example, in August 2008, a significant armedconflict erupted between Russia and Georgia over the separatist regions ofSouth Ossetia and Abkhazia, culminating in Russia’s recognition of theirindependence from Georgia. The political and economic relationships betweenUkraine and Russia have also been strained in recent years. The possibleaccession by Ukraine and Georgia to the North Atlantic Treaty Organization isalso a significant source of tension between Russia and these countries.

 

Theconflicts between Russia and these and other former Soviet republics have, insome instances, also strained Russia’s relationship with the United States andthe European Union which, at times, has negatively impacted Russia’s financialmarkets. The emergence of new or escalated tensions between Russia and otherformer Soviet republics could further exacerbate tensions

 

39

----

Table of Contents

 

between Russia and theUnited States and the European Union, which may have a negative effect on theRussian economy and our ability to obtain financing on commercially reasonableterms. Any of the foregoing circumstances could also have a material adverseeffect on our business, financial condition, results of operations and prospectsand the value of the shares and ADSs.

 

***Crime and corruption could disrupt our ability to conductour business.***

*** ***

Thepolitical and economic changes in Russia in recent years have resulted in asignificant dislocation of authority. Both the local and international presshave reported that significant organized criminal activity has arisen,particularly in large metropolitan centers. Property crime in large cities hasincreased substantially. In addition, the local and international press havereported high levels of corruption, including the bribing of officials for thepurpose of initiating investigations by government agencies. Press reports havealso described instances in which government officials engaged in selectiveinvestigations and prosecutions to further the commercial interests of certaingovernment officials or certain companies or individuals. Additionally, somemembers of the Russian media regularly publish disparaging articles in returnfor payment. The depredations of organized or other crime, demands of corruptofficials or claims that we have been involved in official corruption couldresult in negative publicity, could disrupt our ability to conduct our businesseffectively and could thus materially adversely affect our business, financialcondition, results of operations and the value of the shares and ADSs.

 

***Social instability could increase support for renewedcentralized authority, nationalism or violence and thus materially adverselyaffect our business, financial condition, results of operations and prospects.***

 

Thefailure of the government and many private enterprises to pay full salaries ona regular basis and the failure of salaries and benefits generally to keep pacewith the rapidly increasing cost of living have led in the past, and could leadin the future, to labor and social unrest, particularly during economicdownturns. Labor and social unrest may have political, social and economicconsequences, such as increased support for a renewal of centralized authority,increased nationalism, including restrictions on foreign involvement in theeconomy of Russia, and increased violence. An occurrence of any of theforegoing events could restrict our operations and lead to the loss ofoperating revenues, materially adversely affecting our business, financialcondition, results of operations and prospects.

 

**LegalRisks and Uncertainties**

** **

***Weaknesses relating to the legal system and legislationcreate an uncertain environment for investment and for business activity inRussia.***

*** ***

Russiais still developing the legal framework required to support a market economy.The following risks relating to the Russian legal system create uncertaintieswith respect to the legal and business decisions that we make, many of which donot exist in countries with more developed market economies:

 

·                  inconsistenciesbetween and among the Constitution, federal and regional laws, presidentialdecrees and governmental, ministerial and local orders, decisions, resolutionsand other acts;

·                  conflictinglocal, regional and federal rules and regulations;

·                  the lack ofjudicial and administrative guidance on interpreting legislation;

·                  the relativeinexperience of judges and courts in interpreting legislation;

·                  the lack ofindependent judiciary;

·                  a high degree ofdiscretion on the part of governmental authorities, which could result inarbitrary actions such as suspension or termination of our licenses; and

·                  poorly developedbankruptcy procedures that are subject to abuse.

 

40

----

Table of Contents

 

Therecent nature of much of Russian legislation, the lack of consensus about thescope, content and pace of economic and political reform and the rapidevolution of the Russian legal system in ways that may not always coincide withmarket developments place the enforceability and underlying constitutionalityof laws in doubt and results in ambiguities, inconsistencies and anomalies. Inaddition, Russian legislation often contemplates implementing regulations thathave not yet been promulgated, leaving substantial gaps in the regulatoryinfrastructure. All of these weaknesses could affect our ability to enforce ourrights under our permits and contracts, or to defend ourselves against claimsby others. We cannot assure you that regulators, judicial authorities or thirdparties will not challenge our internal procedures and by-laws or ourcompliance with applicable laws, decrees and regulations.

 

***Failure to comply with existing laws and regulations or thefindings of government inspections, or increased governmental regulation of ouroperations, could result in substantial additional compliance costs or varioussanctions which could materially adversely affect our business, financialcondition, results of operations and prospects.***

 

Ouroperations and properties are subject to regulation by various governmententities and agencies, as well as to ongoing compliance with existing laws,regulations and standards. As a producer of food products, our operations aresubject to quality, health and safety, production, packaging, labeling anddistribution standards. The operations of our production and distributionfacilities are also subject to various environmental laws and workplaceregulations. Regulatory authorities exercise considerable discretion in mattersof enforcement and interpretation of applicable laws, regulations andstandards, the issuance and renewal of permits and in monitoring compliancewith the terms thereof. Russian authorities have the right to, and frequentlydo, conduct periodic inspections of operations and properties of our group ofcompanies throughout the year. Any such future inspections may conclude that weor our subsidiaries have violated laws, decrees or regulations, and we may beunable to refute such conclusions or remedy the violations.

 

Ourfailure to comply with existing laws and regulations or the findings ofgovernment inspections or to obtain all approvals, authorizations and permitsrequired for our operations may result in the imposition of fines or penaltiesor more severe sanctions, including the suspension, amendment or termination ofour permits, requirements that we cease certain of our business activities, orin criminal and administrative penalties applicable to our officers. Any suchdecisions, requirements or sanctions, or any increase in governmentalregulation of our operations, could increase our costs and materially adverselyaffect our business, financial condition, results of operations and prospects.

 

Webelieve that our current legal and environmental compliance programs adequatelyaddress these concerns and that we are in substantial compliance withapplicable laws and regulations. However, as the regulations that apply to ourbusiness are constantly changing, we are sometimes unable to immediately complywith new regulations upon their implementation. Compliance with, or anyviolation of, current and future laws or regulations could require materialexpenditures by us or otherwise have a material adverse effect on our businessor financial results. See “Item 4. Information on Our Company—B. BusinessOverview—Regulation.”

 

Additionally,under relevant Russian legislation, Russian regulatory agencies can imposevarious sanctions for violations of environmental standards. These sanctionsmay include civil and administrative penalties applicable to a company and/orits officers. Also, in the course, or as a result, of an environmentalinvestigation, regulatory authorities can issue an order halting part or all ofthe production at a plant which has violated environmental standards. We havebeen, at various times, subject to administrative sanctions for failure tocomply with environmental regulations relating to effluent discharge and tominor administrative sanctions for violations relating to waste disposal. Inthe event that production at one of our facilities was partially or whollyprevented due

 

41

----

Table of Contents

 

to this type ofsanction, our production capability would suffer significantly and ouroperating results could be materially adversely affected.

 

***Developing corporate and securities laws and regulations inRussia may limit our ability to attract future investment.***

*** ***

Theregulation and supervision of the securities market, financial intermediariesand issuers are considerably less developed in Russia than, for example, in theUnited States and Western Europe. Securities laws, including those relating tocorporate governance, disclosure and reporting requirements, are relativelynew, whereas other laws relating to anti-fraud safeguards, insider tradingrestrictions and fiduciary duties remain undeveloped. In addition, the Russiansecurities market is regulated by several different authorities, which areoften in competition with each other. These include:

·                  FSFM;

·                  FAS;

·                  CBR; and

·                  various professionalself-regulatory organizations.

 

Theregulations of these various authorities are not always coordinated and may becontradictory.

 

Inaddition, Russian corporate and securities rules and regulations can changerapidly, which may materially adversely affect our ability to conduct capitalmarkets transactions. While some important areas are subject to virtually nooversight, the regulatory requirements imposed on Russian issuers in otherareas result in delays in conducting securities offerings and in accessing thecapital markets. It is often unclear whether or how regulations, decisions andletters issued by the various regulatory authorities apply to. As a result, wemay be subject to fines and/or other enforcement measures despite our bestefforts at compliance, which could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

***The judiciary’s lack of independence, its relativeinexperience and occasional abuse of discretion and the difficulty in enforcingcourt decisions could prevent us or you from obtaining effective redress in acourt proceeding.***

*** ***

Theindependence of the judicial system and its immunity from economic, politicaland nationalistic influences in Russia cannot be guaranteed. The court systemis underfunded and judges and courts are generally inexperienced in the area ofbusiness and corporate law. Judicial precedents generally have no bindingeffect on subsequent decisions. Not all Russian legislation and court decisionsare readily available to the public or organized in a manner that facilitates understanding.In addition, the Russian judicial system can be slow or unjustifiably swift,and enforcement of court orders can in practice be very difficult in Russia.All of these factors make judicial decisions in Russia difficult to predict andeffective redress uncertain. Additionally, court claims are often used infurtherance of political and commercial aims or infighting. We may be subjectto such claims and may not be able to receive a fair hearing. Additionally,court orders are not always enforced or followed by law enforcement agenciesand the government may attempt to invalidate court decisions by backdating orretroactively applying relevant legislative changes.

 

Theseuncertainties also extend to property rights. For example, during Russia’stransformation from a centrally planned economy to a market economy,legislation has been enacted to protect private property against expropriationand nationalization. However, it is possible that due to the lack of experiencein enforcing these provisions and due to political factors, these protectionswould not be enforced in the event of an attempted expropriation ornationalization. Expropriation or nationalization of any of our entities, theirassets or portions thereof, potentially without

 

42

----

Table of Contents

 

adequate compensation,would have a material adverse effect on our business, financial condition,results of operations and prospects.

 

***Selective or arbitrary government action could have amaterial adverse effect on our business, financial condition, results ofoperations and prospects and the value of the shares and ADSs.***

*** ***

Governmentalauthorities in Russia have a high degree of discretion and, at times, actselectively or arbitrarily, without hearing or prior notice, and sometimes in amanner that is inconsistent with legislation or influenced by political orcommercial considerations. Selective or arbitrary governmental actions havereportedly included the denial or withdrawal of licenses, sudden and unexpectedtax audits and claims, criminal prosecutions and civil actions. Federal andlocal government entities have also used ordinary defects in matterssurrounding share issuances and registration as pretexts for court claims andother demands to invalidate such issuances and registrations or to voidtransactions. Moreover, the government also has the power in certain circumstances,by regulation or government acts, to interfere with the performance of, nullifyor terminate contracts. Standard & Poor’s has expressed concerns that “Russiancompanies and their investors can be subjected to government pressure throughselective implementation of regulations and legislation that is eitherpolitically motivated or triggered by competing business groups.” In this environment,our competitors may receive preferential treatment from the government,potentially giving them a competitive advantage over us.

 

Inaddition, in recent years, the Russian tax authorities have brought tax evasionclaims aggressively on the basis of certain Russian companies’ use oftax-optimization schemes, and press reports have speculated that theseenforcement actions have been selective and politically motivated. Selective orarbitrary government action, if directed at us, could have a material adverseeffect on our business, financial condition, results of operations, prospects,and the value of the shares and ADSs.

 

***Shareholder liability under Russian legislation could causeus to become liable for the obligations of our subsidiaries.***

*** ***

The Civil Code of the Russian Federation, theFederal Law on Joint Stock Companies and the Federal Law on Limited LiabilityCompanies generally provide that shareholders in a Russian joint stock companyor members of a limited liability company are not liable for the obligations ofthe company and bear only the risk of loss of their investment. This may not bethe case, however, when one entity is capable of determining decisions made byanother entity. The entity capable of determining such decisions is deemed an “effectiveparent.” The entity whose decisions are capable of being so determined isdeemed an “effective subsidiary.” The effective parent bears joint and severalresponsibility for transactions concluded by the effective subsidiary incarrying out these decisions if:

 

·               thisdecision-making capability is provided for in the charter of the effectivesubsidiary or in a contract between the companies; and

 

·               theeffective parent gives obligatory directions to the effective subsidiary.

 

In addition, an effective parent is secondarilyliable for an effective subsidiary’s debts if an effective subsidiary becomesinsolvent or bankrupt resulting from the action or inaction of an effectiveparent. This is the case no matter how the effective parent’s ability todetermine decisions of the effective subsidiary arises. For example, thisliability could arise through ownership of voting securities or by contract. Inthese instances, other shareholders of the effective subsidiary may claimcompensation for the effective subsidiary’s losses from the effective parentwhich caused the effective subsidiary to take action or fail to take actionknowing that such action or failure to take action would result in losses.Accordingly, we could be liable in some cases for the

 

43

----

Table of Contents

 

debts of our subsidiaries. This liability could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***Shareholder rights provisions under Russian law imposesignificant additional obligations on us.***

 

Russianlaw provides that shareholders that vote against or abstain from voting oncertain matters have the right to sell their shares to us at market value inaccordance with Russian law. The decisions that trigger this right to sellshares include:

 

·                  decisions withrespect to a reorganization;

·                  the approval byshareholders of a “major transaction,” which, in general terms, is a transactioninvolving property worth more than 50% of the gross book value of our assetscalculated according to the Russian accounting standards, regardless of whetherthe transaction is actually consummated; and

·                  the amendment ofour charter in a manner that limits shareholder rights.

 

Ourobligation to purchase shares in these circumstances, which is limited to 10%of our net assets calculated according to Russian accounting standards, at thetime the matter at issue is voted upon, could have a material adverse effect onour business, financial condition, results of operations and prospects.

 

UnderRussian law, if we are unable to sell the repurchased shares at a price equalto or exceeding the market price within one year after the date of repurchase,we have to reduce our charter capital accordingly.

 

***There is little minority shareholder protection in Russia.***

 

Minority shareholder protection under Russianlaw principally derives from supermajority shareholder approval requirementsfor certain corporate actions, as well as from the ability of a shareholder todemand that the company purchase the shares held by that shareholder if thatshareholder voted against or did not participate in voting on certain types ofactions. Companies are also required by Russian law to obtain the approval ofdisinterested shareholders for certain transactions with interested parties. Inpractice, enforcement of these protections has been poor. Shareholders of somecompanies have also suffered as a result of fraudulent bankruptcies initiatedby hostile creditors.

 

Thesupermajority shareholder approval requirement is met by a vote of 75% of allvoting shares that are present at a shareholders’ meeting. Thus, controllingshareholders owning slightly less than 75% of outstanding shares of a companymay have a 75% or more voting power if certain minority shareholders are notpresent at the meeting. In situations where controlling shareholderseffectively have 75% or more of the voting power at a shareholders’ meeting,they are in a position to approve amendments to the charter of the company orsignificant transactions including asset transfers, which could be prejudicialto the interests of minority shareholders. It is possible that our controllingshareholders in the future may not act in the best interests of minorityshareholders, and this could materially and adversely affect the value of theshares and ADSs.

 

Whilethe Federal Law on Joint Stock Companies provides that shareholders owning notless than 1% of the company’s stock may bring an action for damages on behalfof the company, Russian courts to date do not have much experience with suchlawsuits. Russian law does not contemplate class action litigation.Accordingly, your ability to pursue legal redress against us may be limited,reducing the protections available to you as a holder of our shares and ADSs.

 

44

----

Table of Contents

 

***The Russian taxation system is underdeveloped and anyimposition of significant additional tax liabilities could have a materialadverse effect on our business, financial condition and results of operations.***

 

The discussion below provides generalinformation regarding Russian taxes and is not intended to be inclusive of allissues. Investors should seek advice from their own tax advisors as to thesetax matters before investing in the ADSs. See also “Taxation.”

 

In general, taxes payable by Russian companiesare substantial and numerous. These taxes include, among others, corporateincome tax, value added tax, property taxes, excise duties, payroll-relatedtaxes and other taxes.

 

Russian tax laws, regulations and courtpractice are subject to frequent change, varying interpretation andinconsistent and selective enforcement. In some instances, although it may beviewed as contrary to Russian constitutional law, the Russian tax authoritieshave applied certain new taxes retroactively, issued tax claims for periods forwhich the statute of limitations had expired and reviewed the same tax periodmultiple times.

 

On October 12, 2006, the Plenum of the HighArbitration Court of the Russian Federation issued Resolution No. 53formulating the concept of “unjustified tax benefit,” which is described in theResolution by reference to circumstances, such as absence of business purposeor transactions where the form does not match the substance, and which couldlead to the disallowance of tax benefits resulting from the transaction or there-characterization of the transaction. Although there has been little furtherguidance on the interpretation of this concept by the tax authorities orcourts, the tax authorities have actively sought to apply this concept whenchallenging tax positions taken by taxpayers in Russian courts. While theintention of this Resolution might have been to combat abuse of tax laws, in practice,the tax authorities may seek to apply this concept in a broader sense.

 

Generally, tax returns in Russia remain openand subject to tax audit by the tax authorities for a period of three calendaryears immediately preceding the year in which the decision to conduct a taxaudit is taken. The fact that a year has been reviewed by the tax authoritiesdoes not prevent further review of that year, or any tax return applicable tothat year, during the eligible three-year period by a superior tax authority. Inaddition, on July 14, 2005, the Constitutional Court of the RussianFederation, or the Constitutional Court, issued a decision that allows thestatute of limitations for tax penalties to be extended beyond the three-yearterm set forth in the tax laws if a court determines that the taxpayer hasobstructed or hindered a tax audit. Moreover, amendments to the Tax Code of theRussian Federation, effective January 1, 2007, provide for the extensionof the three-year statute of limitations if the actions of the taxpayer createdinsurmountable obstacles for the tax audit. Because none of the relevant termsis defined, tax authorities may have broad discretion to argue that a taxpayerhas “obstructed” or “hindered” or “created insurmountable obstacles” in respectof a tax audit and to ultimately seek review and possibly apply penaltiesbeyond the three-year term. There is no guarantee that the tax authorities willnot review our compliance with applicable tax law beyond the three-yearlimitation period. Any such review could, if it concluded that we hadsignificant unpaid taxes relating to such periods, have a material adverseeffect on our business, financial condition, results of operations and/orprospects.

 

Moreover, the financial results of Russiancompanies cannot be consolidated for tax purposes. Therefore, each of ourRussian subsidiaries pays its own Russian taxes and may not offset its profitor loss against the loss or profit of any of our other subsidiaries. Inaddition, intercompany dividends are subject to a withholding tax of 0% or 9%(depending on whether the recipient of dividends qualifies for Russianparticipation exemption rules), if being distributed to Russian companies, and15% (or lower, subject to benefits provided by relevant double tax treaties),if being distributed to foreign companies. If the receiving company itself paysa dividend, it may offset tax withheld against its own withholding liability ofthe onward dividend although not

 

45

----

Table of Contents

 

against any withholding made on a distribution to aforeign company. These tax requirements impose additional burdens and costs onour operations, including management resources.

 

Anti-crisis tax measures were adopted in 2008to help businesses. Such measures include, among others, the reduction of thecorporate income tax rate from 24% to 20% starting from January 1, 2009,the acceleration of tax depreciation and the increase in interest expensedeductibility thresholds.

 

The Russian tax authorities may take moreassertive position in their interpretation of the legislation and assessments,and it is possible that transactions and activities that have not been challengedin the past may now be challenged. The foregoing factors raise the risk of theimposition of arbitrary or onerous taxes on us, which could adversely affectthe value of our shares and ADSs.

 

Current Russian tax legislation is, in general,based upon the formal manner in which transactions are documented, looking toform rather than substance. However, the Russian tax authorities, in somecases, are increasingly taking a “substance over form” approach. We cannotoffer prospective investors any assurance that additional tax exposures willnot arise in the future. Additional tax exposures could have a material adverseeffect on our business, financial condition, results of operations orprospects.

 

In addition to the usual tax burden imposed onRussian taxpayers, these conditions complicate tax planning and relatedbusiness decisions. For example, tax laws are unclear with respect todeductibility of certain expenses. This uncertainty could possibly expose us tosignificant fines and penalties and to enforcement measures, despite our bestefforts at compliance, and could result in a greater than expected tax burden.

 

**OtherRisks**

** **

***We have not independently verified information we havesourced from third parties***

*** ***

Wehave sourced certain information contained in this document from third parties,including private companies and Russian government agencies, and we have reliedon the accuracy of this information without independent verification. Theofficial data published by Russian federal, regional and local governments maybe substantially less complete or researched than those of Western countries.Official statistics may also be produced on different bases than those used inWestern countries. Any discussion of matters relating to Russia in thisdocument must, therefore, be subject to uncertainty due to concerns about thecompleteness or reliability of available official and public information. Inaddition, the veracity of some official data released by the Russian governmentmay be questionable. In 1998, the Director of the Russian State Committee onStatistics and a number of his subordinates were arrested and subsequentlysentenced by a court in 2004 in connection with their misuse of economic data.

 

## ***Item 4.Information on Our Company***

 

#### **A.            Historyand Development**

 

We trace our historyback to 1992, when a group of individuals formed an enterprise which beganleasing a production line at the Lianozovsky Dairy Plant in Moscow andpurchasing juice concentrates and packaging materials. On November 25,1992, we produced the first carton of juice carrying the Wimm-Bill-Dann brandname. We selected this brand name to attract consumers who preferred productswith foreign-sounding names due to their perceived higher quality and noveltyand, since its introduction; the “Wimm-Bill-Dann” name has become a brand namerecognized in the majority of Russian households.

 

46

----

Table of Contents

 

In order to take advantageof the opportunities arising from the privatization of Russian state-ownedassets, our founding shareholders began acquiring shares in the LianozovskyDairy Plant in Moscow, and continued to expand their juice production business.Following their acquisition of a majority stake in the Lianozovsky Dairy Plantin 1995, they added dairy products to the portfolio, thus becoming a dairy andjuice producer. Our growth has been accomplished, in part, through significantacquisitions, including the following:

 

·                  *From 1995 through 1999*, weacquired majority control of the Lianozovsky Dairy Plant (renamed asWimm-Bill-Dann in 2006) and majority stakes in the Moscow Babyfood Plant, theTsaritsino Dairy Plant and the Ramenskiy Plant (renamed as Wimm-Bill-DannBeverages in 2007).  We also began toexpand into regions outside Moscow, acquiring dairy plants in Novosibirsk,Nizhny Novgorod and Vladivostok.

 

·                  *From 2000 through 2002*, weacquired controlling stakes in dairy plants in Ufa, Samara, Belgorod, and theKrasnodar region in Russia, as well as dairy plants in the cities of Kiev andKharkov in Ukraine and in Bishkek, Kyrgyzstan. We also acquired controllingstakes in a production site in Tula, Russia, a large warehouse complex in theMoscow region and a dried milk plant in Buryn, Ukraine. In addition, weacquired 100% interests in dairy plants in the Altaisky and Voronezh regions ofRussia and in the Roska Dairy Plant (renamed Baltic Milk in 2004) inSt. Petersburg.

 

·                  *From 2003 through 2005*, weacquired a 100% interest in Siberian Cheese, a refrigeration and warehousingfacility in Novosibirsk adjacent to our principal Siberian dairy productionfacility. We also expanded into the water business with our acquisition ofcompanies controlling underground wells in the Essentuki area of Russia and a waterprocessing and bottling factory that produces “Essentuki” brand mineral water,as well as our purchase of the Essentuki Mineral Water Plant at CMW (CaucasianMineral Waters) in the town of Essentuki in the Stavropol region. We alsoacquired several raw milk production companies, including Atamanskoe farm,Plemzavod Za Mir i Trud, Zavety Ilyicha and Trud Farms. Inaddition, we acquired the Obninsk Dairy Plant in the Kaluga region, the KurskBabyfood Plant in the Kursk region, Nazarovskoe Milk in the Krasnoyarsk regionand Pervouralsk City Dairy Plant in the Sverdlovsk region.

 

·                  *From 2006 through 2008*, weacquired the Surgut City Dairy Plant in Western Siberia; the Omsk-based dairyproducer Manros-M; and Georgian Foods based in Tbilisi, Georgia. We alsoacquired controlling stakes in Moscow-based dairy producer Ochakovo andAngarsky Dairy Plant (MOLKA), one of the largest dairy enterprises in Irkutskregion.  In addition, we increased ouraggregate ownership in the Moscow Babyfood Plant to 97.3% and our aggregateownership in WBD Beverages to 100%.

 

We continue to incurcapital expenditures in order to improve our production facilities and officeinfrastructure. We incurred capital expenditures in the amount of $121.8million, $195.3 and $192.7 million in 2009, 2008 and 2007, respectively.  We also incurred $2.6 million, $3.3 millionand $21.8 million in 2009, 2008 and 2007, respectively for acquisitions ofstakes from non-controlling interests.

 

Our operations arecurrently organized into three separately reported segments: dairy, beveragesand babyfood, all operating under the umbrella of our holding company,Wimm-Bill-Dann Foods OJSC, which was incorporated on May 31, 2001. Inaddition, at the end of 2004, we created a separately managed non-core businessunit called “Agro” for the purpose of buying and managing a select number ofdairy farms in certain Russian regions. Agro is currently reported as part ofour dairy division.

 

In order to improveour corporate structure and management, as well as to reduce our expenses, wemerged 14 of our subsidiaries (Tsaritsino Dairy Plant, Ufa Dairy Plant,Siberian Milk Dairy

 

47

----

Table of Contents

 

Plant,Rubtsovsk Dairy Plant, Siberian Cheese Plant, Nizhny Novgorod Dairy Plant,Baltic Milk Dairy Plant, Nazarovo Dairy Plant, PAG Rodnik, PervouralskDairy Plant, Kursk Baby Food Plant, Moscow Baby Food Plant, Timashevsk DairyPlant and Vladivostok Dairy Plant) in 2007 into Wimm-Bill-Dann (formerlyLianozovsky Dairy Plant). In 2008 we merged nine additional subsidiaries intoWimm-Bill-Dann (Surgut Dairy Plant, Ochakovo Dairy Plant, Obninsk Dairy Plant,Pavlogradsky Dairy Plant, Krutinsky Dairy Plant, Angarsky Dairy Plant (MOLKA),Anna milk, SP Julia and Va-Bank-2000).

 

We completed ourinitial public offering on February 14, 2002 and listed our shares ofcommon stock, represented by American Depositary Shares, or ADSs, on the NewYork Stock Exchange under the symbol “WBD.” Until November 17, 2009 eachADS represented one underlying share of our common stock. On November 17,2009, a ratio change took effect whereby the ratio of ADSs to common stock waschanged to four ADSs per one underlying share of common stock.

 

According to Standard &Poor’s global scale, our corporate credit rating is BB-, and Moody’s InvestorsService ranks our Corporate Credit rating as Ba3. In 2009 Standard &Poor’s Governance Services reconfirmed our Governance, Accountability,Management Metrics and Analysis (GAMMA) score 7+, which is the highest score inRussia.

 

Our legal name isWimm-Bill-Dann Foods OJSC, and we are incorporated as an open joint stockcompany under the laws of the Russian Federation and registered with the MoscowInter-District Inspectorate No. 39 of the Russian Ministry of Taxes andDuties under the state registration number 1037700236738. We operate in theRussian Federation and the CIS under a number of different trademarks and brandnames, as more fully described below in “—B. Business Overview—CurrentOperations—Our products and brands.” Our business objectives, set forth in Article 4of our charter, include the production and sale of food products, includingmilk and sour milk products, mineral water, fruit and vegetable juices andbeverages and children’s food. Our head office is located at 16 YauzskyBoulevard, Moscow 109028, Russian Federation, and our telephone number is +7495-925-5805. We maintain a website at http://www.wbd.com. The information onour website is not a part of this report. We have appointed CT CorporationSystem, 111 Eighth Avenue, New York, New York 10011, as our authorized agentfor service of process for any suit or proceeding arising out of or relating toour shares, ADSs, or the deposit agreement.

** **

**B.Business Overview**

** **

Weare one of Russia’s largest manufacturers of food and beverage products. Ourreportable business segments in 2009 were dairy, beverages and babyfood. In2009, the dairy segment accounted for 70.2% of our sales, the beveragessegment, which includes juice and bottled mineral water, accounted for 18.6% ofour sales and the babyfood segment accounted for 11.2% of our sales.

** **

Sinceour founding in 1992, we have become the market leader in Russia in the dairyand babyfood markets as well as one of the market leaders in the juice market.In the dairy market, according to an AC Nielsen Dairy Study of 24 major cities,including Moscow and St. Petersburg, or the AC Nielsen Dairy Study we were themarket leader at the end of 2009 with a 29.6% market share in value terms. Inthe Russian juice market, according to a Business Analytica survey of Russia asa whole, we had a 20.5% market share in value terms at the end of 2009 and weare currently among the top-three Russian producers of juice and nectars. Inthe babyfood market, according to Middle East Marketing Research Bureau(MEMRB), we had an 18.1% in value terms at the end of 2009. In 2009 wesuccessfully entered the children’s segment with product offerings for childrenaged between four and nine years old.

 

Wecurrently have 37 manufacturing facilities in Russia, Ukraine, Kyrgyzstan,Uzbekistan and Georgia as well as distribution centers in 40 cities throughoutRussia and the CIS. During 2009, we employed, on average, 16,299 people.

** **

Weoffer our consumers a full range of quality branded dairy, juice, water andbabyfood products, using carefully selected raw materials, modern productiontechnology and strict quality

 

48

----

Table of Contents

 

controls.All of our products are made according to our own recipes and reflect ourunderstanding of consumer demands and tastes.

 

Ourprincipal dairy products include:

 

·                  Traditional products, such as sterilized and pasteurized milk, butterand cream, as well as traditional sour-milk products such as kefir, cottagecheese, soft cottage cheese and sour cream;

 

·                  Yogurts and dairy desserts, such as traditional and drinkable yogurt,curd desserts, fruit-flavored milk, puddings and flavored cottage cheese; and

 

·                  Cheese products, including hard yellow and processed cheese.

 

Ourprincipal beverage products include:

 

·                  Juice and nectars produced from juice concentrate;

 

·                  Enriched juice-based drinks;

 

·                  Mors, a traditional berry-juice-based drink made from natural berries;

 

·                  Bottled natural mineral water; and

 

·                  Drinking water.

 

Ourbabyfood products include:

 

·                  Liquid dairy products for infants under the age of three;

 

·                  Juices and water for infants under the age of three;

 

·                  Meat, fish, poultry, fruit, vegetable and dairy purees for children agedthree and under;

 

·                  Dry formula for feeding babies, developed in close co-operation with theResearch Institute of the Russian Medical Academy;

 

·                  Products for pregnant women and nursing mothers; and

 

·                  Other food products for children.

 

**Business Goals and Strategy**

** **

Ourstrategy for the period 2010-2015 is to build upon our strong existing brands(“brand equity”), established market position, cost leadership, strongmanagement team and scale within Russia and the CIS in order to increase salesand profitability, realize long-term efficiency gains, strengthen our marketposition and increase shareholder value over the long term. We will also seekto maintain our position as one of Russia’s leading fast-moving consumer goods(FMCG) companies with key profit ratios attributable to our industry.

 

Ourapproach takes into account both the challenges and opportunities presented bythe global financial downturn and its impact on the economies of Russia andCIS. We are making use of our experience gained during the 1998 and 2009financial crises to make short and medium-term adjustments to our product mixand marketing efforts, as well as endeavoring to maintain sustainable debtratios. We believe that the continued implementation of our long-term strategy,with its emphasis on building upon existing brand equity, cost leadership andcontinuous innovations will better position us to weather the economic downturnas well as benefit from a future recovery in consumption.

 

**Business Goals**

** **

Ourbusiness goals for 2015 are aimed at achieving qualitative and quantitativeresults that increase shareholder value and establish a foundation forsustainable growth over a five to ten-year time horizon. As Russia’s leadingmanufacturer of food and beverage products, it is both our core

 

49

----

Table of Contents

 

mission and a vitalcomponent of our individual and corporate brand image to be acknowledged byboth consumers and regulators as one of the country’s top food and beverageproducers in terms of health and nutrition.

 

Amongthe goals we will endeavor to achieve by 2015 are:

 

·                  to be leaders inall major categories in which we compete or have a clear path to leadership;

 

·                  to extend ourportfolio to include at least one other food and beverage category;

 

·                  to enhance themarket positions of our top existing dairy, beverages and babyfood brands andhave our top-10 brands by revenue be among the top-50 FMCG brands in Russia;

 

·                  focus oncontinuous innovations, with newly launched and innovative products making asubstantial contribution to our revenue;

 

·                  to strengthen ourroute-to-market execution so that we have greater control over how our productsare sold at the outlet level to ensure the integrity and quality of ourproducts and brands; and

 

·                  to be widelyrecognized as one of Russia’s employers of choice, offering top opportunitiesfor personal and career growth, in order to attract and retain the mosttalented personnel.

 

**BusinessStrategy**

** **

Ourbusiness strategy relies upon two fundamental building blocks: (i) peopleand capabilities and (ii) cost leadership:

 

***People and capabilities.*** We aim to build an agile, fast learning team with superior execution:

 

·                  attracting,developing and retaining top talent within the FMCG industry

 

·                  developingpotential — providing continuous opportunities for training and furthereducation while developing career plans and identifying key skills

 

·                  rewardingperformance*—*establishing clear incentives forsuccess and space for innovation

 

·                  creating theright environment —**maintaining astrong corporate culture based on values and creativity, establishing clearlines of responsibility and reporting while reducing both the institutions andmindset of bureaucracy wherever possible

 

***Cost leadership.***We seek to optimize the supply chain, increase the efficiency of ourassets and reduce working capital by:

 

·                  cost optimization— reducing supply-chain and procurement costs, cutting the unit cost ofmanufacturing and optimizing production lines while making the best use ofexisting assets

 

·                  strict managementof working capital — managing inventories and increasing the effectiveness ofexpenditure

 

50

----

Table ofContents

 

·                  driving marginsand profitability — intelligently managing pricing and volume mix, optimizinginput costs (recipes, raw materials and packaging) and better managingdiscounts and bonuses

 

Ourbusiness strategy is focused on the following four core principles, which arerelevant across all of our business units:

 

***Innovation***. We are continuouslyseeking to develop innovative products and processes, with a focus on healthyand nutritious food and beverage products.

 

***Growth***. We aim to grow bothorganically and through M&A activity by:

 

·                  having clearlyarticulated brand, pack, price strategies for all of our products and markets

 

·                  improvingroute-to-market strategy — further developing an efficient and effectivedistribution model with multi-year planned roll outs for each region/market

 

·                  improving currentand developing new sales channels, in particular hotels, restaurants and cafes(HoReCa)

 

·                  pursuingcarefully selected M&A opportunities — as part of our growth strategy, weare continuously evaluating potential M&A opportunities in order to furtherindustry consolidation as well as to penetrate new markets

*** ***

***Preferred brands andproducts***. Our product strategy is centered on developing foodand beverage products meeting consumer preferences and demand that havesubstantial health and nutrition benefits. We seek to do so by:

 

·                  optimizing ourproduct portfolio

 

·                  investing inmarketing to grow the equity of our brands and allow for accelerated innovationand further quality improvements

 

·                  making ourstrategic brands truly national

 

·                  channelinginvestment and other resources to core brands which will serve as a base forinnovation and entry into new categories and segments

 

***Winning customerrelationships***. We aim tobe the best supplier for our customers and provide superior sales execution inkey cities and channels by:

 

·                  centralizing ourcommercial function at our head office

 

·                  reducing thenumber of distributors we work with while building stronger relationships withdistributors possessing direct distribution capabilities

 

·                  increasing oursales to national and local key accounts

 

·                  implementing aworld-class Key Accounts Management model and new trading terms, including anew pricing policy

 

·                  developingcategory management

 

·                  focusing onimproving service level

 

·                  controlledroute-to-market

 

51

----

Table of Contents

 

**CurrentOperations**

** **

**DairyIndustry**

** **

***Consumption.***Russian dairyconsumption is relatively low compared to most European countries and is characterizedby two primary trends—the comparatively solid development of the market fortraditional dairy products and a more rapidly developing market for yogurts anddesserts.

 

Weestimate, based on a combined data from Comcon, AC Nielsen, USDA, Euromonitor,Canadean Dairy and Russian State Statistics, that per capita consumption of packageddairy products in Russia was approximately67.4, 65.6 and 66.9 kg per year in2007, 2008 and 2009, respectively, levels that are relatively low compared tothe majority of European countries. The demand for dairy products remainedrelatively stable in the aftermath of the 1998 Russian financial crisis and theensuing decline in per capita income, as dairy products are generallyconsidered to be staple consumer goods. In addition, increasing per capitaincome following 1998 has positively affected dairy consumption, particularlyof higher-priced and higher-margin products such as yogurt and dessert dairyproducts. The spike in raw milk prices observed in 2007 caused retail priceincreases for dairy products and this partially offset consumption growth in2008. In 2009 due to relatively stable raw milk prices, consumption oftraditional packaged products recovered, and returned to 2007 levels, despitethe economic crisis. However a renewed spike in raw milk prices at the end of2009 and reduced disposable income may negatively affect consumption in 2010.We estimate that per capita consumption of traditional packaged dairy productsin Russia increased by 3% to approximately 53.7 kg in 2009, from approximately52.3 kg in 2008.

 

Sinceits first widespread commercial appearance in Russia in the early 1990s, thepopularity of yogurt has increased. For instance, the consumption of suchproducts as drinkable yogurt, functional foods/drinks and flavored milk isrelatively high among certain groups of consumers and comparable with milkconsumption levels. While, the per capita consumption of these products remainsrelatively low, we believe that this segment of the dairy market has a highlong-term growth potential as household incomes increase in Russia over time,especially in the regional markets.

 

Consumptionof yogurts and dairy desserts in Russia was also affected by the inflation inlate 2007 through 2008, and the downward trend continued in 2009 due to thegeneral downturn in the economy.

 

Accordingto our estimates, annual per capita consumption of yogurts and dairy dessertswas about 8.7 kg, 8.4 kg and 8.1 kg in 2007, 2008 and 2009 respectively.

 

Accordingto our estimates, annual cheese consumption (yellow, white and processed) inRussia stayed almost flat at approximately 5.0 kg per capita in 2009.

 

***Production.***Milk productionand processing in Russia declined dramatically during the 1990s due to thegeneral state of the Russian economy, a lack of raw materials due, in part, tothe slaughter of dairy cows necessitated by a shortage of feed, and a sharpincrease in energy prices. Additionally, the majority of Russian milkproducers, comprising individual farmers and collective agriculturalenterprises, operate with inefficient and outdated facilities and equipment,and function under outdated management practices. Yields per cow are still lessthan half of those in Western Europe.

 

Theresult of this decline was a drop in processing volumes and an increasedreliance upon imported dairy products. While the financial crisis of 1998 aidedRussian producers to some extent, as it pushed imported foods out of theRussian market, it also caused difficulties for Russian companies that dependedon imported materials for production. In general, producers that were able tolimit their exposure to fluctuations in the value of the ruble and to establishlinks with Russian suppliers survived the crisis and took leading positions inthe marketplace. Although the milk processing sector continues to consolidate,with smaller and less efficient producers going out of business or merging withlarger companies, the market remains fragmented. According to an AC

 

52

----

Table of Contents

 

Nielsen Dairy Study,there were more than 820 active dairy producers at the end of 2009, compared to850 at the beginning of 2007.

 

Inaddition, foreign, particularly European, producers have recognized thepotential for growth in the demand in Russia for milk, yogurt and dairydesserts and are investing in the Russian market. A number of Europeanproducers, such as Danone, Parmalat, Campina, Lactalis and Ehrmann, producedairy products in Russia, principally in the Moscow region, and comprise ourprincipal competition in the yogurt and dairy dessert segment of the dairymarket. Until the recent economic downturn, the market for dairy desserts wasgrowing more rapidly than the traditional dairy market. Foreign producers havealso been developing new products catering to changing consumer tastes with afocus on fresh health and wellness products.

 

Wehave made significant investments in developing our own farms and establishinglong-term relationships with third-party raw milk suppliers. These steps helpus to address the seasonal imbalances in raw milk availability and prices whilealso increasing quality of the raw milk we purchase. The government hascontinued a large scale program aimed at the revival of the agricultural sectorin Russia, which we see as an important and helpful development.

 

**Juiceand Mineral Water industries**

** **

***Consumption.***Before the early1990s, consumption of juice products in Russia was limited. Juice productsmanufactured in the Soviet Union included only vegetable juices and fruitjuices made of locally grown fruit such as apples and pears. Most Russianhouseholds tried orange, pineapple, grapefruit and other exotic fruit juicesfor the first time in 1991 and 1992, following the dissolution of the SovietUnion. Russian juice consumption grew each year until 1998, when it fellfollowing the 1998 financial crisis, which led to a reduction in Russianincomes and a significant increase in the cost of juice products due to theincrease in the ruble cost of imported juice packaging and ingredients. Juiceconsumption began to recover after 1998, rapidly increasing until it reachedits peak in 2007. In the midst of the recent economic downturn, juiceconsumption remained relatively flat in 2008 as compared to 2007 and decreasedby 16% in 2009, according to our estimates. Unlike certain basic dairyproducts, juice is not considered by the average Russian consumer to be part ofthe core, essential food basket, which is why juice consumption is moreaffected by fluctuations in the economy.

 

Accordingto research carried out by the Russian Union of Juice Producers, BusinessAnalytica and Canadean, annual per capita juice product consumption in Russiain 2009, 2008 and 2007 was approximately 17.7 liters, 21.1 liters and 21.3liters, respectively.

 

Consumptionof bottled water in Russia was also significantly affected by the economicdownturn in 2009 decreasing, to 19.7 liters per capita in 2009, from 22.9liters in 2008 according to estimates based on Canadean and Business Analyticadata.

 

***Production.***Following thedissolution of the Soviet Union and the economic reforms that liberalizedimport procedures, foreign producers were able to capture a significant shareof the Russian juice market by importing their products. However, the 1998financial crisis caused the majority of the foreign companies to leave themarket, while forcing a majority of Russian producers to decrease ordiscontinue juice production.

 

Thejuice product market began recovering in 1999, and since then, has experiencedsignificant increases in sales volume, stimulated by rising Russian incomes andan increased interest in health issues, as well as by the advertising effortsof juice-producing companies.

 

Inaddition, a number of Russian producers that survived the 1998 financial crisismanaged to restructure their production facilities using Western technologiesand to strengthen their market positions. In 2009, according to a Business Analyticasurvey of ‘Total Urban Russia’ (cities with a population of over 100,000people), the four largest producers in Russia had an 87% share of the juicemarket. The industry has been experiencing consolidation, as demonstrated bythe increase in

 

53

----

Table of Contents

 

acquisition activity.According to the Business Analytica survey, during 2009, there were more than200 brands of juice products in the Russian juice market, although 10 of them accountedfor 75% of the market in value terms.

 

Thebottled-water market in Russia is characterized by a large number of brands,including local brands that are strong in the regions where they are produced.In addition, the leading brands in Moscow differ from those with leading marketshares in many of the regions outside of Moscow. According to BusinessAnalytica, in 2009, the top-ten bottled water producers in Russia together hada 71% market share in Moscow and a 66% market share in the ten largest citiesof Russia in value terms. This difference is largely due to the prominence oflocal or regional producers in certain regions outside of Moscow whose waterproducts have traditionally benefited from consumer loyalty in those regions.

 

**BabyfoodIndustry**

** **

***Consumption.*** The babyfoodmarket in Russia is comprised of five main segments:

 

·                  liquid dairyproducts (milk, kefir, cottage cheese and curd desserts, yogurts, liquid formula);

 

·                  juice and water;

 

·                  purees (includingfruit, vegetable and meat);

 

·                  powdered formula;and

 

·                  other products(cereals, puddings, soups, biscuits, tea).

 

Accordingto our estimates, from 2003 to 2008, the babyfood market in Russia grew by 99%in volume terms, mainly due to growing category penetration. The marketcontinued to grow in 2009, despite the economic downturn, with 9% growth involume terms. We estimate that over 80% of nationwide babyfood product salesare in the European part of Russia.

 

In2006, the Russian government launched a nationwide program aimed at improvingthe health of the nation and increasing the birth rate, which we believe hashad a positive impact on the babyfood market. Within the framework of theprogram, mothers get additional compensation for the birth of their second andfollowing children. In addition, as more and more Russian women go back to workshortly after giving birth, consumption of and reliance on ready-to-eatbabyfood has increased.

 

***Production.***The babyfoodmarket emerged in Russia in the early 1990s with a government plan to buildapproximately 110 production sites throughout the country to develop babyfoodproducts such as meat, fruit, vegetable, grain and fish purees and variousdairy products. Although only a small number of these government-sponsoredproduction sites have since been built, domestic and foreign producers ofbabyfood started to acquire production facilities in Russia in the second halfof the 1990s. Since 2000, the babyfood market has grown substantially in termsof product variety, production volumes and consumption.

 

Inthe individual product categories, foreign producers currently dominate thepowdered formula and cereals market, while domestic producers hold leadingpositions in the liquid dairy products and supplemental infant food market.

 

**OurProducts and Brands**

** **

Our dairy, beverage and babyfood products accountedfor 70.2%, 18.6% and 11.2% of our net sales in 2009, respectively. Ourprincipal geographic market is Russia, and Moscow is our most significantmarket within Russia. The following table sets forth our annual consolidatednet sales, the proportion of consolidated net sales attributable to each of ourmain business lines, our reported annual sales volumes and their growth rates:

 

54

----

Table of Contents

 
| ** **                                      | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Dairy products**                              |       |        |       |        |       |        |       |
| Sales  (in million USD)                         |       | 1,530.2     |       | 2,095.9     |       | 1,852.5     |       |
| Annual  sales growth, % year on year            |       | (27.0       | )%         | 13.1        | %          | 40.2        | %          |
| Percent  of total sales                         |       | 70.2        | %          | 74.2        | %          | 76.0        | %          |
| Sales  volume (in th. tons)                     |       | 1,337       |       | 1,453       |       | 1,599       |       |
| Annual  volume growth (decline), % year on year |       | (8.0        | )%         | (9.2        | )%         | 18.2        | %          |
| **Beverage products**                           | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Sales  (in million USD)                         |       | 406.6       |       | 473.2       |       | 414.1       |       |
| Annual  sales growth, % year on year            |       | (14.1       | )%         | 14.3        | %          | 27.8        | %          |
| Percent  of total sales                         |       | 18.6        | %          | 16.8        | %          | 17.0        | %          |
| Sales  volume (in million liters)               |       | 534         |       | 509         |       | 491         |       |
| Annual  volume growth, % year on year           |       | 5.0         | %          | 3.7         | %          | 10.3        | %          |
| **Baby food products**                          | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Sales  (in million USD)                         |       | 244.2       |       | 254.5       |       | 171.8       |       |
| Annual  sales growth, % year on year            |       | (4.0        | )%         | 48.2        | %          | 46.6        | %          |
| Percent  of total sales                         |       | 11.2        | %          | 9.0         | %          | 7.0         | %          |
| Sales  volume (in th. tons)                     |       | 135         |       | 111         |       | 87          |       |
| Annual  volume growth, % year on year           |       | 21.6        | %          | 27.5        | %          | 31.9        | %          |
| **Total net sales (in million USD)**            | ** ** | **2,181.1** | ** ** | **2,823.6** | ** ** | **2,438.3** | ** ** |

** **

**DairyProducts and Brands**

 

Wedivide our dairy products by type and by price segment. We have two diaryproduct categories, including “essential dairy”, which are related to economysegment and presented by the following brands: “Vesely Molochnik”, “M”, “KubanskayaBurenka”, “33 Cows” and “Pastushok”, and “value-added dairy,” which are relatedto high price segment and presented by the following brands: “Little House inthe Village”, “Zdraivery”, “Imunele”, “Chudo”, “Bio-Max” and other.  In addition, our products fall within threedefined price segments, as further described below.

 

In2007, 2008 and 2009, dairy products comprised 76.0%, 74.2% and 70.2% of ourtotal sales, respectively. Our principal dairy product categories, principalbrands, and their approximate percentage of our total dairy revenue in 2009,2008 and 2007 are as follows:

 
| **Product  line**  | ** ** | **Main brands**                                                                                                                                                        | ** ** | **Approximate********percentage of total********dairy in********2009** | ** ** | **Approximate********percentage of********total dairy in********2008** | ** ** | **Approximate********percentage of********total dairy in********2007** | ** ** |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Essential  Dairy   |       | “Vesely Molochnik”, “M”, “Kubanskaya Burenka”, “33  Cows”, “Pastushok”                                               |       | 39                                                                     | %          | 41                                                                     | %          | 41                                                                     | %          |
| Value-Added  Dairy |       | “Little House in the Village”, “Zdraivery”,  “Imunele”, “Chudo”, “Bio-Max”, “Lamber”, “Mazhitel” |       | 61                                                                     | %          | 59                                                                     | %          | 59                                                                     | %          |

 

TheRussian market for packaged dairy products has several defined market segments.It can also be divided into non-branded and branded products, althoughnon-branded products generally cover only the lower segment of the market. Ourbranding policy is designed to ensure we reach customers in most of thesegments with the right mix of brands, products and packaging formats. Wesupport strong national brands, as well as a few key local brands which arewell established in their respective regions. The following chart illustratesour estimates of the current market segment positioning for our major brands,as well as a general description of the purchasers within each market segment:

 

55

----

Table of Contents

 
| **Product  line** | ** ** | **Purchaser material well-********being scale**                                              | ** ** | **Traditional products**                                                                                                                                | ** ** | **Yogurts and********dairy desserts**      | ** ** | **Health-********oriented********enriched******** products** | ** ** | **Cheese********Products**   | ** ** |
|-------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------|------------|
| Premium           |       | Enough money to buy major household appliances,  monthly income above $500 per family member |       | “Little House in the Village”                                                                                                                 |       | “Bio-Max”, “Zdraivery” |       | “Imunele”, “Bio-Max”, “Mazhitel”    |       | “Lamber”           |       |
| Value  for Money  |       | Enough money to buy food and clothing, but not  enough to buy major household appliances     |       | “33 Cows”, “Na Zdorovye”, “Vesely Molochnik”,  “Slavyanochka”, “Kubanskaya Burenka” and “M” |       | “Chudo”                          |       |                                                              |       | “Vesely Molochnik” |       |
| Econom            |       | Enough money for food only                                                                   |       | “Zavetny Bidonchik”, “Pastushok”, “Nash Doctor”                                                                           |       | “Frugurt”, "Lada"      |       |                                                              |       |                         |       |

 

Ingeneral, we seek to maintain at least one brand within most dairy marketsegments, and we intend to develop new brands to expand our coverage ofattractive segments. In 2009, we launched the new “Zdraivery” brand,specifically for children aged between four and nine years old. A variety ofproducts are marketed under the Zdraivery brand, including traditional dairyproducts, yogurt, dairy desserts, juice and smoothies.

*** ***

***Market trends and*****competition**. According toour estimates, the total market for packaged dairy products in Russia was9.6 billion liters in 2007 and 9.3 billion liters in 2008. The decline in2008 was due to significant price increases in retail product prices caused bythe growth of global raw milk prices at the end of 2007. Despite the economicdownturn in 2009, the market for packaged dairy products increased to 9.5billion liters which was driven by increased consumption of traditional dairyproducts. At the same time, given existing low per capita consumption, webelieve that the Russian dairy market continues to provide a long-termopportunity for growth. In particular, Russian households have proven receptiveto yogurt, enriched dairy products and dairy-dessert products. We also expect continuedgrowth in the consumption of products with extended shelf life, includingsterilized milk.

 

From2000 to the present, we have expanded our distribution capacity, reduced oursales to wholesalers, increased our sales to retailers and increased advertising.We also remain committed to our regional expansion strategy and are constantlyexpanding our regional product offerings as consumer spending has grownsteadily in the regions. Cutting costs and improving the quality of ourproducts remain our main focus areas. We believe that these strategies, alongwith our marketing efforts have increased public awareness and customer loyaltyand will continue to help us mitigate the negative effects of the currenteconomic downturn. We have also increased our production of value-addedproducts that are available in attractive and convenient packaging.

 

Inthe dairy market, according to the AC Nielsen Dairy Study we were the marketleader at the end of 2009 with a 30.5% market share in volume terms*.

 

Intraditional dairy, we compete primarily with local producers, such as Unimilk,Molvest (Voronezhsky M.K.), as well as with a number of smaller regionalproducers. In enriched dairy, we compete primarily with Danone. In the marketfor yogurts and desserts and, to some extent, for children’s foods products, wecompete with foreign producers such as Danone, Campina and Ehrmann who continueto invest in their businesses in Russia. We view the following producers as ourprimary competitors:

 

----

* Dairy market sharesstated for our company and its competitors exclude cheese and butter

 

56

----

Table of Contents

 

·                              *Groupe Danone*, aFrench company and the most active foreign producer in Russia. It has a dairyplant in the Volga region where it produces yogurts, as well as a dairy plantin the Moscow region. Both domestically produced and imported products are soldunder the Danone brand name across Russia through its own distribution network.Key brands are Activia, Actimel, Rastishka and Danissimo, which Danoneaggressively promotes. According to the AC Nielsen Dairy Study, at the end of2009, Danone had an 11.6% market share in yogurts and desserts in volume termsand a 6.8% share of the total Russian dairy market in volume terms.

 

·                              *Unimilk*,the second largest dairy holding company in Russia. Unimilk has over 25 dairyproduction facilities in Russia and two in Ukraine. Its largest productionfacility, the St. Petersburg-based Petmol, produces a wide range of dairyproducts. According to the AC Nielsen Dairy Study, at the end of 2009, Unimilkhad a 19.1% market share in traditional dairy, a 9.9% market share in yogurtsand desserts and 18.4% share of the total Russian dairy market in volume terms.

 

·                              *Ehrmann*, aGerman company producing yogurts at its plant located in the Moscow region. Itsbrand names Ehrmigurt, Yogurtovich, Fruktovich and Uslada were developedspecifically for Russian consumers. According to the AC Nielsen Dairy Study,Ehrmann had a 3.1% market share in yogurts and desserts at the end of 2009 involume terms.

 

·                              *Molvest,* aRussian company producing a wide range of dairy products. Its main brand namesare Vkusnoteevo and Ivan Poddubniy. According to the AC Nielsen Dairy Study,Molvest had a 3.4% market share in traditional dairy and a 3.0% share of thetotal Russian dairy market in volume terms at the end of 2009.

 

·                              *Campina,* aninternational co-operative dairy company that specializes in production ofmilk, yogurt and desserts. Its main brand names are Campina, Fruttis, Nezhniy,Stupinskoe and Yogho!. Campina merged with Friesland Foods, another largeinternational dairy co-operative, in 2009. According to the AC Nielsen DairyStudy, Campina had a 7.3% market share in yogurts and desserts at the end of2009 and a 1.0% share of the total Russian dairy market in volume terms.

 

Recenttrends also indicate that industry consolidation may lead to the emergence oflarger domestic producers, which would likely increase competition.

 

Foreigndairy manufacturers generally have large promotional budgets and advancedproduction know-how, allowing them to offer quality and innovative products,and strong distribution networks. While foreign manufacturers in the pastgenerally tended to focus on niche markets, usually in the premium segment,they are now increasingly offering products to the average Russian consumerwith an average income. For example, Danone owns two plants in Russia and hasintroduced several of its yogurt brands into the Russian market, some of whichwere developed specifically for Russian consumers. Dutch company Campina alsoowns a dairy plant in Russia that produces fresh yogurts and yogurts with along shelf life. In addition, the German companies Ehrmann and Onken produceyogurt at Russian plants. Foreign cheese producers have also launchedproduction facilities, including French company Lactalis and German companyHochland. Lactalis also owns seven dairy factories in Kazakhstan, Moldova andUkraine that produce milk, kefir, sour cream, yogurt and cheese. In Russia,Lactalis owns Lactalis Istra, a factory located near Moscow with capacity toproduce up to 6,000 metric tons of cheese annually, and in Ukraine it owns adairy plant in Nikolaev that produces various dairy products. Due to theirincreased domestic production of yogurt and dairy desserts, foreign producershave become our main competitors in these sectors, whereas we mainly competewith domestic producers in the traditional dairy sector.

 

Webelieve that we have several important competitive advantages that will allowus to maintain a leading position in the Russian dairy market, including strongand diversified brands across all price segments, stable access to raw milk, abroad distribution network, our focus on new product development, a substantialin-house R&D department, modern production assets and

 

57

----

Table of Contents

 

technology, access toexternal capital and a strong management team. We also benefit from our strongregional production base, while our foreign competitors must generallytransport their yogurts and premium segment desserts from Moscow to theregions, which is costly and logistically complex.

 

Weintend to take advantage of these strengths through our strategy of promotingbrand awareness and loyalty with an emphasis on product quality, as well as bycontinuing our efforts to focus on developing new products equal to or betterin quality than those offered by Western producers.

 

**BeverageProducts and Brands**

** **

In2007, 2008 and 2009, beverage products comprised 17.0%, 16.8% and 18.6% of ourtotal sales, respectively.  Our principalbeverage product lines and types of products and brands are as follows:

 
| **Product  Line**                                                           | ** ** | **Brands and Types of Products**                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Juice, nectars and juice containing drinks produced  from juice concentrate |       | · “J7,” covering 14 kinds of  fruit and berry juices and nectars·  “100% Gold Premium” and “100%  Gold Classic”, covering 15 kinds of fruit juices, nectars and juice  containing drinks

· “Lovely Garden,” covering 19  kinds of fruit and berry juices and nectars, 5 kinds of juices and nectars  enriched with vitamins and 3 kinds of traditional Russian berry drinks |
|                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Enriched juice-based drinks                                                 |       | ·“J7 Exotic,” an exotic fruit juice and nectar range  and “J7 Imunno”, an enriched variety;·“Zdraivery,” covering 6 kinds of enriched fruit  juice and nectars;                                                                                                                                                                                                                                            |
|                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Traditional berry-juice-based drinks                                        |       | · “Wonder Berry,” covering 4  kinds of berry-juice based drinks;                                                                                                                                                                                                                                                                                                                                                               |
|                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Mineral water                                                               |       | ·“Essentuki,” covering 3 kinds  of therapeutic mineral water (Essentuki #4, #17 and #20) ·“Novoessentukskaya,” covering 1  kind of therapeutic mineral table water· “Rodniki Rossii,” covering  drinking table water in gas and still varieties                                                                                                                                             |

 

Thejuice market consists of three basic price segments, and our juice products arepresent in all of them.  In 2009 we alsolaunched new premium juice products under “Zdraivery” brand and relaunched “100%Gold Classic”. We also launched “Rodniki Rossii”, a new brand of mineral water,at the end of 2008.

 

Thefollowing chart illustrates our estimates of the current market-segment positioningfor our major brands, as well as a general description of the purchasers withineach market segment:

 

58

----

Table of Contents

 
| **Segment**     | ** ** | **General Purchaser********Characteristics**                                      | ** ** | **Juice and nectars********produced from********juice concentrate** | ** ** | **Traditional********berry-juice-********based drinks** | ** ** | **Other juice-********based drinks**         | ** ** | **Mineral********water**      |
|-----------------|------------|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------|
| Premium         | ** ** | Aged 20-45                                                                        | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | “J7 Exotic”                   | ** ** | “Essentuki”         |
| ** **      | ** ** | Men and women  in the middle to upper-middle income bracket                       | ** ** | “J7”                                                      | ** ** | “Wonder Berry”                                | ** ** | “J7 Imunno”  “Zdraivery” | ** ** |                          |
| ** **      | ** ** | ** **                                                                        | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** | ** **                    |
| Value for Money | ** ** | Aged 20-45                                                                        | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** | “Rodniki  Rossii”   |
|            | ** ** | ·Men and women in the middle to upper-middle  income bracket                 | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** |
|            | ** ** |                                                                              | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** |
|            | ** ** | ·Active, optimistic and open-minded                                          | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** |
|            | ** ** |                                                                              | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** |
|            | ** ** | Aged 25-45                                                                        | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** |
|            | ** ** | ·Primarily married men and women with  children in the middle income bracket | ** ** | “100% Gold Premium”  “Lovely Garden”       | ** ** | “Lovely Garden”                               | ** ** | ** **                                   | ** ** |
|            | ** ** | ·Self-confident, rational, but not trend  setters                            | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** |
|            | ** ** |                                                                              | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** | ** **                    |
| Econom          | ** ** | Aged  25-45                                                                       | ** ** | ** **                                                          | ** ** | ** **                                              | ** ** | ** **                                   | ** ** | “Novoessentukskaya” |
|            | ** ** | Men and women  typically with children and below average incomes; family oriented | ** ** | “100% Gold  Classic”                                      | ** ** | ** **                                              | ** ** | ** **                                   | ** ** |

 

Ourmain water brand is produced at factories from underground wells in theEssentuki area of Russia. Our mineral water products are positioned in each ofthe three segments of the market and cater to consumers who prefer bottled naturalmineral water to purified or ordinary tap water. We remain committed toexpanding our Essentuki production capacity. We also introduced the “RodnikiRossii” natural drinking water brand at the end of 2008, which delivered astrong performance in 2009 and demonstrated its potential for its strongdevelopment in the future.

 

Ouraim in the bottled water sector is to satisfy the growing demand among Russianconsumers for quality mineral and drinking water using ecologically pureRussian sources. We believe that consumers will eventually distinguish andvalue the superior quality spring and natural water products from competingpurified water brands.

 

Webelieve that our primary competitors in this area are Pepsi’s “Aqua Minerale”and Coca-Cola’s “BonAqua,” as well as “Saint Springs”, “Shishkin Les” and “Arkhyz”.We have positioned our brand in a more up-to-date style, accentuating the factthat it is naturally produced mineral water, and offer both still andcarbonated waters in a variety of sizes.

 

***Market trends and competition.***The Russian juicemarket grew steadily from the time of the dissolution of the Soviet Union untilthe 1998 financial crisis, following which there was a significant decrease inconsumption from which the market had substantially recovered by 2000.

 

Thelonger term growth of household incomes in Russia and the increasing preferencefor juice over fresh fruit has driven the consumption of vitamin-rich,value-added products with different tastes and nutritional characteristics. Forexample, according to Business Analytica, in Moscow, which had higher averageper-capita incomes than most other parts of Russia, the average consumption ofjuice in 2009 was approximately 48 liters per capita, as opposed tonational per

 

59

----

Table of Contents

 

capita consumption ofapproximately 17.7 liters per capita according to our estimates based onRussian Union of Juice Producers, Business Analytica and Canadean surveys.

 

Theeconomic downturn had a significant effect on the juice market in 2009.According to our estimates, the total market for juice products, defined as thetotal consumption of domestically produced and imported products, declined to2,514 million liters in 2009 from 3,003 million liters in 2008. Thisdecline can be attributed to a combination of weakened consumer spending powerand an increase in the average price. We believe that we will see stabilizationin the juice market in 2010 and that it will potentially return to growth in2011.The markets for juice products in Moscow, the Moscow region and St.Petersburg are relatively mature compared to other regions of Russia, and areexpected to exhibit relatively modest growth rates in the future, withparticular growth expected in the upper-middle product segment. We believe thatsignificant growth opportunities lie in the regions of Russia. Juice remains anovelty in many regions, and we believe that with rising household incomesthere will be a growing demand for juice offerings in the lower-middle pricesegment. The Russian juice market is highly competitive largely due to strongrivalry among top 4 players with several brands covering all price segments.

 

Inthe Russian juice market, according to the Business Analytica survey, we had a20.5% market share in value terms at the end of 2009.

 

Ourprincipal competitors in the Russian juice market include the followingcompanies:

 

·                  *Multon*is a Russian juice producer acquired by Coca-Cola in 2005. According toBusiness Analytica, had a 20.3% market share in value terms in Russia at theend of 2009. Its key brands include Dobry, Rich and Nico. Multon has gainedsignificant market share since 1998 primarily through aggressive pricingpolicies and advertising.

 

·                  *Lebedyansky* is based in theLipetsk region. Lebedyansky acquired local juice producer Troya Ultra in 2006.In 2008, PepsiCo acquired 100% stake in Lebedyansky. According to BusinessAnalytica, PepsiCo had a 32.3% market share in Russia at the end of 2009 invalue terms. Its key brands include Tonus, Ya, Fruktovy Sad, Privet and otherbrands.

 

·                  *Nidan* is aNovosibirsk-based Russian company that, according to Business Analitica, had a13.2% market share in Russia at the end of 2009 in value terms. Its key brandsinclude Moya Semya, Caprise and Da!. In 2007 Lion Capital, a British investmentfund, acquired 75% of Nidan’s shares.

 

Accordingto our estimates, which are based on data from Business Analytica and Canadeandata, the total market for bottled water in Russia decreased to 2,794 millionliters in 2009 from 3,256 million liters in 2008. Russian bottled-waterproducers dominated the market, with a 60% market share in value terms, whilethe combined share of the two market leaders, PepsiCo and Coca-Cola, amountedto 35%, according to a Business Analytica survey of Russia’s 10 largest citiesin 2009. According to the same survey, we were among the top-ten waterproducers in Russia, with a 3.9% market share by value in 2009. Market growthin recent years has been driven mainly by the increased consumption of bottledwater sold in large format packaging and which is consumed for drinking andused for cooking. Despite the short-term negative impact on the market due tothe economic downturn, we believe that this market will continue to expand overthe longer term due to increasing awareness of the importance of food and waterquality.

 

**BabyfoodProducts and Brands**

 

Ourbabyfood products, sold under the “Agusha” brand, include liquid dairybabyfood, juice, purees and products for pregnant and nursing women. Theseproducts are mainly produced at the Moscow Dairy Babyfood Plant and at theKursk Babyfood Plant, with production launched at Manros-M in Omsk in March 2008.In 2007, 2008 and 2009, babyfood products comprised 7.0%, 9.0% and 11.2% of ourtotal sales, respectively.

 

60

----

Table of Contents

 

Weare currently developing our babyfood sales by focusing on geographicalexpansion, developing a full range of products and increasing production. Inaddition, we plan to continue to launch of new products and expand the range ofthe existing products.

 

Tofurther expand our geographical reach and widen our portfolio, we acquired theKursk Babyfood Plant in July 2005 and re-launched it after an extensivemodernization in April 2007. The plant sources certain of its rawmaterials from its own fruit orchards, and our acquisition of the plant allowedus to expand our babyfood product range to include fruit and vegetable purees.

 

Agushais the leading brand on the Russian babyfood market in terms of spontaneousbrand and advertising awareness in 2009 according to the Comcon Brand Healthstudy, as well as the leading brand in terms of volume share according to theMEMRB retail audit.

 

***Market trends and competition.*** The babyfoodmarket in Russia has experienced dynamic growth in recent years, supported byimproved market conditions, including rising average incomes, more stringentgovernment regulation of babyfood production and the introduction of variousstate-supported social programs aimed at improving domestic birth rates andproviding maternity assistance. As a result of these improved conditions andincreased consumer demand, domestic production of babyfood products hasincreased over the last few years, with certain of Russia’s major juice anddairy producers increasing their production capacity and introducing newbabyfood brands. Foreign producers are also active in the market and, similarto the dairy and juice markets, several have begun to focus on establishinglocal production capacity in Russia. The babyfood market is alreadyconsolidated, with the top five players accounting for approximately 74% of thetotal value in 2009, according to MEMRB. Given the present low per capitaconsumption and the long-term trend of increasing household incomes, we believethis market segment continues to have strong growth potential. Another factordriving the growth of the Russian babyfood market is the increase in the numberof infants aged four and under by 2.5% in 2006, 2.6% in 2007, 3.1% in 2008 and3.3% in 2009, according to the Federal State Statistics Service.

 

We are the leader in the babyfood market with the overallvolume share of 25.9% as of the end of 2009, according to MEMRB.

** **

**NewProduct Development**

** **

Fora leading consumer-goods company operating in an ever more competitivemarketplace, we rely on the process of innovation in order to strengthen ourmarket position. We believe that having high-technology research anddevelopment capabilities is a crucial competitive advantage for us and a key toour long-term growth.

 

OurResearch and Development (R&D) department, employing more than 20 people,is located at Wimm-Bill-Dann in Moscow, the company’s flagship enterprise andone of the largest and best technically equipped dairy production facilities inEurope. The factory has its own testing platform, and the R&D departmentcreates and tests new products for each of our dairy, beverages and babyfoodunits. The department works closely with production units across the companyand with our marketing division to combine intelligence and research aboutchanging consumer habits and patterns to develop new products.

 

Innovationsinclude enriched versions of existing products, new formats and packaging forpopular products (i.e. changing how they are consumed), and developing productsthat are entirely new for the Russian market.

 

Muchof our new product development effort over the past three years has focused onhigher-margin, value-added yogurt and dessert products.

 

In2009, we re-designed the entire line of “Chudo” products in order to improvebrand visibility and consumer recognition. In addition, following the successfullaunch of a cottage cheese product under the “Chudo” brand in the family packformat in 2008, we have built upon our

 

61

----

Table of Contents

 

initial success bylaunching spoonable yogurts and mixed curds with chocolate sauce in family packformat in 2009.

 

Wealso extended our “BioMax” brand with the launch of new curd and spoonable anddrinkable yogurt products under the “BioMax Effective” line to strengthen ourcompetitive advantage over Danone’s “Activia” products.

 

Inorder to expand our target audience, we launched the “Zdraivery” brand in 2009.“Zdraivery” is a brand for children, aged between four and nine years with awide product portfolio, including traditional dairy products, yogurt and dairydesserts, juice and smoothies. They are positioned as healthy products madeonly from natural ingredients, and which help children to grow and develop.

 

Inthe babyfood segment, we have re-launched the “Total Care” line within the “Agusha”brand in 2009. We redesigned the brand for better visibility on the store shelfand increase its attractiveness to shoppers. We also launched compote and morsunder the “Agusha” brand in the 500ml packaging. In 2010, we plan to launch theproduction of compotes for children in the 200ml package format.

 

**Advertisingand Marketing**

** **

Brandbuilding and marketing have always been at the core of our business. Since theearly 1990’s, we have built brands into household names in Russia and the CIS,from the “J7” brand of juice to one of Russia’s first yogurts under the “Chudo”brand to leading babyfood brand “Agusha”.

 

Ourmarketing strategy is directed at leveraging our leading portfolio of brands byaccelerating brand building based on our deep understanding of consumers andreact quickly to new trends in the marketplace. As the cost of advertising onRussian television continues to rise, we will continue to concentrate on morefocused and efficient campaigns to reach target consumer audiences.

 

Ourinvestment in some 10 power brands in recent years is aimed at increasing theiraverage selling price and market share, while achieving the right product mix.We believe our most successful brands still have considerable untappedpotential.

 

Injuice, the “J7” brand saw radical changes in 2007, with a new advertisingcampaign, new packaging, improved taste profile and new pricing structure. Wewill continue to expand the brand and enhance its brand equity.

 

Insteadof viewing products within the context of a single market niche, we havepositioned all of our power brands on the basis of health and wellness,reflecting our mission and the emerging trend toward healthier lifestylesvisible today in Russia. We see each brand as a reflection of our broadercorporate identity, with our label on every product aimed at conveying aconsistent message of quality, taste and health.

 

Ouradvertising and marketing expenditures of $138.0 million in 2007, $142.3million in 2008 and $139.5 million in 2009 constituted 5.7%, 5.0% and 6.4% ofnet sales, respectively. Though we are, in some instances, able to obtainvolume discounts, we expect these expenditures, as a percent of net sales, toincrease significantly due to market competition and annual media inflation.According to Gallup, in Russia, we were the tenth largest advertiser both in2007 and 2008 and the seventh largest advertiser in 2009.

 

In2007, we began systematic testing of the quality of our advertising whichcontinued in 2008 and 2009. We saw positive results with several key brands,including “J7,” “Little House in the Village,” “Chudo” and “Agusha”. In 2009 wedeveloped strong commercial campaigns for the

 

62

----

Table of Contents

 

“J7,” “Chudo” and “Agusha”brands. We launched a new brand “Zdraivery”, which we supported with strongadvertizing campaigns targeted specifically to children and their parents.

 

Weplan to continue to allocate the bulk of our advertising budget to a limitedgroup of strategic brands which are highly ranked in their respective markets.We also plan to continue our aggressive advertising and marketing of selectednew products.

 

Wehave also built brand awareness through charitable work and sponsored events.For example, we sponsor International Charity Foundation events benefitingorphans through the “Hope around the World” program, as well as several othercharitable organizations. We also serve as a trustee of the Charity Foundationfor Special Grants, which was headed by the late Mstislav Rostropovich, aprominent Russian cellist.

 

**Salesand Distribution**

** **

Accordingto the Russian Federal Statistics Agency, total retail sales in Russiadecreased by 5.5% year-on-year in 2009 due to the general economic downturn.

 

SevenRussian regions (Moscow, St. Petersburg, Moscow region, Sverdlovsk region, theRepublic of Bashkortostan, Tyumen region and Krasnodar region) accounted for42.1% of total retail turnover in 2009, with Moscow alone accounting for 17.1%,according to the Russian Federal Statistics Agency.

 

Inrecent years, individuals in Russia have been spending an increasing percentageof their incomes on consumer goods. According to the Russian Federal StatisticsAgency in 2009, the cash income of the population grew 1.9% compared to 2008,however due to the increase of savings share in the disposable income by 1.7%,the consumer purchase power decreased in comparison with 2008.

 

Notably,the share of products being sold in open markets continued to decline in 2009.According to Business Analytica, the juice sales by volume at open markets in2009 comprised 10.7% of total juice sales in Russia as compared to 11.6% in2008. The portion of dairy product sales by volume at open markets in 2009remained flat at 7% in 2009 as compared to 2008, according to the AC NielsenDairy Study. In the babyfood segment the share of open market sales isinsignificant.

 

Theabsolute size of the retail market has continued to grow every year, withRussia’s regional markets growing at a faster pace as compared to the moremature Moscow and St. Petersburg markets. According to Business Analytica andAC Nielsen data, the share of sales via modern formats, such as supermarkets,hypermarkets and discounters, in the overall volume of retail sales continuedto increase in 2009. According to Business Analytica, the share of juice soldin modern format outlets grew from 21.7% of total juice sales in 2008 to 23.5% in2009. The corresponding share of all dairy products grew by volume from 73.6%in 2008 to 74.0% in 2009, according to an AC Nielsen.

 

InMoscow, the country’s largest single market, this ratio is considerably higher.

 

Overthe last several years, foreign and domestic retail chains have focused onexpanding into large regional cities throughout Russia, in particular targetingfast-growing but under-served regions such as the Urals and Siberia. We believethat the expansion of retail chains creates additional opportunities for marketexpansion and has a generally positive effect. In particular, retail chainsgenerally operate with increased business transparency and new technologiesthat enhance sales and marketing efforts, as well as provide manufacturers withnew opportunities to increase the volume and geography of sales.

 

63

----

Table of Contents

 

**Sales**

** **

In2009, we continued the reorganization of our sales and distribution functionsin order to increase their efficiency. In 2007, as a part of this long termplan, we merged our dairy and babyfood sales forces widen distribution in thebabyfood segment. In 2009, we focused our efforts on the re-engineering ofprocesses for key account management processes and retained Bain &Company, an independent consultant, to provide the necessary support. Inaddition, in 2009, WBD Foods’ management team was strengthened with theaddition of a new vice president to our management team who has joined us as anexpert in key account management, increased the number of key account managersby 25%, and modified the functional specialization scheme of key accountmanagers.

 

Inaddition, as part of our strategy to expand the geography of our distributionnetwork, we opened four new distribution centers in Tyumen, Saratov, Pyatigorskand Novorossiysk in 2009. We also hired a team of regional field managers inorder to improve the control procedures over trade marketing activities carriedout by the distribution centers.  Inaddition to sales made through our distribution centers, we also continued tosell our products directly from production sites and through independentdistributors.

 

***Distribution***

*** ***

Dueto differing consumption patterns and product characteristics, our dairy,babyfood and beverage businesses require different distribution strategies. Wehave therefore built two distribution systems: one for our dairy and babyfood,and the other one for beverage products. At the same time, we use the samemarketing approach in each business and take advantage of synergies between thesystems to the extent possible.

 

Wesell our products through various sales channels, including independentdistributors and wholesalers, supermarket chains, small- and medium-sizedgrocery stores, open air markets, pavilions, kiosks, and hotels, restaurant andcafes (HoReCa)

 

Inan effort to mitigate the effects of the global economic downturn and relateddecline in sales as well as to generally fortify our sales strategy, welaunched a route-to-market strategy in 2009. In this connection, we undertookan analysis of the cities and towns where our products are sold in order toidentify the most promising markets and develop customized plans for theirdevelopment.

 

Wealso increased the share of our direct store delivery, strengthened ourpartnerships with distributors, unified our trade terms in order to providemore transparency and insight to our customers and implemented a sales force informationsystem that enables us to control and manage the direct sales of each of ourindependent distributors.

 

***Independentdistributors***

*** ***

Oneof the challenges we faced in 2009 was preventing a sharp decline in sales inthe context of the global economic downturn and its negative impact on theRussian marketplace. With this objective in mind, and with the goal of creatinga foundation for strong sales growth in the future, we launched aroute-to-market strategy. We made a cluster analysis of the cities/towns inorder to identify the most promising markets and develop customized programsfor their development. In addition, we increased the share of DSD (Direct StoreDelivery), strengthened our partnerships with distributors, and unified ourtrade terms in order to inject more transparency. All of these actions helpedus avoid a sharp drop in sales in 2009.

 

Asa percentage of total sales during 2009, in value terms, we sold 48% of ourdairy products, 66% of beverages and 40% of babyfood products through independentdistributors and this process is supervised by our sales teams.

 

During2009, our dairy and babyfood products distribution network consisted of 35regional sales offices throughout Russia and the CIS. All of our dairydistributors in Moscow are exclusive

 

64

----

Table of Contents

 

to us and do notdistribute the dairy products of our competitors. We have also implemented asegmentation program among the Moscow distributors whereby each distributorcontrols the distribution of a particular segment or segments of the dairymarket. A number of independent distributors, with which we have establishedrelationships, purchase dairy, beverage and babyfood products from us. In orderto incentivize these distributors, in 2009 we introduced a new type ofdiscounts — discount for cooperation. These discounts are given to distributorswho deliver great results across all our categories.

 

During2009, our beverage-product distribution network consisted of 16 regional salesoffices throughout Russia. In Moscow, our independent distributors actprincipally as logistical coordinators. Our sales representatives work directlywith retail outlets and other customers in making sales, while relying on thedistributors to execute the orders, carry out deliveries and collect payments.Outside of Moscow, we rely more heavily on our independent distributors. Someof our beverage distributors have teams devoted exclusively to the sale anddistribution of our products.

 

Allof our dairy distributors in Moscow are exclusive to us and do not distributethe dairy products of our competitors. We have also implemented a segmentationprogram among the Moscow distributors whereby each distributor controls thedistribution of a particular segment or segments of the dairy market. A numberof independent distributors, with which we established relationships, purchasedairy, beverage and babyfood products from us. In 2008 we started to consolidateour base of distributors and decreased the total number of distributors from240 to 173, which has increased our ability to manage the distribution systemmore effectively while, at the same time, enhancing the profitability of our partnersby providing them with greater economies of scale. Independent distributorspurchase directly from us and then resell our products through their owndistribution centers. Given the importance of these customers, we processorders from independent distributors relatively quickly. We launched ourInternet-based ordering system in Moscow in January 2000, and all ordersby our dairy product distributors in Moscow and the Moscow region are nowplaced through the Internet. In 2001, we started to use an automated ordersystem with all of our independent distributors who purchase our products inlarge volumes, and in 2002, we began using this automated order system with oursmaller independent distributors as well

 

In2004, we worked with and invested in our independent distributors in Moscow toestablish warehouses and transportation infrastructure capable of fullysupporting a “cold supply chain” in order to maintain our products’ integrity,freshness and nutritional value.

 

In2009, we started a program for product portfolio optimization aimed atincreasing level of service, reducing the write-offs of finished goods, andimproving production efficiency.

 

***Directsales***

*** ***

Asthe share of chain retailers grows, our intention is to increase the share ofour own direct sales to them.

 

Asa percentage of our total sales during 2009, in terms of value, we sold 40% ofour dairy products, 27% of beverages and 33% of babyfood products directlythrough our national and local key accounts. We believe that the importance ofthese customers to our business will continue to grow in the coming years. Wewant to become and remain the supplier of choice for these customers by furtherdeveloping key supplier relationships and improving customer service standards.Over the past several years we have been selling products directly to severalretail chains, including Seventh Continent, Auchan, Metro, Perekryostok, Lenta,and other. In addition, in 2009, we began direct distribution to the SPAR,Billa, and Magnolia retail chains. See also “—Sales” above for a description ofthe steps we took in 2009 to improve key account management.

 

65

----

Table of Contents

 

Whilewe increased national and local key-account relationships and sales in 2009,the economic downturn has had an impact on the business of these clients.Liquidity problems and large debts led to some retail chains experiencingproblems with solvency.

 

Inconnection with this, we toughened our credit policy and are carefully trackingthe financial condition of our partners. We have also increased our efforts toreduce receivables.

 

***Export program***

*** ***

Webegan exporting our juice products, in particular our “Wonder Berry”traditional berry-juice drinks, to Western markets in 1999, mainly focusing onRussian communities abroad. We selected this product because of itsdistinctiveness and the opportunity it presented to take advantage of theexpansion of the red-berry juice market in Europe.

 

Wecurrently export our juice products to the United States,Canada, certain CIS countries, Latvia, Estonia and Lithuania,Mongolia and Vietnam. Our juice products are distributed in these countriesthrough independent distributors and are sold in various national and multinationalretail chains. Our products are also exported and sold through various saleschannels in CIS countries such as Ukraine, Kyrgyzstan, Kazakhstan,Turkmenistan, Georgia, Armenia, Azerbaijan, Moldova and Belarus,. We alsoexport our “Essentuki” mineral water, principally to the United States, Canada.Our production facilities were certified in 2007 to export “Essentuki” toUkraine. Our beverage export sales totaled $4.6 million in 2007, $8.3 millionin 2008 and $6.0 million in 2009.

 

TheLianozovsky Dairy Plan (2004), Tsaritsino Dairy Plant (2005) and the Rubtsovskdairy plant (2007) have received licenses to export dairy products to theEuropean Union (EU). During the licensing process, all of the equipment andproduction, technological and control processes at the plants were inspected toensure compliance with international norms and standards based on theprinciples of Hazard Analysis andCritical Control Points (HACCP).The EU license is accepted by a majority of CIS countries as an indicator ofhigh quality and safety.

 

Weroutinely participate in trade shows in foreign countries and work with foreigndistributors on promotional campaigns and product tastings (e.g., “Green Week”,“ANUGA” and “SIA”). We also engage in market testing and market research in, aswell as one-off deliveries to, foreign countries in order to determine theattractiveness of potential future markets. We are a six-time recipient, mostrecently in 2009, of “The Best Industry Sector Exporter” award from the Tradeand Economic Council of the Russian Ministry of Economic Development and Trade.

 

Whenwe export our products to any other country, we seek to ensure that we arecompliant with the applicable legislation governing the import of food productsinto that country. Independent distributors have, in a few cases, attempted toexport our products to other countries that did not meet applicablelegislation.

 

**Productionand Raw Materials**

** **

**ProductionEfficiency and Quality**

** **

OurQuality Management System (QMS) is a clearly defined set of procedures thataimed at ensuring control of the quality process control and quality assurance.

 

Inaccordance with the QMS, we undertake supplier assessment audits to ensure thatour suppliers provide materials that meet our exacting quality standards. Thisincludes raw materials for making our products, packaging and equipment. Ourexperts work with existing and prospective suppliers to ensure their goodscomply with our quality, safety and performance standards. Suppliers are gradedand assigned Key Production Indicators (KPIs) based on criteria that measureproduct quality, delivery, cost and responsiveness. This work not only ensuressuppliers meet our standards but helps make them more efficient, lowering ourinput costs.

 

TheQMS plays a critical role in the ongoing technological integration across allof our factories and trading groups. In the dairy business unit, where we havemade substantial investments since 2003 in modernizing acquired production facilities,quality control experts have

 

66

----

Table of Contents

 

led a “unificationproject,” aimed at establishing the tight coordination of the manufacturingprocess at a number of our geographically dispersed plants. The consistentapplication of manufacturing procedures and technology ensures that plantsoperating thousands of kilometers apart can make products with consistentlyhigh and uniform taste and quality.

 

Wehave continued the deployment of the program designed to improve productionconditions, work practices and the professional level of our employees, whichwas initially launched in 2007 in order to enhance the performance of ourproduction plants. Each plant is audited at regular intervals, assigned a score(using a 100-point scale) and rated accordingly.  Following these audits, and together withlocal specialists, we produce action plans for the improvement of each plant. Plantscompete to achieve the highest ratings.

 

Wehave our own accredited research test center laboratory with a team ofscientists and experts. Samples of all our primary ingredients and samples ofour final products undergo microbiological analysis and in-depth testing. Inaddition, we have ISO/IEC 17025 certified laboratories at all of our plantsthat perform quality checks on our products at all stages, including qualitychecks on the raw milk supplied by farms to us, the materials at our productionfacilities and the finished products in our warehouses.

 

Wealso measure the quality of the product and packaging once our products enterthe market place. The product samples that are purchased in various cities aredelivered to our Quality Department in Moscow by a courier to be tested forspecification compliance. Under a system launched in 2007, trade sampling andlaboratory analysis compare products against our specifications and provide aQuality Index calculation determining whether a product meets the standards setby us.

 

Indeveloping new types of products, we cooperate closely with the Institute ofNutrition of the Russian Academy of Medical Sciences, Moscow State Universityof Food Production, Moscow State University of Applied Biotechnology andAll-Russian Institute of the Dairy Industry. This collaboration has providedour employees with scientific support, solutions to technical problems andon-site training. We also work closely with several multinational raw materialand additive suppliers in order to benefit from their collective technicalexpertise as we develop new products and evolving quality standards.

 

Inaddition, our researchers and quality control experts work closely with Russianfederal bodies and their regional and local departments, such as the Sanitaryand Epidemiological Inspectorate and the country’s main consumer safety agency,known as Rospotrebnadzor. We also actively work with lawmakers and governmentexperts to develop new regulations and procedures for the food industry aimedat making sure rules are clear for all participants.

 

Inaddition to compliance with the relevant Russian quality standards, we striveto ensure that our products conform to the quality standards of organizationssuch as the World Health Organization, l’Association Francaise de Normalisationand the Food and Agricultural Organization, as well as EU regulations. We arealso a member of the International Federation of Fruit Juice Producers, theRussian Union of Juice Manufacturers and the Russian Dairy Union. Additionally,we assist relevant Russian government agencies in initiating and developingregulations for the Russian market.

 

Toimprove the feedback and answer questions from our consumers, we haveestablished a nation-wide toll-free hot-line in Russia and Ukraine. The numberis printed on our packaging used for all of our products.

 

In2008, the standard production reporting system was deployed at all of ourproduction sites to report on the key production indicators. A systemperformance reviews for production staff was developed and implemented,allowing us to explain fully the incentive plans and training programsavailable to production personnel.

 

Weinstalled 19 production lines in 2009, including cottage cheese productionline, sterile milk production line, family format yogurts production line andother. We believe that the new lines will

 

67

----

Table of Contents

 

enhance our productionefficiency in making high-quality and complex products. For example, ourBabyfood plant already manufactures products to very high quality standards.

 

Wehave continued to extend the Company’s Quality and Safety Management System. Bythe end of 2009, 19 of our dairy and beverage plants were granted ISO 9001Certificates, and 14 were granted ISO 22000 Certificates. During 2010, we planto develop and certify the Quality and Safety Management System for a number ofother plants.

 

**Food RawMaterials**

** **

Themain raw materials we use in our production include the following:

 

·                  raw milk, whichwe obtain from domestic farmers;

 

·                  powdered milk,which we generally obtain from our own production, domestic producers orimport;

 

·                  bacteriacultures, which we generally import;

 

·                  flavorings, whichwe generally import;

 

·                  sugar, which wegenerally buy locally;

 

·                  juice concentrateand juice puree, which we primarily import, but also purchase domestically; and

 

·                  other ingredientssuch as frozen fruits, aromas and stabilizers.

 

Theprices of each of these raw materials are generally volatile.

 

Ourpurchasing policy is to build long-term strategic relationships with ourpartner suppliers. We have focused on developing partnerships with establishedleaders in the field of local and global food production, including the leadingRussian and international producers of sugar, fruit concentrates and purees,powder milk, frozen fruits and ingredients.

 

Wepurchase almost all of our raw materials from producers. We purchase certainraw materials such as bacteria cultures, juice concentrates and flavors fromforeign manufacturers when products of appropriate quality are not availablelocally.

 

Withthe aim of ensuring a stable supply of raw milk at reasonable and forecastedprices, ensuring consistent quality of milk and balancing out seasonality, weare moving towards long-term milk supply contracts, leasing milking and refrigerationequipment to local producers, providing selected local milk producers withworking capital loans, assisting with long-term subsidized bank financingarrangements, contracting directly with farmers and avoiding middlemen andworking with the state authorities that regulate this sector. 

 

***“Milk Rivers” program.*** We havestrengthened our position in the dairy market by developing our own network ofraw-material suppliers, in significant part through investments that supportagricultural producers.

 

Inthe summer of 1999, we merged and formalized these programs under our “MilkRivers” program, through which we provide local farms with trade loans, feed,and leased combine-harvesters and milking and refrigeration equipment. Inselecting farms to participate in this program, we choose only those that seekto increase the quality of their products and raise the productivity of theirherds. We also look for producers that can help balance out the seasonality inraw milk production volumes.

 

Underthe Milk Rivers program, we have leased milking and refrigeration equipment forterms, which typically vary from one to five years to agricultural enterpriseslocated in the Moscow and other regions, including Voronezh, Nizhny Novgorod,Ufa, Novosibirsk, Krasnodar and Altai. The lease receivables are primarilydenominated in U.S. dollars, euros and rubles. Equipment leased out to farmsincludes milking and refrigeration equipment for accelerated milk cooling andthe

 

68

----

Table ofContents

 

temporary storage ofmilk at farms and other technical devices that increase the productivity offarms. The type of equipment provided depends on the needs of each particularfarm.

 

Wehave also offered seminars and lectures to our Milk Rivers program participantsto help them improve the quality of the milk they produce.

 

***Other initiatives.*** A key factor forenhancing the milk productivity of a herd and increasing its milk quality isthe availability of a good feed base. This particular problem is one of themost acute issues in recent years and is due to harvesting problems linked to alack of modern harvesting machinery on Russian farms. For this reason, thesecond stage of the Milk Rivers program has entailed providing newfodder-harvesting machines to a number of the participating agriculturalenterprises. German company Doppstadt, through its joint-venture in St.Petersburg, is our partner in this project.

 

**Seasonality**

** **

Ingeneral, our business is quite balanced and is not subject to significantseasonal fluctuations.

 

Thedemand for our dairy products is higher during the winter months, when Russianraw milk production is at its lowest. Conversely, during the summer months, wegenerally experience lower demand for dairy products, while raw milk productionis at its peak. To address these seasonal demands, we built strongrelationships with raw milk suppliers and continue investment in “Milk rivers”program.

 

Thedemand for our juice products traditionally peaks during the April/May periodand again in December. We believe that the high demand during April throughMay is related to the public’s heightened desire for vitamin-rich food anddrink products during the transition from winter to spring, and the high demandin December is related to increased juice consumption during the holidays.

 

Thedemand for both dairy and juice products in southern Russia rises in the summerdue to an increase in the number of tourists.

 

Mineralwater is the part of our products portfolio most subject to seasonalfluctuations, although our “Essentuki” brand is a therapeutic water product andhas relatively low seasonality in comparison with drinking waters, such as ourrecently launched “Rodniki Rossii” brand. The share of water is relatively lowin our product portfolio, so the seasonal peaks and troughs are more or lesscompensated by the opposite seasonality of our dairy products.

 

Salesof certain babyfood products are affected by seasonal factors. In particular,sales of juice and purees for babies are typically 10-15% higher during thesummer months, while sales of liquid dairy baby products are typically 5-8%lower in the summer due, in part, to the fact that many Russians travel to thecountryside for vacations in the summer and are unable to transport suchproducts, which have a short shelf life.

 

**Packaging**

** **

Ourprincipal packaging raw materials include materials needed for packaging ourdairy, babyfood and juice products, consisting mainly of aseptic paper,none-aseptic paper, plastics (PP, PE, Polysterene and others), foils andcorrugated board. Our main supplier of composed material for the production ofmilk and juice carton containers is Tetra Pak, the world leader in manufacturingequipment and materials for aseptic packaging of liquid food products.

 

OJSCTetra Pak AO (“Tetra Pak”) supplied approximately 67.2%, 65.0% and 63.1% of ourtotal packaging materials in value terms in 2007, 2008 and 2009 (includingcarton, plastic, foil and other materials), and we are substantially dependentupon this packaging supplier to meet our requirements.

 

Asa major Russian consumer of Tetra Pak products, we have annual contracts withTetra Pak, which supplies us from its Russian plants as well as from its otherEuropean plants.

 

69

----

Table ofContents

 

Wehave established similar relationships with companies such as SIG Combibloc(aseptic paper for juice and milk) and Elopak (none-aseptic paper for dairyproducts).

 

Aspart of our strategy to increase locally produced raw materials, we aredeveloping relationships with Russian manufacturers of packaging materials, in particularwith companies such as Gofra, Gotek, Stirolplast, FormalineGrainer, Interpak,Polex, Formaplast, Eximpack, Lukoil-Neftekhim and Planet Thermoforming.

 

Weare focused on two main areas in building our procurement strategy:

 

·               standardizationof specifications for raw materials and packaging allowing group purchasing;and

 

·               strategicrelationships with key group-wide suppliers

 

Thesetwo factors are directed at allowing us to benefit from economies of scale,which we believe will lead to enhanced effectiveness and cost optimization.

 

**Trademarksand Patents**

 

Wehave registered brand names and trademarks throughout Russia and in othercountries. We keep track of our intellectual property and monitor theprotection of our brand names and instances of copyright infringement in Russiaand the CIS. The extent to which we seek protection of our trademarks outsideof Russia and the CIS depends on the significance of the brand and jurisdictionconcerned. The brand names listed above under “— Our products and brands—Dairyproducts and brands” and “—Our products and brands—Beverage products andbrands,” which we have registered in Russia, are material to us. We also ownseveral licenses, patents and proprietary recipes, know-how and technologiesrelated to our products and processes. See “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business and Industry—We may not be able toprotect our intellectual property rights adequately, resulting in material harmto our financial results and ability to develop our business” for a descriptionof the risks related to the protection of our trademarks.

 

In2008, we obtained recognition of our “J7” trademark (combined mark) as awell-known trademark from Rospatent, the Russian patent office. Suchrecognition protects this trademark for an unlimited duration of time andprovides us with certain additional benefits with respect to our use of thesetrademarks.

 

**Insurance**

** **

We maintain property insurance coverage for ourproduction facilities and our warehousing facility in Tomilino. The insurancecoverage has been taken out on an “All Risks” basis covering buildings andequipment at our production facilities for the total sum of $1.0 billion. Wehave insurance for business interruption at production facilities with thetotal coverage of $0.9 billion.

 

We have product liability insurance for our productionand distribution operations Russia with $2.5 million liability coverage perinsurance claim within the territory of Russia, the CIS countries and Mongolia,and $5.0 million liability coverage per insurance claim worldwide except forthe claims made on territory of Russia, the CIS countries and Mongolia, with acumulative coverage limit of $5.0 million.

 

We have generalliability insurance covering production and distribution operations with $5.0million liability coverage per claim and in the annual aggregate within theterritory of Russia and Ukraine, and $1.0 million liability coverage per claimand in the annual aggregate within the territory of Uzbekistan and Kyrgyzstan.

 

70

----

Table of Contents

 

See“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—We do not carry the types of insurance coverage customary in othermore economically developed countries for a business of our size and nature,and a significant event could result in substantial property loss and inabilityto rebuild in a timely manner or at all.”

 

**Environmentaland Product Liability**

** **

Weare subject to the requirements of environmental laws and regulations. While wedevote resources designed to maintain compliance with these requirements, wecannot assure you that we operate at all times in complete compliance with allsuch requirements. We could be subject to potentially significant fines andpenalties for any noncompliance that may occur. See “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Business and Industry—Failureto comply with existing laws and regulations or the findings of governmentinspections, or increased governmental regulation of our operations, couldresult in substantial additional compliance costs or various sanctions whichcould materially adversely affect our business, financial condition, results ofoperations and prospects.”

 

Wealso face an inherent business risk of exposure to product liability claims inthe event that consumption of our products results in personal illness ordeath, and we cannot assure you that we will not experience any materialproduct liability losses in the future. In addition, if any of the products wehave produced are determined to be unsuitable for consumption, we may berequired to participate in a recall involving such products. We have not hadany significant historical experience of such claims and are unaware of anypotential unasserted claims. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Business and Industry—Failure to comply with existing laws andregulations or the findings of government inspections, or increased governmentalregulation of our operations, could result in substantial additional compliancecosts or various sanctions which could materially adversely affect ourbusiness, financial condition, results of operations and prospects” and “Item3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—Independent distributors may export our products to countries wheresuch products do not meet the requirements of applicable legislation. Theconsequent recalls of our products and the associated negative publicity mayadversely affect our reputation in the Russian Federation, the CIS and abroadand adversely affect our results of operations.”

 

**Regulation**

 

Theproduction, sale and distribution of food and beverages in the RussianFederation are regulated by general civil legislation and by speciallegislation that includes quality standards and various safety and sanitaryrules.

 

**GovernmentEntities Involved**

** **

Inaddition to the federal executive bodies and their structural subdivisions thathave authority over general issues, such as defense, internal affairs,security, border service, justice, tax enforcement and rail transport, thereare a large number of government agencies directly involved in regulating andsupervising the quality and safety of food in the Russian Federation.

 

*The Ministry of Health Protection and Social Development.*This Ministry isauthorized to issue regulations in various areas, including with respect tosanitary and epidemiological safety and consumer rights protection. TheMinistry supervises and coordinates its subordinate bodies, including, amongothers, the Federal Service for Supervision in the Area of Protection ofConsumer Rights and Human Welfare.

 

*The Federal Service for Supervision in the Area ofProtection of Consumer Rights and Human Welfare.*This Service isthe principal federal body authorized to supervise sanitary and epidemiologicalissues in the Russian Federation. The Service enforces sanitary-epidemiologicalrules (which include sanitary rules, sanitary standards and hygienicrequirements) and monitors the sanitary conditions of production sites andequipment, compliance with sanitary standards for raw

 

71

----

Table ofContents

 

material and finishedproduct storage at manufacturing plants, compliance with sanitary standards forthe storage and sale of food products and safety at wholesale and retailoutlets and businesses catering to the public. The Service also carries outinspections of sellers’ premises.

 

*The Federal Agency for Technical Regulation and Metrology.*This Agencymanages government property in the sphere of technical regulation andmetrology. On a temporary basis, until such functions are transferred to otherfederal authorities, the Agency oversees compliance with obligatory general andindustrial standards. This Agency is subordinated to the Ministry of Industryand Energy.

 

*The Federal Service for Veterinary and Phyto-SanitarySupervision.*This Service supervises the sanitary safety of rawfood materials used in the production of food products and beverages where suchraw food materials are derived from animals. This Service is subordinated tothe Ministry of Agriculture.

 

**ApplicableFood and Health Legislation**

** **

Theprincipal Russian legislation regulating the quality and safety of food andbeverages includes the following:

 

*The Federal Law on Quality and Safety of Food Products* establishes ageneral framework for ensuring that food products and materials used in theirproduction conform to certain quality, safety and sanitary requirements andprovides for the state registration and certification of food products once theyso conform. It also establishes general requirements for the manufacturing,packaging, storage, transportation and sale of food products and beverages, andfor the destruction of poor-quality and unsafe products.

 

*The Federal Law on the Sanitary Epidemiological Well Beingof People* requires food products and beverages, and the rawmaterials used in their production, to meet certain sanitary standards andhealth requirements and to have no harmful effects. Products that do notconform to sanitary rules and health requirements and represent a dangerto consumers must be withdrawn immediately from production or sale. As aresult, the fulfillment of sanitary standards and health requirements is anobligatory condition for the production, import and sale of food and beverageproducts in the Russian Federation.

 

*The Federal Law on Technical Regulation* provides for thedevelopment, enactment, application and enforcement of obligatory technicalrequirements and the development of voluntarily standards relating to manufacturingprocesses, operations, storage, transportation, selling and utilization.Amendments to this law, dated May 1, 2007, provide for the adoption ofobligatory technical requirements on the safety of food products by January 1,2010. Until such technical requirements are developed and adopted, the existingstandards are mandatory to the extent they are necessary to secure theprotection of safety and health, environmental protection and consumers’rights. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to OurBusiness and Industry—Possible implementation of new federal or localgovernment policies, or selective application of existing policies, affectingthe food industry could substantially and negatively affect our turnover and operatingmargin.”

 

*The Governmental Regulation on Monitoring of Quality andSafety of Food Products and Health of People*establishes a procedurefor supervising and monitoring the quality and safety of food products.

 

*The Government Regulation on State Registration of New FoodProducts, Materials and Goods* provides for theobligatory state registration of certain food products, including mineralwater, babyfood and dairy products enriched with vitamins and/or othermicroelements. Food producers intending to develop and offer a new food productto the public are required to file an application for the product’s stateregistration and incorporation into the State Register of Permitted FoodProducts. Such applications are reviewed by the Federal Service for Supervisionin the Area of Protection of Consumer Rights and Human Welfare (together withthe Federal Service 

 

72

----

Table ofContents

 

for Veterinary andPhyto-Sanitary Supervision with respect to products derived from animals)within 40 days of their filing.

 

*The Regulation for the Conduct of Sanitary-EpidemiologicalExaminations of Products*establishes procedures for the sanitary-epidemiologicalexamination of products. Government bodies which monitor sanitary and healthissues conduct sanitary-epidemiological examinations of samples of each productand issue a conclusion as to whether such product satisfies the prescribed requirements.Products that have not undergone a hygienic evaluation may not be produced,shipped, used, sold or certified.

 

Anumber of other regulations also apply to food products, including babyfoodproducts. For example, requirements for the storage, production, labeling,transportation and sale of food and beverages are established by statestandards, sanitary rules, hygienic requirements and other regulations.

 

Inaddition, food products may be subject to regulation by regional authorities.For instance, the Moscow Government approved a series of regulations relatingto the use of genetically modified organisms (GMO) in food products aimed atinforming customers about such use and providing preferences to manufacturerswho do not use GMO. In particular, in February 2007, the Moscow Governmentissued a decree recommending that manufacturers refrain from marketing GMOproducts in Moscow and establishing a voluntary GMO labeling system.

 

**RegistrationRequirements**

** **

Certainfood and beverage products (such as children’s products, dietary foods, milkproducts enriched by vitamins and/or other microelements, additives to food andfood products manufactured using technologies that have never been applied inthe Russian Federation) must be registered with the Russian government if theyare either manufactured in Russia or imported into Russia for the first time.The regulation makes it illegal to manufacture, import or circulate productsthat are subject to state registration but have not been registered.

 

Theproduct registration process includes:

 

·               An examination ofdocuments provided by the manufacturer or supplier of the product describingthe product, its safety and evidencing its conformity with applicable rules;

 

·               Toxicological,hygienic, veterinary and other types of tests of products and, with respect toproducts manufactured in Russia, an examination of the manufacturing conditionsof such products;

 

·               Registration ofthe product, its manufacturer and supplier with the State Register of FoodProducts maintained by the Federal Service for Health Protection and SocialDevelopment; and

 

·               Issuance of acertificate of state registration permitting the product to be manufactured,imported or distributed in the Russian Federation.

 

Thestate registration of products is carried out by the Federal Service forSupervision in the Area of Protection of Consumer Rights and Human Welfare(together with the Federal Service for Veterinary and Phyto-SanitarySupervision with respect to products derived from animals).

 

**Certification**

** **

Thecertification of products and services is currently regulated by the FederalLaw on Technical Regulation. Product certification is a procedure whereby anagency authorized by the government confirms that a product complies withtechnical regulations, standards and requirements. Milk products, babyfood,juice, certain water products and other beverages are subject to mandatorycertification. Conformity symbols evidencing that the manufacturer hasundergone certification procedures are required to be printed on a product’spackaging. Failure to mark a product with a required conformity symbol carriespossible administrative sanctions.

 

73

----

Table ofContents

 

**BulkPurchase of Raw Milk**

** **

Asupplier of raw milk must provide a certificate stating that the farm fromwhich it originated has passed a health inspection. Milk bought in bulk mustalso conform to requirements with respect to temperature, color, sedimentation,content of neutralizers, heavy metals, density, protein content, fat content,alcohol content and other characteristics.

 

**Productionand Transportation**

** **

Laboratoryemployees and technical specialists must verify that the condition ofequipment, implements, raw materials and packaging conform to sanitaryrequirements. For example, in the course of manufacturing, microbiologicaltests must be conducted of samples of raw materials, packaging and products.Products are tested for their content of chemical pollutants, toxins, medicinaland hormonal preparations, radionuclides and pathogenic microorganisms. Theyare also tested to identify bacteria, yeast and mold content, and to determinetheir sterility and the effectiveness of the pasteurization process. Productsare also examined to determine the amounts of certain nutrients they contain,including protein, fat, vitamins and carbohydrates. In addition, thecleanliness of the factory, storage conditions and employees must be monitored.

 

Foodproducts and beverages must be transported in specially equipped vehicles, forwhich sanitary registration documents must have been issued. Adherence totransportation and storage requirements is a very important component ofsecuring delivery of a quality product from producer to consumer’s table,especially during the summer months.

 

**PackagingMaterial and Labeling Requirements**

** **

Manufacturersand suppliers of all types of packaging materials used in the production ofdairy and juice products must provide certificates of conformity andsanitary-epidemiological certificates for packaging materials showing that thepackaging materials are permitted and safe for contact with the food products.

 

TheLaw on the Protection of Consumers’ Rights and the Law on Quality and Safety ofFood Products determine the scope and format of the information that should bemade available to consumers. According to these laws and other applicablenational standards, the packaging of finished products must contain the followinginformation: the name of the product, information regarding its certification,conditions of use (if necessary), contraindications (if any), preservatives andfood additives, net mass or volume, ingredients, nutritional value, conditionsof storage, shelf life, name and address of the manufacturer and otherinformation. The law also authorizes a wide range of government and publicagencies to monitor producers’ compliance with the requirements of the law andimposes sanctions and penalties if such requirements are not met.

 

**SpecialRequirements for Children’s Dairy Products**

** **

TheLaw on the Quality and Safety of Food Products defines children’s food productsas food products specially designed for children under 14 that meet certainnutritional requirements. Such products are subject to more stringentsanitary-epidemiological standards. For example, certain ingredients andcomponents are prohibited for use in children’s food products, and theprocedures for monitoring raw materials and ingredients used in manufacturing,technological processes and sanitary conditions of production are stricter forchildren’s dairy products than for other dairy products. Laboratory analysesand tests must be conducted for a broader list of microbiological indicators.Packaging materials for children’s dairy products must be certified for usewith children’s products. Children’s dairy products are also subject to speciallabeling requirements. For example, packaging of children’s dairy products mustbear information on the purpose and conditions of use of such products.

 

Underthe Sanitary Rules on Children’s Food Products, which became effective on June 1,2005, the volume of liquid food product packaging for children under threeyears old cannot

 

74

----

Table ofContents

 

exceed 0.35 liters. Inaddition, such products may be produced only by separate specialized factoriesor manufacturing lines that are subject to special certification.

 

**Competitionand Pricing**

** **

TheFederal Antimonopoly Service is the governmental agency that regulates theprevention and limitation of monopolistic activity and the support ofcompetition in the market. The Federal Law on the Protection of Competitionprohibits the abuse of a dominant market position to limit competition.Following the sudden and, in some cases, substantial increases in food pricesin 2007, FAS initiated inspections of food producers, including us, as well asdistributors and retail chains throughout Russia in order to determine whetherthese price increases were caused by price collusion among producers andretailers. Regional divisions of FAS have undertaken inspections of ouroperations in Omsk, Voronezh, St. Petersburg, Krasnoyarsk, Ufa and Moscow.Although said inspections have been resolved positively forus, we cannot guarantee that the analogous proceedings will notbe instituted in the future and as a result we will not be held liable.

 

Inaddition, FAS may categorize a company controlling over 50% of a market orotherwise able to control the market conditions as a dominant force in suchmarket. Companies controlling over 35% are listed by FAS in a special registerand may become subject to monitoring and reporting requirements with respect tosuch markets. Current Russian legislation does not clearly define “market” interms of the types of services or the geographic area.

 

Ourbabyfood business is categorized as a monopoly in Moscow and the Moscow region,placing restrictions on our ability to increase our profit margins for thatbusiness. Our Moscow-based subsidiary, Moscow Baby Food Plant was included onthe list of entities holding dominant position in the Moscow region baby foodmarket. In 2007, we merged Moscow Baby Food Plant into our Moscow-basedsubsidiary Wimm-Bill-Dann and received all requisite approvals from FAS forsuch merger. Although Moscow Baby Food Plant no longer exists, it remains onthe list of entities holding dominant position in the Moscow region baby foodmarket. Wimm-Bill-Dann, however, has not been categorized by FAS as an entityholding dominant position in the Moscow region babyfood market. Any futureruling that Wimm-Bill-Dann or any of our other businesses are a monopoly couldresult in the regulation of our prices and restrictions on our commercialactivities. Although the Company is not currently included in the local ornational FAS registry we cannot guaranty that we will not be included insuch registry in the future.

 

Becauseof our significant market position, the Federal Antimonopoly Service monitorsour activities and our subsidiaries are required to notify the FederalAntimonopoly Service on the monthly basis on our milk products prices and rawmilk prices. We are also required to notify the Federal Antimonopoly Serviceand/or apply for its prior approval for the acquisition of other companies.

 

See“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—Further restrictions on our babyfood business which is categorized asa monopoly, the extension of monopoly status to our other businesses, or afinding that we or our distributors have violated antimonopoly laws couldresult in further regulation of our prices and restriction on our commercial activities”  and “—Any finding by FAS that our businesseshave acted in violation of the antimonopoly laws may result in the impositionof substantial fines and the imposition of government-determined prices,restrictions on our activities or expansion, or government-mandated withdrawalfrom regions or markets where we currently operate, which could have a materialadverse effect on our business, financial condition, results of operations andprospects.”

 

75

----

Table ofContents

 

**Trade Law**

** **

OnFebruary 1, 2010, the Federal Law “On framework of state regulation oftrading activities in the Russian Federation,” or the Trade Law, came intoforce. The Trade Law introduces a number of new requirements in respect ofmanufacturers, distributors and chain retailers in the sphere of food productsthat may significantly affect our operations. These requirements include, amongother things, a prohibition on unfair competition and other discriminatoryactivities, requirements relating to the content and terms of supplyagreements, as well as provisions on the regulation of prices and retailmargins by Russian governmental authorities. In particular, according to theTrade Law, the federal government can, under certain circumstances, set themaximum retail prices for food products of “social significance” within theterritory of one or more regions of Russia for up to 90 days.

 

TheTrade Law also limits the remuneration paid under supply contracts by suppliersto distributors or retail chains in the form of bonuses for marketing,promotional and similar activities to a maximum 10% of the price of theacquired food products and prohibits the payment of bonuses for products ofsocial significance altogether. Additionally, the Trade Law requires that we,retailers and distributors disclose on our websites or make available on demandour main supply conditions, including the material terms of supply contracts.

 

Althoughthe Trade Law also contains provisions that may positively affect our relationswith chain retailers, including new restrictions on retailers’ ability tocharge suppliers for the opportunity to supply new store locations andmodifying the range of products supplied, it is too soon to predict the overallimpact of the new law.

 

See“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry— The Russian government has the power to regulate the prices for goodsof social significance, including food products that we make.”

 

**C.Organizational Structure**

** **

The following table sets out our primary productionsubsidiaries, their countries of incorporation and our aggregate beneficialownership interest and voting interest in each subsidiary as of April 20,2010.

 
| **Plant**                             | ** ** | **Ownership********Interest** | ** ** | **Country of********Incorporation** |
|---------------------------------------|------------|-------------------------------|------------|------------------------------------------|
| Wimm-Bill-Dann  Plant (1)             |       | 98.68                         | %          | Russian  Federation                      |
| Karasuk  Dairy Plant                  |       | 93.80                         | %          | Russian  Federation                      |
| Wimm-Bill-Dann  Ukraine (2)           |       | 98.53                         | %          | Ukraine                                  |
| Moloko  Veidelevki                    |       | 100.00                        | %          | Russian  Federation                      |
| Tuymazinskiy  Dairy Plant             |       | 85.00                         | %          | Russian  Federation                      |
| Bishkek  Dairy Plant                  |       | 96.10                         | %          | Kyrgyz Republic                          |
| Gulkevichy  Dairy Plant               |       | 52.27                         | %          | Russian  Federation                      |
| WBD  Toshkent                         |       | 100.00                        | %          | Republic of  Uzbekistan                  |
| Bolsherechensk  Dairy Plant           |       | 79.78                         | %          | Russian  Federation                      |
| **Beverage plants**                   |       |                          |       |                                     |
| Wimm-Bill-Dann  Beverages (3)         |       | 100.00                        | %          | Russian  Federation                      |
| Essentuki  Mineral Water Plant at CMW |       | 100.00                        | %          | Russian  Federation                      |
| **Farms**                             |       |                          |       |                                     |
| Trud                                  |       | 96.55                         | %          | Russian  Federation                      |
| Atamanskoe  Farm                      |       | 99.54                         | %          | Russian  Federation                      |
| Plemzavod  Za Mir and Trud            |       | 100.00                        | %          | Russian  Federation                      |
| Zavety  Ilyicha                       |       | 99.59                         | %          | Russian  Federation                      |
| Niva                                  |       | 94.62                         | %          | Russian  Federation                      |

 

76

----

Table of Contents

 

----

(1) FormerlyLianozovsky Dairy Plant. During 2007 and 2008, the following subsidiaries weremerged into Wimm-Bill-Dann: Tsaritsino Dairy Plant, Ufa Dairy Plant, SiberianMilk Dairy Plant, Rubtsovsk Dairy Plant, Siberian Cheese Plant, Nizhny NovgorodDairy Plant, Baltic Milk Dairy Plant, Nazarovo Dairy Plant, PAG Rodnik,Pervouralsk Dairy Plant, Kursk Babyfood Plant, Moscow Babyfood Plant,Timashevsk Dairy Plant, Vladivostok Dairy Plant, Surgut Dairy Plant, OchakovoDairy Plant, Obninsk Dairy Plant, Pavlogradsky Dairy Plant, Krutinsky DairyPlant, Angarsky Dairy Plant (MOLKA), Anna milk, SP Julia and Va-Bank-2000.

 

(2) Formerly Kiev Dairy Plant No. 3. In 2007we merged Buryn Powder Milk Plant and Kharkov Dairy Plant into Wimm-Bill-DannUkraine.

 

(3) FormerlyRamenskiy Dairy Plant

 

**D.Property, Plants and Equipment Production facilities**

** **

Wecurrently manufacture our products at 37 production facilities, including 31production sites that produce dairy products, two babyfood production sites,two water production subsidiaries and two plants that produce exclusivelyjuices. We have made substantial investments to maintain and enhance quality,lower costs and increase productivity. Over 2007, 2008 and 2009 we investedapproximately $512.9 million in the modernization of our existingproduction facilities and $27.7 million in the purchase of minority stakes inour existing production subsidiaries.

 

Ourmain production plants are capable of managing the production of a diverse andevolving product range, enabling us to adapt quickly to changes in consumerdemand on a seasonal basis or otherwise. We continue to implement cost-cuttingprograms at all of our plants and introduce innovative products and packagingformats.

 

Weare also reviewing our production staff numbers with the aim of enhancingproductivity. Sales per production employee, calculated on the basis of ourtotal headcount, which is a common measure of productivity used in the foodindustry, was $220,145 per employee in 2007, $287,473 per employee in 2008 and$247,062 per employee in 2009.

 

Thefollowing table contains data regarding our main production facilities.

 
| **Moscow and  Moscow region**         | ** ** | **Year of********Acquisition********(1)** | ** ** | **Year of********Building** | ** ** | **Number of********Production********Lines** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|-----------------------------|------------|----------------------------------------------|------------|
| Wimm-Bill-Dann  + Babyfood (2)        |       | 1995                                      |       | 1989                        |       | 198                                          |       |
| Wimm-Bill-Dann  Beverages (3)         |       | 1997                                      |       | 1982                        |       | 14                                           |       |
| **Central Russia (excluding Moscow)** |       |                                      |       |                        |       |                                         |       |
| (Caucasian  Mineral Waters)           |       | 2005                                      |       | 2001                        |       | 3                                            |       |
| **Ural**                              |       |                                      |       |                        |       |                                         |       |
| Tuimazy  Dairy Plant                  |       | 2002                                      |       | 1958                        |       | 9                                            |       |
| **Other CIS countries**               |       |                                      |       |                        |       |                                         |       |
| Wimm-Bill-Dann  Ukraine (4)           |       | 2001                                      |       | 1973                        |       | 43                                           |       |
| Bishkek  Dairy Plant                  |       | 2000                                      |       | 1990                        |       | 16                                           |       |
| Tashkent  Dairy Plant                 |       | 2004                                      |       | 1970                        |       | 9                                            |       |

 

----

(1)          “Acquisition” means the purchase of more than 50% ofthe issued share capital. Only plants acquired by us as of April 20, 2010are included in this table.

 

(2)          Formerly Lianozovsky Dairy Plant. In April and May 2007,the following subsidiaries were merged into Wimm-Bill-Dann: Tsaritsino DairyPlant, Ufa Dairy Plant, Siberian Milk Dairy Plant, Rubtsovsk Dairy Plant,Siberian Cheese Plant, Nizhny Novgorod Dairy Plant, Baltic Milk Dairy Plant,Nazarovo Dairy Plant, PAG Rodnik, Pervouralsk Dairy Plant, Kursk BabyfoodPlant, Moscow Babyfood Plant, Timashevsk Dairy Plant, Vladivostok Dairy Plant,Obninsk Dairy Plant, Annino Dairy Plant, Angarsky Dairy Plant (MOLKA), SurgutDairy Plant and Manros-M. On March 5, 2007, we sold Novokuibyshevskmoloko —our Samara region-based subsidiary.

 

(3)          Formerly Ramenskiy Dairy Plant

 

(4)          Formerly Kiev Dairy Plant No3. In December 2007 Buryn Powder Milk Plant and Kharkov Dairy Plant weremerged into Wimm-Bill-Dann Ukraine.

 

77

----

Table ofContents

 

As of December 31, 2009 and 2008 the assets thatserved as collateral for certain of our**short- andlong-term loans consisted of the property, plant and equipment with a net bookvalue of $21.6 million and $75.5 million, respectively.

 

## ***Item 4A. Unresolved Staff Comments***

## *** ***

None.

 

## ***Item 5. Operatingand Financial Review and Prospects***

## *** ***

*The following discussion of our financial condition andresults of operations is intended to help the reader understand our company,our operations and our present business environment and should be read inconjunction with our consolidated financial statements, related notes and otherinformation included elsewhere in this document. In particular, we refer you tothe risks discussed in “Item 3. Key Information—D. Risk Factors” forinformation regarding governmental, economic, fiscal, monetary or politicalpolicies or factors that could materially adversely affect our operations oryour investment in our shares and ADSs. In addition, this section containsforward looking statements that involve risk and uncertainties. Our actualresults may differ materially from those discussed in forward lookingstatements as a result of various factors, including those described under “Item3. Key Information—D. Risk Factors” and “Cautionary Statement Regarding ForwardLooking Statements.” Our reporting currency is the U.S. dollar and ourconsolidated financial statements have been prepared in accordance with U.S.GAAP.*

* *

**RussianBusiness Environment**

** **

TheRussian economy is vulnerable to market downturns and economic slowdownselsewhere in the world. The recent global financial crisis has resulted incapital markets instability, significant deterioration of liquidity in thebanking sector, and tighter credit conditions within Russia in 2008 and thefollowing economic downturn adversely affected our financial condition in 2009.

 

Thecurrent economic environment is challenging and we believe that the outlook forthe next several years presents significant challenges in terms of sales volumeand pricing as well as input costs. Specifically, the current economicconditions create uncertainty about (1) the level of demand for ourproducts; (2) the pricing of major commodities manufactured by us; (3) theexchange rate between the ruble and the U.S. dollar and its impact on ourfinancial condition.

 

Webelieve we have taken measures to deal with the uncertainties in our operatingenvironment and that our operating cash flows in 2010 will be sufficient toallow us continue to operate in the normal course of business including routineworking capital and priority capital projects, assuming the successful managingof our debt.

 

**BusinessStructure**

** **

Wehave organized our business into three segments:

 

·                  thedairy segment, comprising the production and sale of milk, yogurts, dessertsand other dairy products, it also provides processing services to our beveragesegment. The dairy segment also includes our agricultural subsidiaries;

·                  thebeverages segment, comprising the production and sale of juice, nectars,traditional berry-juice-based drinks, mineral water and other beverageproducts;

·                  thebabyfood segment, comprising the production of liquid dairy babyfood, juice,purees and products for pregnant and nursing women.

 

Thetable below sets forth by segment our key dairy, beverage and babyfoodsubsidiaries:

 

78

----

Table of Contents

 
| **Plant**                                                                                    | ** ** | **Voting********Interest** | ** ** | **Country of********Incorporation** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------|------------|
| **Dairy plants**                                                                             | ** ** | ** **                 | ** ** | ** **                               | ** ** |
| Wimm-Bill-Dann  Plant (including merged Moscow Babyfood Plant, relating to Babyfood segment) |       | 98.68                      | %          | Russian  Federation                      |       |
| Karasuk  Dairy Plant                                                                         |       | 93.80                      | %          | Russian  Federation                      |       |
| Wimm-Bill-Dann  Ukraine                                                                      |       | 98.53                      | %          | Ukraine                                  |       |
| Moloko  Veidelevki                                                                           |       | 100.00                     | %          | Russian  Federation                      |       |
| Tuymazinskiy  Dairy Plant                                                                    |       | 85.00                      | %          | Russian  Federation                      |       |
| Bishkek  Dairy Plant                                                                         |       | 96.10                      | %          | Kyrgyz Republic                          |       |
| Gulkevichy  Dairy Plant                                                                      |       | 52.27                      | %          | Russian  Federation                      |       |
| WBD  Toshkent                                                                                |       | 100.00                     | %          | Republic of  Uzbekistan                  |       |
| Bolsherechensk  Dairy Plant                                                                  |       | 79.78                      | %          | Russian  Federation                      |       |
| **Farms**                                                                                    |       |                       |       |                                     |       |
| Trud                                                                                         |       | 96.55                      | %          | Russian  Federation                      |       |
| Atamanskoe  Farm                                                                             |       | 99.54                      | %          | Russian  Federation                      |       |
| Plemzavod  Za Mir and Trud                                                                   |       | 100.00                     | %          | Russian  Federation                      |       |
| Zavety  Ilyicha                                                                              |       | 99.59                      | %          | Russian  Federation                      |       |
| Niva                                                                                         |       | 94.62                      | %          | Russian  Federation                      |       |
| **Beverage plants**                                                                          |       |                       |       |                                     |       |
| Wimm-Bill-Dann  Beverages                                                                    |       | 100.00                     | %          | Russian  Federation                      |       |
| Essentuki  Mineral Water Plant at CMW                                                        |       | 100.00                     | %          | Russian  Federation                      |       |

** **

**Exchange Rates**

 

The appreciation in real terms ofthe ruble against the U.S. dollar tends to result in an increase in ourreportable costs and revenues, while depreciation of the ruble against the U.S.dollar in real terms tends to result in a decrease in our reportable costs andrevenues. Following the general economic downturn, the ruble depreciatedagainst the U.S. dollar in 2009 by 2.9%, based on the exchange rate as of December 31,2009 as compared to the exchange rate as of December 31, 2008. Thisgenerally resulted in a decrease in the reported U.S. dollar value of ourruble-denominated assets and liabilities. The ruble depreciated by 27.8%against the U.S. dollar based on the average exchange rate in the year ended December 31,2009 as compared to the average exchange rate in the year ended December 31,2008. This generally results in a decrease in the reported U.S. dollar value ofour ruble-denominated sales and operating expenses. Additionally, nominaldepreciation of the ruble against the U.S. dollar has a similar effect when incomestatements of our non-U.S. dollar-denominated subsidiaries are translated intoU.S. dollars while preparing our consolidated financial statements. As a resultof ruble depreciation, we recognized a translation loss of $15.5 million in2009, compared to a loss of $129.7 million in 2008 and gain of $41.0 million in2007. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to OurFinancial Condition—Rubledepreciation could increase our hard-currency-denominated costs, decrease ourcash reserves, or make it more difficult for us to comply with financial ratiosand to repay our debts and will affect the value of dividends received byholders of ADSs” and Note 2 to our Consolidated Financial Statements includedelsewhere herein for a description of our currency translation methodology.

 

**A.Operating Results**

** **

**Overview**

** **

Weare one of the largest Russian manufacturers of dairy, beverage and babyfoodproducts, with sales of $2,181.1 million, $2,823.6 million and$2,438.3 million in 2009, 2008 and 2007, respectively. Our reportablebusiness segments in 2009 were dairy products, beverage products and babyfoodproducts, which comprised 70.2%, 18.6% and 11.2% of our sales, respectively.Our principal geographic market is Russia, which accounted approximately for92.0%, 93.0% and 93.0% of our sales in each of 2009, 2008 and 2007. We alsohave production facilities and 

 

79

----

Table of Contents

 

distribution chains inthe CIS countries of Ukraine, Kyrgyzstan, Uzbekistan and Georgia, as well as adistribution center in Kazakhstan.

 

Ourproducts are typically priced in rubles for Russian sales and in localcurrencies for our sales in other CIS countries. Our direct costs, includingpersonnel, utility and transportation expenses are incurred primarily inrubles, while direct materials costs are incurred primarily in rubles and U.S.dollars.

 

In2009, our net income, attributable to WBD Foods shareholders increased by 14.6%to $116.5 million from $101.7 million in 2008 primarily due to a combination offavorable factors, such as raw milk purchase prices decline in the firstthrough the third quarter of 2009 and decrease of juice concentrates prices in2009, and selling prices growth in the beverages and babyfood segments.

 

 Our sales decreased by 22.8% in 2009,including year-on-year sales decreases of 27.0%, 14.1% and 4.0% in the dairy,beverage and babyfood segments, respectively. Ruble selling prices increased by1.4% in the dairy segment, 4.6% in the beverages segment and 0.9% in thebabyfood segment.  However, the averagedollar selling price declined by from $1.44 to $1.11, or 22.9% per 1 kilogramin the dairy segment, from $0.93 to $0.76, or 18.2% per liter in the beveragessegment and from $2.30 to $1.82, or 20.5% per 1 kilogram in the babyfoodsegment in the full year 2009 compared to 2008. By volume, dairy segment salesdecreased by 8.0%, beverage segment sales increased by 5.0% and babyfoodsegment sales increased by 21.5% in the year ended December 31, 2009 ascompared to the year ended December 31, 2008.

 

Ourselling and distribution expenses decreased in 2009 as compared to 2008 andslightly increased as a percentage of sales, from 17.3% to 17.4%. In particular,transportation tariffs tended to decline in 2009 whereas in 2008 we experiencedtransportation tariffs growth. This factor allowed us to decrease ourtransportation costs in 2009.

 

Overthe past three years, we have been constructing new capacity, modernizingexisting capacity. Our capital expenditures (excluding acquisitions) in 2009,2008 and 2007 were $121.8, $195.3 and $192.7 million, respectively.Expenditures for acquisitions of noncontrolling stakes in certain of oursubsidiaries, in 2009, 2008 and 2007 totaled $2.6, $3.3 and $21.8 million,respectively.

 

Asof December 31, 2009, we had a total of $523.9 million in outstandingdebt (consisting of loans, notes payable and vendor financing obligations). Theshort-term portion of our debt comprised 42.1% of our total indebtedness as of December 31,2009. Additionally, of our total indebtedness as of December 31, 2009,52.2% was denominated in foreign currency and 47.8% was denominated in rubles.

 

Below is a summary ofour operational highlights for 2009 and the beginning of 2010.

 

**Corporateand Operational Highlights for 2009**

 
| January   |   | · | We changed our supply and production processes for  all dairy products in accordance with new technical regulations in Russia,  which came into force on December 31, 2008.                                  |
|-----------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |   |                                                                                                                                                                                                              |
|      |   | · | We launched the new brand “Zdraivery” targeting  children aged 4-9 years old with a wide portfolio of products, including  traditional dairy products, yogurt, and dairy desserts, juice and smoothies. |
|      |   |   |                                                                                                                                                                                                              |
|      |   | · | We  launched the production of “Rodniki Rossii” brand mineral water sourced from  the Essentuki region of Russia.                                                                                       |
|      |   |   |                                                                                                                                                                                                              |
| February- |   | · | We  re-designed the entire line of “Chudo” products significantly improving                                                                                                                             |

 

80

----

Table of Contents

 
| December          |   | shelf  visibility.                                                                                                                                                                                                                                                                                        |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                                                                                                                                                      |
|              | · | We  successfully installed and put into operation 19 production lines at our  production sites, including: ERMI, ARSIL, A3 Speed and Trepko. The new lines  will enhance production efficiency of high-quality and complex products.                                                                      |
|              |   |                                                                                                                                                                                                                                                                                                      |
| March             | · | We carried out the re-branding of “Agusha”, one of  the most popular babyfood brands in Russia with the aim of enhancing the  brand awareness. We have improved the design for better visibility on shelf  and improved its attractiveness.                                                     |
|              |   |                                                                                                                                                                                                                                                                                                      |
|              | · | We  launched a new line of yogurts and desserts under “BioMax” brand.                                                                                                                                                                                                                           |
|              |   |                                                                                                                                                                                                                                                                                                      |
|              | · | We  repaid our ruble-denominated bonds in the amount of 4,660.3 million rubles  ($158.6 million or $129.9 million at the exchange rate as of  December 31, 2008 or March 6, 2009, the date of repayment,  respectively).                                                                        |
|              |   |                                                                                                                                                                                                                                                                                                      |
| May-June          | · | We  issued bonds on MICEX, raising cash of 3 billion rubles, ($96.9 million at  the exchange rates at the dates of the transactions). The bonds are due in  February 2013, and bondholders have a put option exercisable in  September 2010 at 100% of the nominal value plus accrued interest. |
|              |   |                                                                                                                                                                                                                                                                                                      |
| May               | · | We  were ranked among the Top-40 companies globally for corporate reputation. WBD  was ranked 37th globally by Forbes magazine and the Reputation Institution in  their 2009 survey of the World’s Most Reputable Companies survey.                                                                  |
|              |   |                                                                                                                                                                                                                                                                                                      |
| June              | · | We  received a strong corporate governance score from Standard & Poor’s.  Standard & Poor’s Governance Services affirmed its governance,  accountability, management, metrics and analysis (GAMMA) score of ‘GAMMA-7+’  on a 10-point scale.                        |
|              |   |                                                                                                                                                                                                                                                                                                      |
| October           | · | We  opened a dairy factory in Tbilisi, Georgia                                                                                                                                                                                                                                                            |
|              |   |                                                                                                                                                                                                                                                                                                      |
|              | · | We  installed and put into operation a warehouse management system in Nizhny  Novgorod and Kazan.                                                                                                                                                                                                         |
|              |   |                                                                                                                                                                                                                                                                                                      |
|              | · | As  part of the ongoing process of reorganizing our Sales and Distribution  function we formed a Local Key Accounts Department to better serve our local  customers.                                                                                                                                      |
|              |   |                                                                                                                                                                                                                                                                                                      |
| November          | · | We carried out a split of our ADSs, whereby the  ratio was changed from 1 common share per 1 ADS to 1 common share per 4 ADSs.  The split did not affect the number of common shares outstanding.                                                                                                         |
|              |   |                                                                                                                                                                                                                                                                                                      |
| November-December | · | We implemented new terms and conditions for our  distributors in Central Region, including a reduction in mark-ups for  distributors when on-selling to sub-distributors and retailers.                                                                                                                   |
|              |   |                                                                                                                                                                                                                                                                                                      |
| December          | · | We finished reconstruction of the Moscow Baby Food  plant.                                                                                                                                                                                                                                                |
|              |   |                                                                                                                                                                                                                                                                                                      |
|              | · | We  launched compote and mors beverages under the “Agusha” brand                                                                                                                                                                                                                                |

 

81

----

Table of Contents

 

**Corporateand Operational Highlights for 2010**

 
| January        | · | We launched sales of packed sliced cheese under  our Lamber brand                                                                                                                                                                                                                                                                                           |
|----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| February       | · | We  launched production of pasteurized milk in PET bottles under the “Domik v  Derevne” brand.                                                                                                                                                                                                                                                    |
| February-March | · | We implemented new terms and conditions for our  distributors in the South, Urals, Siberia and Far East regions.                                                                                                                                                                                                                                            |
| April          | · | Standard &  Poor’s Governance  Services affirmed governance,  accountability, management, metrics and analysis (GAMMA) score of ‘GAMMA-7+’,  noting positive developments in the on-going deployment of the Company’s risk  management system and increase in the activity of the board-level corporate  governance committee. |

 

82

----

Table of Contents

 

**Resultsof Operations**

** **

Thefollowing table summarizes the results of our operations for the years ended December 31,2009, 2008 and 2007:

 
| ** **                                         | ** ** | **2009********(in thousands)** | ** ** | **% of********sales** | ** ** | **2008********(in thousands)** | ** ** | **% of********sales** | ** ** | **2007********(in thousands)** | ** ** | **% of********sales** | ** ** |
|----------------------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|-------------------------------------|------------|----------------------------|------------|-------------------------------------|------------|----------------------------|------------|
| Sales                                              |       | $                                   | 2,181,062  |                       | 100.0      |                                | $          | 2,823,564                  |       | 100.0                               |       | $                          | 2,438,328  |   | 100.0 |   |
| including:                                         |       |                                |       |                       |       |                                |       |                       |       |                                |       |                       |       |
| Dairy                                              |       | 1,530,247                           |       | 70.2                       |       | 2,095,900                           |       | 74.2                       |       | 1,852,458                           |       | 76.0                       |       |
| Beverages                                          |       | 406,609                             |       | 18.6                       |       | 473,196                             |       | 16.8                       |       | 414,117                             |       | 17.0                       |       |
| Baby  Food                                         |       | 244,206                             |       | 11.2                       |       | 254,468                             |       | 9.0                        |       | 171,753                             |       | 7.0                        |       |
| Cost of  sales                                     |       | (1,452,737                          | )          | 66.6                       |       | (1,910,528                          | )          | 67.7                       |       | (1,654,879                          | )          | 67.9                       |       |
| Gross  profit                                      |       | 728,325                             |       | 33.4                       |       | 913,036                             |       | 32.3                       |       | 783,449                             |       | 32.1                       |       |
| Selling  and distribution expenses                 |       | (379,659                            | )          | 17.4                       |       | (488,110                            | )          | 17.3                       |       | (387,853                            | )          | 15.9                       |       |
| General  and administrative expenses               |       | (137,440                            | )          | 6.3                        |       | (171,400                            | )          | 6.1                        |       | (180,922                            | )          | 7.4                        |       |
| Other  operating expenses                          |       | (9,552                              | )          | 0.4                        |       | (8,383                              | )          | 0.3                        |       | (704                                | )          | 0.0                        |       |
| Operating  income                                  |       | 201,674                             |       | 9.2                        |       | 245,143                             |       | 8.7                        |       | 213,970                             |       | 8.8                        |       |
| Financial  income and expenses, net                |       | (43,224                             | )          | 2.0                        |       | (101,504                            | )          | 3.6                        |       | (16,851                             | )          | 0.7                        |       |
| Provision  for income taxes                        |       | (40,678                             | )          | 1.9                        |       | (39,898                             | )          | 1.4                        |       | (54,302                             | )          | 2.2                        |       |
| Consolidated  net income                           |       | 117,772                             |       | 5.4                        |       | 103,741                             |       | 3.7                        |       | 142,817                             |       | 5.9                        |       |
| Noncontrolling  interests                          |       | (1,237                              | )          | 0.1                        |       | (2,029                              | )          | 0.1                        |       | (2,769                              | )          | 0.1                        |       |
| Net  income attributable to WBD Foods shareholders |       | $                                   | 116,535    |                       | 5.3        |                                | $          | 101,712                    |       | 3.6                                 |       | $                          | 140,048    |   | 5.7 |   |

 

**YearEnded December 31, 2009 Compared to Year Ended December 31, 2008**

** **

Inevaluating our operating results, we exclude the impact of currency translationas our primary statement of income accounts are denominated in Russian rublesso it is more meaningful to evaluate these figures without the impact ofcurrency.  In order to exclude currencytranslation effects, we compare the current year results to the prior yearusing a fixed average exchange rate.

 

**Sales**

** **

Salesdecreased by 22.8% to $2,181.1 million in 2009 from $2,823.6 millionin 2008. The dairy business is our largest segment, representing 70.2% of salesin 2009 compared to 74.2% in 2008.

 
| ** **         | ** ** | **Year ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2009**                                   | ** ** | **% of******** sales** | ** ** | **2008** | ** ** | **% of********sales** | ** ** |
| ** **         | ** ** | **(in thousands)**                    | ** ** | **(in thousands)** | ** ** |
| Dairy  products    |       | $                                          | 1,530,247  |   | 70.2 |   | $ | 2,095,900 |   | 74.2 |   |
| Beverage  products |       | 406,609                                    |       | 18.6 |   | 473,196 |   | 16.8 |   |
| Babyfood           |       | 244,206                                    |       | 11.2 |   | 254,468 |   | 9.0 |   |
| Total  sales       |       | $                                          | 2,181,062  |   | 100.0 |   | $ | 2,823,564 |   | 100.0 |   |

 

Declinein customers’ personal income and overall stagnation in the national economy asa result of general economic downturn adversely affected our sales.

 

Themajority of our sales prices are stated in rubles. As a result, rubledepreciation against the U.S. dollar adversely affected our revenues whenreported in U.S. dollars. Ruble depreciation in 2009 caused a decrease in ourdairy segment sales by approximately $424.2 million, beverages segment sales byapproximately $111.2 million and babyfood segment sales by approximately $67.8million. The general economic downturn materially adversely affected both oursales volume and selling price as a result of changes in consumers’ preferencesand switched demand to low-margin, economy-class products primarily in ourdairy segment.

 

83

----

Table of Contents

 

Salesin our dairy segment decreased by 27.0% to $1,530.2 million in 2009compared to $2,095.9 million in 2008. Our sales volume decreased by 116thousand tons or 8.0% to 1,337 thousand tons in 2009 from 1,453 thousand tonsin 2008 primarily due to a raw milk shortage on the Russian market in thefourth quarter of 2009. The average dollar selling price decreased by 21.8%from $1.44 per kilogram in 2008 to $1.11 per kilogram in 2009, driven mainly byadverse effect of the ruble depreciation against the U.S. dollar. However, ouraverage ruble prices per kilogram increased in 2009 in comparison with 2008 by0.49 ruble per kilogram, or 1.4% from 35.8 ruble per kilogram to 36.3 ruble perkilogram, as a result of raw milk prices growth in the fourth quarter of 2009,driven by a shortage of raw milk on the Russian market.

 

Salesin our beverages segment decreased by $66.6 million, or 14.1% to$406.6 million in 2009 compared to $473.2 million in 2008.Ourbeverages segment sales volume increased by 25 thousand liters or 5.0% to 534million liters in 2009 compared to 509 million liters in 2008. The averagedollar selling price decreased by 18.1% from $0.930 per liter in 2008 to $0.761per liter in 2009, driven primarily by the adverse effect of ruble depreciationagainst the U.S. dollar, which was partly off-set by the combination offavorable factors, including a 4.6% increase in ruble selling prices for ourbeverages segment products, 5.0% increase in sales volume and the improvementsin our product mix.

 

Salesin our babyfood segment decreased by $10.3 million, or 4.0% to $244.2 millionin 2009 from $254.5 million in 2008. Babyfood sales volume increased by 24thousand tons, or 21.5% to 135 thousand tons in 2009 compared to 111 thousandtons in 2008 as a result of re-branding of “Agusha” brand and our leadingpositions on the babyfood market. The average selling price decreased by 20.5%from $2.30 per kilogram in 2008 to $1.82 per kilogram in 2009.

 

In 2009, 55.9% of our sales came from regions otherthan Moscow, compared to 56.0% in 2008. Regional sales represented 57.7%, 63.7%and 31.5% of dairy, beverages and babyfood segment revenues in 2009, respectively.We have focused for several years on sales growth in the regions through theexpansion of our distribution and production capabilities in various regions,as well as certain CIS countries.

 

**Costof Sales**

** **

Costof sales primarily consists of expenses relating to raw materials (raw milk fordairy and babyfood products, concentrates for juices and packaging materialsfor all products), which accounted for 80.0% and 83.9% of our total cost ofsales in 2009 and 2008, respectively. The table below sets forth these costsfor both 2009 and 2008:

 
|                           |   | **Year ended December 31,** |       |
|--------------------------------|--------|--------------------------------------------|------------|
|                           |   | **2009**                                   | ** ** | **%** | ** ** | **2008** | ** ** | **%** |   |
|                           |   | **(in thousands)**                    |       | **(in thousands)** |   |
| Raw  materials                 |   | $                                          | 1,162,897  |   | 80.0 |   | $ | 1,602,540 |   | 83.9 |   |
| Personnel                      |   | 88,392                                     |       | 6.1 |   | 111,789 |   | 5.9 |   |
| Depreciation  and amortization |   | 75,491                                     |       | 5.2 |   | 82,459 |   | 4.3 |   |
| Utilities                      |   | 39,541                                     |       | 2.7 |   | 53,177 |   | 2.8 |   |
| Goods  for resale              |   | 38,687                                     |       | 2.7 |   | 4,529 |   | 0.2 |   |
| Other                          |   | 47,729                                     |       | 3.3 |   | 56,034 |   | 2.9 |   |
| Total  cost of sales           |   | $                                          | 1,452,737  |   | 100.0 |   | $ | 1,910,528 |   | 100.0 |   |

 

Raw-materialcosts decreased by 27.4% in 2009. Raw materials also decreased as a percentageof sales to 53.3% in 2009 from 56.8% in 2008. Raw-material costs accounted for55.9% of dairy sales in 2009 compared to 59.2% in 2008. This decline wasprimarily caused by significant ruble depreciation against the U.S. dollar,which favorably affected our raw-material costs by approximately $213.9million, and the continued decrease in raw milk prices which began at the endof 2008 and continued through the third quarter of 2009. However, it wasoff-set by a sharp increase in raw milk prices in the fourth quarter of 2009driven by a shortage of raw milk on the 

 

84

----

Table of Contents

 

Russian market.Raw-material costs accounted for 41.0% of babyfood sales in 2009 compared to44.4% in 2008, primarily as a result of raw materials prices decrease in 2009.Raw-material costs decreased to 51.2% of beverage sales in 2009, compared to52.7% in 2008 due to the decrease in the price of juice concentrates.

 

Ourdairy and babyfood segments purchases of package materials and fruitconcentrates, which are primarily denominated in hard-currencies, grew in 2009in comparison with 2008, which resulted in an increase of share ofhard-currency-denominated raw materials costs. In particular, 78.3% of our rawmaterial costs were ruble-denominated and 21.7% were hard-currency-denominatedin 2009, whereas 87.7% of these costs were ruble-denominated and 12.3% werehard-currency denominated in 2008. In the beverages segment, 16.7% of our rawmaterial costs were ruble-denominated and 83.3% were hard-currency-denominatedin 2009, and 21.6% of our raw material costs were ruble-denominated and 78.4%were hard-currency denominated in 2008.

 

Personnelexpenses decreased by 20.9% in 2009 compared to 2008 due to our decreasedemployee headcount and the depreciation of the ruble against the U.S. dollar,which decreased our ruble-denominated personnel costs in U.S. dollar terms. Theaverage number of production personnel decreased in 2009 by 10.1% to 8,828compared to 9,822 in 2008 due to the staff optimization process which continuedin 2009.

 

Depreciationand amortization decreased by 8.5% from $82.5 million in 2008 to$75.5 million in 2009 as a result of ruble depreciation against the U.S.dollar (favorable effect $21.0 million), which was partly off-set bydepreciation charge of the capital expenditures we made in the fourth quarterof 2008 and in 2009 in order to increase our production capacity by improvingour facilities and overall infrastructure.

 

Utilitycosts decreased by 25.6% in 2009 primarily due to significant depreciation ofthe ruble against the U.S. dollar in 2009, as our utility costs are incurredprimarily in rubles.

 

Goodsfor resale increased to $38.7 million in 2009 compared to $4.5 million in 2008due to a significant growth in the volume of co-packing products we sold as aresult of the shortage of raw milk supplies in the fourth quarter of 2009.

 

**Sellingand Distribution Expenses**

** **

Sellingand distribution expenses decreased by 22.3% in 2009 compared to 2008. As a percentageof sales, selling and distribution expenses increased to 17.4% in 2009 from17.3% in 2008. Our selling and distribution expenses in 2009 and 2008 were asfollows:

 
|                                     |   | **Year ended**     |    |
|------------------------------------------|--------|-------------------------|---------|
|                                     |   | **December 31,**   |    |
|                                     |   | **2009**                |    | **2008** |   |
|                                     |   | **(in thousands)** |    |
| Advertising  and marketing               |   | $                       | 139,532 |   | $ | 142,312 |   |
| Personnel                                |   | 92,223                  |    | 120,183 |   |
| Shipping  and handling                   |   | 89,086                  |    | 135,598 |   |
| Warehouse                                |   | 14,787                  |    | 13,285 |   |
| Materials  and supplies                  |   | 458                     |    | 13,124 |   |
| Bad debt  expense                        |   | 4,511                   |    | 8,156 |   |
| Other                                    |   | 39,062                  |    | 55,452 |   |
| Total  selling and distribution expenses |   | $                       | 379,659 |   | $ | 488,110 |   |

 

Advertisingand marketing expenses decreased in 2009 by 2.0% or $2.8 million inabsolute terms, and increased by 1.4% as a percentage of sales to 6.4% in 2009from 5.0% in 2008. The decrease in expenses was caused by significantdepreciation of the ruble against the U.S. dollar and decrease in the mediainflation rates in 2009. However, our ruble-denominated marketing andadvertisement expenses increased mainly due to our continued investments inmajor and new brand promotions. The increase was primarily attributable to TVadvertising expenses due to the 

 

85

----

Table of Contents

 

increased volume of TVadvertisements placed on Russia’s leading national television channels in 2009.

 

Personnelexpenses decreased by 23.3% in 2009 compared to 2008. The average number ofemployees in our selling and distribution department decreased to 5,224 in 2009from 6,005 in 2008 mainly due to the headcount optimization process thatcontinued into 2009. As majority of our personnel expenses are denominated inrubles, significant depreciation of the ruble against the U.S. dollar favorablyaffected our personnel costs. Our payroll cost per employee per annum in ourselling and distribution department decreased by 11.8% to $17,654 in 2009 from$20,014 in 2008, mainly due to reduction of personnel headcount anddepreciation of the ruble against the U.S. dollar in 2009. Our personnel costsas a percentage of sales decreased to 4.2% in 2009 from 4.3% in 2008.

 

Shippingand handling costs, which primarily consist of external transportation costs,decreased by 34.3% in 2009, compared to 2008. Our transportation expenses as apercentage of sales slightly decreased to 4.1% in 2009 from 4.8% in 2008. Thedecrease in transportation costs was mainly caused by depreciation of the rubleagainst the U.S. dollar, and by slight decrease in shipping rates in 2009.

 

Ourbad debt expenses slightly decreased to 0.2% as a percentage of sales in 2009from 0.3% in 2008 primarily due to improved debt collectability in 2009. Seealso “B. Liquidity and Capital Resources—Critical Accounting Policies andEstimates—Allowance for Doubtful Accounts” below.

 

**Generaland Administrative Expenses**

** **

Generaland administrative expenses decreased by 19.8% in 2009 compared to 2008, andincreased as a percentage of sales to 6.3% in 2009 from 6.0% in 2008. Ourgeneral and administrative expenses in 2009 and 2008 were as follows:

 
| ** **                                 | ** ** | **Year ended**     | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **December 31,**   | ** ** |
| ** **                                 | ** ** | **2009**                | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Personnel                                  |       | $                       | 76,710     |   | $ | 81,972 |   |
| Taxes other  than income tax               |       | 13,916                  |       | 17,127 |   |
| Depreciation                               |       | 11,869                  |       | 17,700 |   |
| Audit,  consulting and legal fees          |       | 5,653                   |       | 11,985 |   |
| Materials and  supplies                    |       | 709                     |       | 4,570 |   |
| Communication  costs                       |       | 3,835                   |       | 4,489 |   |
| Rent                                       |       | 1,209                   |       | 3,695 |   |
| Other                                      |       | 23,539                  |       | 29,862 |   |
| Total general  and administrative expenses |       | $                       | 137,440    |   | $ | 171,400 |   |

 

Personnelexpenses decreased by 6.4%, primarily as a result of the depreciation of theruble against the U.S. dollar and decrease in the average number of employees,which was partly off-set by severance payments. The average number of employeesdecreased to 2,247 in 2009 compared to 2,658 in 2008 due to our continuedemployee headcount optimization efforts, which resulted in the severancepayments in accordance with labor agreements.

 

Depreciationexpense decreased by 32.9% from $17.7 million in 2008 to$11.8 million in 2009, as a result of ruble depreciation against the U.S.dollar (by approximately $3.3 million), and a one-off transaction related tooffice facility upgrades, incurred in 2008 as part of our capital investmentsprogram budget. We completed our office assets renovation program in 2008 andno significant upgrades were undertaken in 2009.

 

Ourexpenses for audit, consulting and legal services decreased by 52.8% in 2009compared to 2008, as result of the cost optimization scheme.

 

86

----

Table of Contents

 

**OtherOperating Expenses**

 

Other operating expenses increased to $9.6 millionin 2009 from $8.4 million in 2008, mainly as a result of intangible assets,previously treated as indefinite-lives trademarks, impairment loss recognizedas part of amortization expense.

 

**OperatingIncome**

** **

Operatingincome decreased by 17.7% to $201.7 million in 2009 from $245.1 million in2008, as a result of ruble depreciation against the U.S. dollar. In particular,the ruble depreciation against the U.S. dollar by 27.8% adversely affected ouroperating results in 2009 in comparison with those in 2008. The generaleconomic downturn materially adversely affected both our sales volume andselling price as a result of changes in consumers’ preferences and switcheddemand to low-margin, economy-class products primarily in our dairy segment. Asa percentage of sales, operating income increased from 8.7% in 2008 to 9.2% in2009, primarily as a result of gross profit margin growth.

 

**Earningsbefore Interest, Taxation, Depreciation and Amortization (EBITDA)**

** **

Wepresent EBITDA because we consider it an important supplemental measure of ouroperating performance. EBITDArepresents net income before interest, income taxes and depreciation andamortization, adjusted for interest income, foreign currency exchange gain andlosses, bank charges and other financial expenses and noncontrolling interest.EBITDA margin is EBITDA expressed as a percentage of sales.

 

Our consolidated EBITDA decreased by $54.4 millionor 15.1% from $361.0 million in 2008 to $306.6 million in 2009 because of rubledepreciation against the U.S. dollar, which adversely affected our EBITDA by$85.1 million, which was partly off-set by combination of favorablefactors, such as raw milk purchase prices decline in the first through thethird quarter of 2009 and stable decrease of juice concentrates prices in 2009,ruble-denominated selling prices growth by 1.4%, 4.6% and 0.9% in the dairy,beverages and babyfood segments, respectively, and volume growth by 21.5% and5.0% in the babyfood and beverages segments, respectively.

 

Ourconsolidated EBITDA margin increased by 1.3% from 12.8% in 2008 to 14.1% in2009 as a result of selling prices growth and decrease of cost of sales.

 

EBITDA is a non-U.S. GAAP financial measure. Thefollowing table reconciles EBITDA to net income attributable to WBD Foodsshareholders and EBITDA margin to net income attributable to WBD Foodsshareholders as a percentage of sales.

 
| ** **                                          | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                   | ** ** | **% of********sales** | ** ** | **2008** | ** ** | **% of******** sales** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                    | ** ** | **(in thousands)** | ** ** |
| Net  income, attributable to WBD Foods shareholders |       | $                                          | 116,535    |   | 5.3 |   | $ | 101,712 |   | 3.6 |   |
| Add:  Depreciation and amortisation                 |       | 104,883                                    |       | 4.8 |   | 115,823 |   | 4.1 |   |
| Add:  Income tax expenses                           |       | 40,678                                     |       | 2.0 |   | 39,898 |   | 1.4 |   |
| Add:  Interest expenses                             |       | 33,467                                     |       | 1.5 |   | 44,544 |   | 1.6 |   |
| Less:  Interest income                              |       | (4,595                                     | )          | (0.2 | ) | (6,648 | ) | (0.2 | ) |
| Add:  Foreign exchnage losses, net                  |       | 11,616                                     |       | 0.5 |   | 61,357 |   | 2.2 |   |
| Add:  Bank charges                                  |       | 2,687                                      |       | 0.1 |   | 2,868 |   | 0.1 |   |
| Add:  Noncontrolling interest                       |       | 1,237                                      |       | 0.1 |   | 2,029 |   | 0.1 |   |
| Add:Loss  (gain) on other financial income/expenses |       | 43                                         |       | 0.01 |   | (617 | ) | (0.02 | ) |
| EBITDA                                              |       | $                                          | 306,551    |   | 14.1 |   | $ | 360,966 |   | 12.8 |   |

 

87

----

Table of Contents

 

**Financial Income and Expenses**

** **

Financialincome and expenses comprised the following:

 
| ** **                               | ** ** | **Year ended**     | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **December 31,**   | ** ** |
| ** **                               | ** ** | **2009**                | ** ** | **2008** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Interest  expense                        |       | $                       | 33,467     |   | $ | 44,544 |   |
| Interest  income                         |       | (4,595                  | )          | (6,648 | ) |
| Foreign  currency losses (gains), net    |       | 11,616                  |       | 61,357 |   |
| Bank  charges                            |       | 2,687                   |       | 2,868 |   |
| Other  financial expenses (income), net  |       | 49                      |       | (617 | ) |
| Total  financial income and expense, net |       | $                       | 43,224     |   | $ | 101,504 |   |

 

Interestexpense decreased by 24.9% in 2009 compared to 2008. This was mainly due toruble depreciation against the U.S. dollar and a reduction in our average debt,which primarily consists of $250 million syndicated loan, received in April 2008,whereas our debt in 2008 additionally included notes payable that we repaid in2009.

 

Wereceived interest income of $4.6 million in 2009 compared to $6.6 millionin 2008. Income was received from short-term investing of free cash accumulatedfor repayment of our ruble-denominated bonds, commencing in 2010.

 

In2009 and 2008 our net income, attributable to WBD Foods shareholders wasnegatively affected by currency exchange rate fluctuations resulting in an$11.6 million and $61.4 million, respectively. The net foreign exchange lossprimarily arose from our U.S. dollars denominated debt. In 2009 the averageU.S. dollar rate appreciated by 27.8% against the ruble, and the average eurorate appreciated by 21.4% against the ruble in 2009, while the average U.S.dollar rate appreciated by 19.9% against the ruble, and the average euro rateappreciated by 15.3% against the ruble in 2008.

 

**Provisionfor Income Taxes**

** **

Ourprovision for income taxes for the years ended December 31, 2009 and 2008was as follows:

 
| ** **                            | ** ** | **Year ended**     | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **December 31,**   | ** ** |
| ** **                            | ** ** | **2009**                | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
| Current  provision                    |       | $                       | 44,058     |   | $ | 39,844 |   |
| Deferred  income tax charge/(benefit) |       | (3,380                  | )          | 54 |   |
| Total  provision for income taxes     |       | $                       | 40,678     |   | $ | 39,898 |   |

 

Provisionfor income taxes amounted to $40.7 million in 2009 and $39.9 millionin 2008. These provisions comprise current income tax charges of$44.1 million in 2009 and $39.8 million in 2008, and a deferred taxbenefit of $3.4 million in 2009 and expense of $0.1 million in 2008.Deferred tax benefits and charges arise on temporary differences between thebases of computing income under domestic tax principles and U.S. GAAP.

 

Effective January 1, 2009 the statutory incometax rate in Russia was reduced down to 20% from 24%. In the view of thischange, we evaluated our deferred income tax assets and liabilities at the 20%income tax rate as of December 31, 2008. Resulting from that change inrate, the net deferred income tax expense decreased by $3.4 million in 2008.

 

88

----

Table of Contents

 

The relationship between pretax earnings for financialreporting purposes and taxable income for income tax purposes, for the yearsended December 31, 2009 and 2008 was as follows:

 
| ** **                                                                      | ** ** | **Year ended********December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| ** **                                                                      | ** ** | **(in thousands)**                      | ** ** |
| Income  before provision for income taxes                                       |       | $                                            | 158,450    |   | $ | 143,639 |   |
| Russian  statutory tax rate                                                     |       | 20                                           | %          | 24 | % |
| Income  tax provision at Russian statutory rate                                 |       | 31,690                                       |       | 34,473 |   |
| Tax  effect of expenses not deductible for national statutory taxation purposes |       | 10,695                                       |       | 13,238 |   |
| Tax  effect of income not taxable for national statutory taxation purposes      |       | (668                                         | )          | (3,193 | ) |
| Tax  effect of income tax at different rates                                    |       | 1,517                                        |       | (1,290 | ) |
| Increase  (decrease) in valuation allowance                                     |       | 464                                          |       | (1,594 | ) |
| Tax  effect of income tax rate change                                           |       | —                                       |       | (3,446 | ) |
| Tax  effect of other permanent differences                                      |       | (3,020                                       | )          | 1,710 |   |
| Provision  for income taxes                                                     |       | $                                            | 40,678     |   | $ | 39,898 |   |

 

For Russian income tax purposes, certain of oursubsidiaries have accumulated tax losses incurred in 2004-2009, which may becarried forward for use against their future income within 10 years. Thereare no restrictions for use of accumulated tax losses. As of December 31,2009, for statutory income tax purposes, we had $47.0 million in tax lossesavailable to carry forward expiring as follows:

 
| ** **                        | ** ** | **(in thousands)** | ** ** |
|-----------------------------------|------------|--------------------|------------|
| December  31, 2010                |       | $                  | 20,712     |   |
| December  31, 2011                |       | 1,696              |       |
| December  31, 2012                |       | 2,256              |       |
| December  31, 2013                |       | 1,710              |       |
| December  31, 2014 and thereafter |       | 20,658             |       |
| Total  loss carryforward          |       | $                  | 47,032     |   |

 

**NoncontrollingInterest**

** **

Thenoncontrolling interest reflects the net income and losses of our subsidiariesthat are attributable to the noncontrolling interests in those subsidiaries. In2009, net income attributable to noncontrolling interests in our subsidiariesdecreased to $1.2 million from $2.0 million in 2008. Of theseamounts, net income attributable to the noncontrolling interests in the dairysegment was $1.0 million in 2009 and $1.5 million in 2008, respectively. Thedecrease in noncontrolling interest was generally due to our acquisition ofshares from minority shareholders.

 

**NetIncome Attributable to WBD Foods Shareholders**

** **

Net income attributable to WBD Foods shareholdersincreased in 2009 to $116.5 million (5.3% of sales) from $101.7 million(3.6% of sales) in 2008, primarily due to a reduction of foreign currencyexchange losses by $49.7 million in 2009 and combination of favorable factorswhich off-set adverse effect of ruble depreciation against the U.S. dollar,such as raw milk purchase price decline in the first through the third quarterof 2009 and decrease of juice concentrates prices in 2009, ruble-denominatedselling prices growth by 1.4%, 4.6% and 0.9% in the dairy, beverages and 

 

89

----

Table of Contents

 

babyfood segments, respectively, and volume growth by21.5% and 5.0% in the babyfood and beverages segments, respectively.

 

**YearEnded December 31, 2008 Compared to Year Ended December 31, 2007**

 

**Sales**

 

Salesincreased by 15.8% to $2,823.6 million in 2008 from $2,438.3 millionin 2007. The dairy business was our largest segment, representing 74.2% ofsales in 2008 compared to 76.0% in 2007.

 
| ** **         | ** ** | **Year ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2008**                                   | ** ** | **% of******** sales** | ** ** | **2007** | ** ** | **% of******** sales** | ** ** |
| ** **         | ** ** | **(in thousands)**                    | ** ** | **(in thousands)** | ** ** |
| Dairy  products    |       | $                                          | 2,095,900  |   | 74.2 |   | $ | 1,852,458 |   | 76.0 |   |
| Beverage  products |       | 473,196                                    |       | 16.8 |   | 414,117 |   | 17.0 |   |
| Babyfood           |       | 254,468                                    |       | 9.0 |   | 171,753 |   | 7.0 |   |
| Total  sales       |       | $                                          | 2,823,564  |   | 100.0 |   | $ | 2,438,328 |   | 100.0 |   |

 

Themajority of our sales prices are stated in rubles. Following this fact, rubledepreciation against the U.S. dollar adversely affected our revenues whenreported in U.S. dollars. As a result, the effect of this factor on our 2008reportable sales was a decrease of our dairy segment sales by approximately$49.2 million, beverages segment sales by approximately $11.1 million andbabyfood segment sales by approximately $6.0 million.

 

Salesin our dairy segment increased by 13.1% to $2,095.9 million in 2008compared to $1,852.5 million in 2007. We sold 1,453 thousand tons ofdairy products in 2008 and 1,599 thousand tons of dairy products in 2007.The average selling price increased by 24.6% from $1.158 per kilogram in 2007to $1.443 per kilogram in 2008 driven mainly by average ruble price growth — aresult of launching new high-margin products.

 

Salesin our beverages segment increased by 14.3% to $473.2 million in 2008compared to $414.1 million in 2007. We sold 509 million liters ofjuice and water in 2008 and 491 million liters of juice and water in 2007.The average selling price increased by 10.2% from $0.844 per liter in 2007 to$0.930 per liter in 2008, driven primarily by a combination of favorable factors,such as price, volume and mix.

 

Salesin our babyfood segment increased by 48.2% to $254.5 million in 2008 from$171.8 million in 2007 and this was driven by both favorable volume and pricefactors. We sold 110.9 thousand tons of babyfood products in 2008 and 87.4thousand tons in 2007. The average selling price increased by 16.7% from $1.966per kilogram in 2007 to $2.295 per kilogram in 2008.

 

In 2008, 56% of our sales revenues came from regionsother than Moscow. Regional sales represented 56%, 67% and 28% of dairy,beverages and babyfood segment revenues in 2008, respectively. We have focusedfor several years on sales growth in the regions through the expansion of ourdistribution and production capabilities in various regions, as well as certainCIS countries.

 

**Costof Sales**

** **

Costof sales primarily consists of expenses relating to raw materials (raw milk fordairy and babyfood products, concentrates for juices and packaging materialsfor all products), which accounted for 83.9% and 84.9% of our total cost ofsales in 2008 and 2007, respectively. The table below sets forth these costsfor both 2008 and 2007:

 

90

----

Table of Contents

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                   | ** ** | **%** | ** ** | **2007** | ** ** | **%** | ** ** |
| ** **                     | ** ** | **(in thousands)**                    | ** ** | **(in thousands)** | ** ** |
| Raw  materials                 |       | $                                          | 1,602,540  |   | 83.9 |   | $ | 1,405,801 |   | 84.9 |   |
| Personnel                      |       | 111,789                                    |       | 5.9 |   | 90,207 |   | 5.5 |   |
| Depreciation  and amortization |       | 82,459                                     |       | 4.3 |   | 65,879 |   | 4.0 |   |
| Utilities                      |       | 53,177                                     |       | 2.8 |   | 42,554 |   | 2.6 |   |
| Goods  for resale              |       | 4,529                                      |       | 0.2 |   | 7,341 |   | 0.4 |   |
| Other                          |       | 56,034                                     |       | 2.9 |   | 43,097 |   | 2.6 |   |
| Total  cost of sales           |       | $                                          | 1,910,528  |   | 100.0 |   | $ | 1,654,879 |   | 100.0 |   |

 

 

Raw-materialcosts increased by 14.0% in 2008. Raw materials decreased as a percentage ofsales to 56.8% in 2008 from 57.7% in 2007. Raw-material costs accounted for59.2% of dairy sales in 2008 compared to 60.3% in 2007. This was primarilycaused by a reduction in raw-milk prices in 2008 in comparison with the fourthquarter of 2007. Raw-material costs accounted for 44.4% of babyfood sales in2008 compared to 44.3% in 2007. Raw-material costs increased to 52.7% ofbeverage sales in 2008, compared to 51.4% in 2007 due to the growth in pricesfor juice concentrates.

 

Inthe dairy and babyfood segments, 87.7% of our raw material costs wereruble-denominated and 12.3% were hard-currency-denominated in 2008, whereas85.0% of these costs were ruble-denominated and 15.0% were hard-currencydenominated in 2007. In the beverages segment, 21.6% of our raw material costswere ruble-denominated and 78.4% were hard-currency-denominated in 2008, and21.2% of our raw material costs were ruble-denominated and 78.8% werehard-currency denominated in 2007.

 

Personnelexpenses increased by 23.9% in 2008 compared to 2007. The average number ofproduction personnel decreased in 2008 by 11.3% to 9,822 compared to 11,076 in2007 due to continuing staff departures within costs optimization process in2008.

 

Depreciationand amortization increased by 25.2% from $65.9 million in 2007 to$82.5 million in 2008, reflecting the significant capital expenditures wehave been making to increase our production capacity by improving ourfacilities and overall infrastructure.

 

Utilitycosts increased by 25.0% in 2008 due to larger production and warehousingfacilities, as well as an increase in electricity and gas tariffs.

 

**Sellingand Distribution Expenses**

** **

Sellingand distribution expenses increased by 25.8% in 2008 compared to 2007. As a percentageof sales, selling and distribution expenses increased to 17.3% in 2008 from15.9% in 2007. Our selling and distribution expenses in 2008 and 2007 were asfollows:

 
| ** **                               | ** ** | **Year ended**     | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **December 31,**   | ** ** |
| ** **                               | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Advertising  and marketing               |       | $                       | 142,312    |   | $ | 137,965 |   |
| Personnel                                |       | 120,183                 |       | 83,901 |   |
| Shipping  and handling                   |       | 135,598                 |       | 111,228 |   |
| Bad debt  expense                        |       | 13,285                  |       | 11,534 |   |
| Materials  and supplies                  |       | 13,124                  |       | 11,249 |   |
| Warehouse                                |       | 8,156                   |       | 1,650 |   |
| Other                                    |       | 55,452                  |       | 30,326 |   |
| Total  selling and distribution expenses |       | $                       | 488,110    |   | $ | 387,853 |   |

 

Advertisingand marketing expenses increased in 2008 by 3.2% or $4.3 million inabsolute terms, and decreased by 0.7% as a percentage of sales to 5.0% in 2008from 5.7% in 2007. The 

 

91

----

Table of Contents

 

increase in expenses wasdue our continued investments into major brand promotions and a launch of arange of new products. The increase was primarily attributable to TVadvertising expenses due to the increased volume of TV advertisements placed aswell as growth in advertising prices on Russia’s leading national televisionchannels, which, in 2008, exceeded 50%. Despite this media advertising priceinflation, we were able to obtain volume discounts and manage the costincreases more effectively.

 

Personnelexpenses increased by 43.2% in 2008 compared to 2007. The average number ofemployees in our selling and distribution department increased to 6,005 in 2008from 5,712 in 2007 mainly due to the development of our sales network in 2008.Our payroll cost per employee increased by 36.3% to $20,014 in 2008 from$14,689 in 2007, mainly due to implementation of a performance based rewardsystem, increase of salaries as well as continually enhancing the quality anddeveloping our regional sales force in 2008. Our personnel costs as apercentage of sales increased to 4.3% in 2008 from 3.4% in 2007.

 

Shippingand handling costs, which primarily consist of external transportation costs, increasedby 21.9% in 2008, compared to 2007. Our transportation expenses as a percentageof sales slightly increased to 4.8% in 2008 from 4.6% in 2007. The increase intransportation costs was mainly due to the expansion of our sales volumes inthe regions and increased transportation tariffs (in particular, for motortransportation - by 12-15%, railway — by 20%, air — by 30%).

 

Ourbad debt expenses increased to 0.3% as a percentage of sales in 2008 from 0.1%in 2007 primarily due to the fact that we used more conservative approach forbad debt measurement in terms of the general economic instability and downturn.See also “B. Liquidity and Capital Resources—Critical Accounting Policies andEstimates—Allowance for Doubtful Accounts” below.

 

**Generaland Administrative Expenses**

** **

Generaland administrative expenses decreased by 5.3% in 2008 compared to 2007, anddecreased as a percentage of sales to 6.0% in 2008 from 7.4% in 2007. Ourgeneral and administrative expenses in 2008 and 2007 were as follows:

 
| ** **                                 | ** ** | **Year ended**     | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **December 31,**   | ** ** |
| ** **                                 | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Personnel                                  |       | $                       | 81,972     |   | $ | 102,195 |   |
| Taxes  other than income tax               |       | 17,127                  |       | 17,200 |   |
| Audit,  consulting and legal fees          |       | 17,700                  |       | 9,512 |   |
| Depreciation                               |       | 11,985                  |       | 10,636 |   |
| Materials  and supplies                    |       | 4,570                   |       | 4,654 |   |
| Communication  costs                       |       | 4,489                   |       | 3,647 |   |
| Rent                                       |       | 3,695                   |       | 3,278 |   |
| Other                                      |       | 29,862                  |       | 29,800 |   |
| Total  general and administrative expenses |       | $                       | 171,400    |   | $ | 180,922 |   |

 

Personnelexpenses decreased by 19.8%, while the average number of employees decreased to2,658 in 2008 compared to 3,008 in 2007. Our average cost per employeedecreased by 9.2% to $30,840 in 2008 from $33,978 in 2007, due to the processof personnel headcount optimization, in particular the decrease in the numberof personnel with relatively high salaries in 2008.

 

Ourexpenses for audit, consulting and legal services increased by 12.7% in 2008compared to 2007, as result of our consultations with external professionaladvisors.

 

Depreciationexpense increased by 86.0% from $9.5 million in 2007 to $17.7 millionin 2008, reflecting our investments made to upgrade our administrative officebuildings in Russia and CIS.

 

92

----

Table of Contents

 

**OtherOperating Expenses**

** **

Other operating expenses increased to $8.4 millionin 2008 from $0.7 million in 2007, mainly as a result of losses on fixed assetsretirement in terms of our capital investments program primarily at our dairysegment. The increase of other operating expenses was also caused by growth ofvarious non-production social-related expenses, such as social programsfinancing, health support and financial aid.

 

**OperatingIncome**

** **

Operatingincome increased by 14.6% to $245.1 million in 2008 from $214.0 million in2007, as a result of cost control measures undertaken in the last three years.Offsetting these measures, our foreign currency-denominated raw-materialspurchases, primarily at the beverages segment, resulted in a decrease of ouroperating income due to the ruble depreciation against both the U.S. dollar andthe euro. As a percentage of sales, operating income slightly decreased from8.8% in 2007 to 8.7% in 2008.

 

**Earningsbefore Interest, Taxation, Depreciation and Amortization (EBITDA)**

** **

EBITDA is considered as a key performance indicatorby our management in order to manage and evaluate performance of our businesssegments continuously. EBITDA represents net income before interest, incometaxes and depreciation and amortization, adjusted for interest income, foreigncurrency exchange gain and losses, bank charges and other financial expensesand noncontrolling interest. EBITDA margin is EBITDA expressed as a percentageof sales.

 

Our consolidated EBITDA increased by $60.4 millionor 20.1% from $300.5 million in 2007 to $361.0 million in 2008 primarilybecause of operating profit growth to $245.1 million in 2008 from $214.0million in 2007. Operating profit grew primarily as a result of costcontrol measures undertaken in the last three years.

 

EBITDA is a non-U.S. GAAP financial measure. Thefollowing table reconciles EBITDA to net income attributable to WBD Foodsshareholders and EBITDA margin to net income attributable to WBD Foodsshareholders as a percentage of sales.

 
| ** **                                          | ** ** | **Year ended December 31,** | ** **    |
|-----------------------------------------------------|------------|--------------------------------------------|---------------|
| ** **                                          | ** ** | **2008**                                   | ** **    | **% of******** sales** | ** ** | **2007** | ** ** | **% of******** sales** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                    | ** **    | **(in thousands)** | ** ** |
| Net income, attributable to WBD Foods shareholders  |       | $                                          |  101,712 |   | 3.6 |   | $ |  140,048 |   | 5.7 |   |
| Add:  Depreciation and amortisation                 |       | 115,823                                    |          | 4.1 |   | 86,575 |   | 3.6 |   |
| Add:  Income tax expenses                           |       | 39,898                                     |          | 1.4 |   | 54,302 |   | 2.2 |   |
| Add:  Interest expenses                             |       | 44,544                                     |          | 1.6 |   | 34,988 |   | 1.4 |   |
| Less:  Interest income                              |       | (6,648                                     | )             | (0.2 | ) | (2,952 | ) | (0.1 | ) |
| Add:  Foreign exchnage losses (gains), net          |       | 61,357                                     |          | 2.2 |   | (18,120 | ) | (0.7 | ) |
| Add: Bank  charges                                  |       | 2,868                                      |          | 0.1 |   | 2,912 |   | 0.1 |   |
| Add:  Noncontrolling interest                       |       | 2,029                                      |          | 0.1 |   | 2,769 |   | 0.1 |   |
| Add:Loss  (gain) on other financial income/expenses |       | (617                                       | )             | (0.02 | ) | 22 |   | 0.01 |   |
| EBITDA                                              |       | $                                          | 360,966       |   | 12.8 |   | $ | 300,544 |   | 12.3 |   |

 

**Financial Income and Expenses**

** **

Financialincome and expenses comprised the following:

 

93

----

Table of Contents

 
| ** **                               | ** ** | **Year ended**     | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **December 31,**   | ** ** |
| ** **                               | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Interest  expense                        |       | $                       | 44,544     |   | $ | 34,988 |   |
| Interest  income                         |       | (6,648                  | )          | (2,952 | ) |
| Foreign  currency losses (gains), net    |       | 58,811                  |       | (18,120 | ) |
| Loss on  currency forward contracts      |       | 2,546                   |       | — |   |
| Bank  charges                            |       | 2,868                   |       | 2,912 |   |
| Other  financial expenses (income), net  |       | (617                    | )          | 23 |   |
| Total  financial income and expense, net |       | $                       | 101,504    |   | $ | 16,851 |   |

 

Interestexpense increased by 27.3% in 2008 compared to 2007. This was mainly due to anincrease in our average debt, including a $250 million Syndicated Loan receivedin April 2008.

 

Wereceived interest income of $6.6 million in 2008 compared to $3.0 millionin 2007. Income was received from investing of free cash accumulated forrepayment of third series of bonds placed on the Moscow Inter-bank CurrencyExchange (MICEX).

 

In2008, we incurred total foreign exchange losses of $58.8 million, mainlycomprised of losses from a U.S. dollar-denominated syndicated loan and otherU.S. dollar and euro-denominated debt. The U.S. dollar appreciated by 19.9%against the ruble, and the euro appreciated by 15.3% against the ruble in 2008.

 

Duringthe fourth quarter of 2008 we entered into currency forward contracts as a partof our cash management functions. The loss in the amount of $2.5 millionrepresents the fair value adjustment on these contracts. No such contracts wereentered into during 2007.

 

**Provisionfor Income Taxes**

** **

Ourprovision for income taxes for the years ended December 31, 2008 and 2007was as follows:

 
| ** **                            | ** ** | **Year ended**     | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **December 31,**   | ** ** |
| ** **                            | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
| Current  provision                    |       | $                       | 39,844     |   | $ | 49,409 |   |
| Deferred  income tax charge/(benefit) |       | 54                      |       | 4,893 |   |
| Total  provision for income taxes     |       | $                       | 39,898     |   | $ | 54,302 |   |

 

Provisionfor income taxes amounted to $39.9 million in 2008 and $54.3 millionin 2007. These provisions comprise current income tax charges of$39.8 million in 2008 and $49.4 million in 2007, and a deferred taxexpense of $0.1 million in 2008 and $4.9 million in 2007. Deferredtax benefits and charges arise on temporary differences between the bases ofcomputing income under domestic tax principles and U.S. GAAP.

 

Effective January 1, 2009 the statutory incometax rate in Russia was reduced down to 20% from 24%. Following that fact weevaluated our deferred income tax assets and liabilities at the 20% income taxrate. Resulting from that change in rate, the deferred income tax expensedecreased by $3.4 million.

 

Our historical relationship between pretax earningsfor financial reporting purposes and taxable income for income tax purposes,for the years ended December 31, 2008 and 2007 was as follows:

 

94

----

Table of Contents

 
| ** **                                                                      | ** ** | **Year ended**     | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                      | ** ** | **December 31,**   | ** ** |
| ** **                                                                      | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | **(in thousands)** | ** ** |
| Income  before provision for income taxes                                       |       | $                       | 143,639    |   | $ | 197,119 |   |
| Russian  statutory tax rate                                                     |       | 24                      | %          | 24 | % |
| Income  tax provision at Russian statutory rate                                 |       | 34,473                  |       | 47,309 |   |
| Tax  effect of expenses not deductible for national statutory taxation purposes |       | 13,238                  |       | 12,758 |   |
| Tax  effect of income not taxable for national statutory taxation purposes      |       | (3,193                  | )          | (2,396 | ) |
| Tax  effect of income tax at different rates                                    |       | (1,290                  | )          | (947 | ) |
| Increase  (decrease) in valuation allowance                                     |       | (1,594                  | )          | (2,741 | ) |
| Tax effect of income tax rate change                                            |       | (3,446                  | )          | — |   |
| Tax  effect of other permanent differences                                      |       | 1,710                   |       | 319 |   |
| Provision  for income taxes                                                     |       | $                       | 39,898     |   | $ | 54,302 |   |

 

In 2008, our effective income tax rate was 27.8%compared to the Russian statutory income tax rate of 24.0% and, in 2007, oureffective income tax rate was 27.5% compared to the Russian statutory incometax rate of 24.0%. This increase in 2008 of our effective income tax rate is primarilydriven by a decrease in taxable profits accompanied by an increase in theCompany’s non-deductible expenses as a percentage of income before income taxin 2008, compared to 2007.

 

For Russian income tax purposes, certain of oursubsidiaries have accumulated tax losses incurred in 2004-2008, which may becarried forward for use against their future income within 10 years. Thereare no restrictions for use of accumulated tax losses effective January 1,2008. As of December 31, 2008, for statutory income tax purposes, we hadtax losses available to carry forward of $19.2 million expiring as follows:

 

 

**NoncontrollingInterest**

** **

Thenoncontrolling interest reflects the net income and losses of our subsidiariesthat are attributable to the noncontrolling shareholders in those subsidiaries.In 2008, net income attributable to noncontrolling interests of oursubsidiaries decreased to $2.0 million from $2.8 million in 2007. Netincome attributable to the noncontrolling interests in the dairy segment was$1.5 million in 2008 and $2.0 million in 2007, respectively.

 

**NetIncome, Attributable to WBD Foods Shareholders**

** **

Net income, attributable to WBD Foods shareholdersdecreased in 2008 to $101.7 million (3.6% of sales) from $140.0 million(5.7% of sales) in 2007, primarily as a result of the increase in financialexpenses explained above.

 

95

----

Table of Contents

 

**B.Liquidity and Capital Resources**

* *

**CapitalRequirements**

** **

Weneed working capital to finance the following:

 

·                  repayment ofdebt;

 

·                  capitalexpenditures, consisting of purchases of property, plant and equipment;

 

·                  acquisitions; and

 

·                  dividend payouts.

 

In2009, we continued to purchase property, plant and equipment in order toincrease production capacity and to improve infrastructure at our new andexisting subsidiaries.

 

**GlobalEconomic Conditions**

** **

Globalmarket and economic conditions have been unprecedented and challenging since2008, with tighter credit conditions and recession in most major economies continuedinto 2009. As a result of these market conditions, the cost and availability ofcredit has been and may continue to be adversely affected by illiquid creditmarkets and wider credit spreads. Concern about the stability of the marketsgenerally and the strength of counterparties specifically has led many lendersand institutional investors to reduce, and in some cases, cease to providecredit to businesses and consumers. These factors have led to a decrease in spending by businesses andconsumers alike.  Continued turbulence inthe Russian, U.S. and international markets and economies and prolongeddeclines in business and consumer spending may adversely affect our liquidityand financial condition, and the liquidity and financial condition of our customers,including our ability to refinance maturing liabilities and access the capitalmarkets to meet liquidity needs. See also “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Financial Condition— We may be adversely affectedby the current economic environment” and “—Continued turmoil in the creditmarkets could cause our business, financial condition, results of operationsand the price of our shares and ADSs to suffer.”

 

**CapitalExpenditures**

** **

Ourtotal capital expenditures in 2009, excluding acquisitions, amounted to$121.8 million. Capital expenditures in our dairy segment amounted to$76.8 million and related to the expansion of our packing and processingcapacity, modernization of production and office infrastructure and improvementof raw milk processing and transportation equipment. Capital expenditures inour beverages segment amounted to $13.2 million and related mainly to theinstallation of new production lines and the modernization of our warehouseinfrastructure. Capital expenditures in our babyfood segment amounted to $20.8million and relate to the installation of new babyfood production lines. Ourcorporate and common capital expenditures, including those relating to ITinfrastructure and software implementation, including ERP, totaled $11.0million.

 

Ourcapital expenditures, excluding acquisitions, for the period from 2007 through2009 are set forth in the following table:

 
| ** **                         | ** ** | **Year ended December 31,**     | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2007** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **In millions of U.S. Dollars** | ** ** |
| Dairy  segment                     |       | $                               | 76.8       |   | $ | 140.7 |   | $ | 134.6 |   | $ | 352.1 |   |
| Beverages  segment                 |       | 13.2                            |       | 22.6 |   | 21.5 |   | 57.3 |   |
| Babyfood  segment                  |       | 20.8                            |       | 16.5 |   | 28.2 |   | 65.5 |   |
| Corporate  and common expenditures |       | 11.0                            |       | 15.5 |   | 8.4 |   | 34.9 |   |
| Total  capital expenditures        |       | $                               | 121.8      |   | $ | 195.3 |   | $ | 192.7 |   | $ | 509.8 |   |

 

96

----

Table of Contents

 

Asof December 31, 2009, our capital commitments amounted to $33.8 millionand were mainly attributable to construction projects and acquisitions ofequipment. We plan to finance our capital commitments through cash generated byoperating activities and through vendor financing.

 

**Acquisitionsof Subsidiaries and Purchase from Noncontrolling Interests**

** **

During2009, 2008 and 2007, we made a number of acquisitions for total considerationof $3.0 million, $3.3 million and $21.8 million, respectively. The goal ofthese acquisitions was to expand into new markets, strengthen our operationalpresence in the regions of Russia and the CIS and to acquire noncontrollinginterests in certain our subsidiaries. The following table summarizes ouracquisitions in the last three years:

 
| ** **                                                           | ** ** | **Direct owner-** | ** ** | ** **                       | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **ship interest**      | ** ** | **Acquisition cost**        | ** ** |
| ** **                                                           | ** ** | **acquired, %**        | ** ** | **(in US$ ‘000)** | ** ** |
| **2009**                                                             | ** ** | ** **             | ** ** | ** **                       | ** ** |
| WBD  (purchase of noncontrolling interests)                          |       | 0.44                   |       | $                                | 2,982      |   |
| **Total**                                                            |       |                   |       | $                                | **2,982**  |   |
| **2008**                                                             |       |                   |       |                             |       |
| WBD  Beverages (purchase of noncontrolling interests)                |       | 2.57                   |       | $                                | 3,263      |   |
| **Total**                                                            |       |                   |       | $                                | **3,263**  |   |
| **2007**                                                             |       |                   |       |                             |       |
| Ochakovo  Dairy Plant (purchase of noncontrolling interests)         |       | 4.71                   |       | $                                | 3,312      |   |
| Obninsk  Dairy Plant (purchase of noncontrolling interests)          |       | 33.51                  |       | 11,877                           |       |
| Niva  Farm                                                           |       | 94.62                  |       | 1,185                            |       |
| Angarsky  Dairy Plant (MOLKA) (purchase of noncontrolling interests) |       | 13.24                  |       | 830                              |       |
| Georgian  products                                                   |       | 100.00                 |       | 1,100                            |       |
|                                                                 |       |                   |       |                             |       |
| Acquisition  of noncontrolling interests in subsidiaries             |       | 17.08                  |       | 2,746                            |       |
| Other                                                                |       | various                |       | 750                              |       |
| **Total**                                                            |       |                   |       | $                                | **21,806** |   |

 

See“Item 4. Information on Our Company” for more information on our acquiredbusinesses and Note 3 to our Consolidated Financial Statements includedelsewhere herein.

 

**CapitalResources**

** **

Wegenerally rely on operating cash flows and debt to finance capital expendituresand acquisitions. In addition, we finance a portion of our equipment purchasesthrough vendor financing. The availability of external financing is influencedby many factors, including our financial position and market conditions. Undercertain circumstances, we may be required to repay certain indebtedness. See “Item3. Key Information—D. Risk Factors—Risks Relating to Our FinancialCondition—Covenants in our debt agreements restrict our ability to borrow,invest and engage in various activities, which could impair our ability toexpand or finance our future operations.” The global economic downturn may alsoaffect our ability to refinance maturing liabilities and access debt and thecapital markets to meet liquidity needs. See also “—Global Economic Conditions”above, “Item 3. Key Information—D. Risk Factors—Risks Relating to Our FinancialCondition— We may be adversely affected by the current economic environment”and “—Continued turmoil in the credit markets could cause our business,financial condition, results of operations and the price of our shares and ADSsto suffer.”

 

97

----

Table of Contents

 

**Debt**

** **

Ourdebt consists of notes, bank loans and vendor financing for property, plant andequipment, of which 52% are at fixed rates. The following table summarizes ourdebt position as of December 31, 2009 and 2008:

 
| ** **                                       | ** ** | **At December 31,********2009** | ** ** | **At December 31,********2008** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**                   | ** ** |
| Long-tem  debt, including current portion:       |       |                                      |       |                                      |       |
| Notes                                            |       | $                                         | 185,835    |                                      | $          | 247,647 |   |
| Bank  loans                                      |       | 308,306                                   |       | 335,789                                   |       |
| Vendor  financing                                |       | 25,278                                    |       | 23,476                                    |       |
| Total  long-term debt, including current portion |       | 519,419                                   |       | 606,912                                   |       |
| Short-term  debt                                 |       | 4,521                                     |       | 66,278                                    |       |
| Total  debt                                      |       | $                                         | 523,940    |                                      | $          | 673,190 |   |
| **Denominated in:**                              |       |                                      |       |                                      |       |
| U.S.  dollars                                    |       | $                                         | 251,008    |                                      | $          | 256,084 |   |
| Euro                                             |       | $                                         | 22,411     |                                      | $          | 22,099 |   |
| Rubles                                           |       | $                                         | 250,521    |                                      | $          | 395,007 |   |

 

Ourtotal debt matures as follows:

 
| **Year**             | ** ** | **(in thousands)** | ** ** |
|----------------------|------------|-------------------------|------------|
| 2010                 |       | $                       | 220,507    |   |
| 2011                 |       | $                       | 266,113    |   |
| 2012                 |       | $                       | 16,682     |   |
| 2013                 |       | $                       | 6,664      |   |
| 2014 and  thereafter |       | $                       | 13,974     |   |

 

**Notes**

 

***Ruble Notes***

 

On December 21,2005, we issued 3,000,000 non-convertible ruble-denominated notes at a facevalue of 1,000 rubles each. The offering raised a total of 3 billion rubles($99.2 million at the exchange rate as of December 31, 2009, of which$13.2 million at the exchange rate as of December 31, 2009 have beenrepaid). The notes are redeemable on December 15, 2010. The interest rateof the coupon is 9%. The interest is payable semi-annually in arrears,commencing on June 21, 2006.

 

On March 6, 2009, we repaid ruble bonds, which were issued in March 2008and which had a put option exercisable on March 6, 2009 in the amount of4,660.3 million rubles, which is the equivalent of $128.6 million at theexchange rates at March 6, 2009.

 

**In May and June 2009, we issued bonds on MICEXraising cash of 3 billion rubles, ($96.9 million at the exchange rates at thedates of transactions or $99.5 million at the exchange rate as of December 31,2009). The bonds are due in February 2013, and bondholders have a putoption exercisable in September, 2010, at 100% of nominal value plus accruedinterest. The annual interest rate of the coupon is 15% for the next one and ahalf years.**As a result, the bonds are classified as current debt as of December 31,2009. The annual interest rate of the coupon is15% for the next one and half years. The interest is payable semi-annuallycommencing in September 2009.

** **

**BankLoans**

** **

Substantiallyall of our long-term bank loans as of December 31, 2009 consisted of ourU.S. dollar-denominated syndicated loan, and ruble and euro-denominated loans.Majority of our ruble-denominated loans were lent to our agriculturalsubsidiaries for capital expenditure financing purposes. Interest expensesincurred by our agricultural entities are subsidized by local

 

98

----

Table of Contents

 

governmentalauthorities. The following table sets forth our long-term debt structure as of December 31,2009 and 2008:

 
| ** **                               | ** ** | **2009**                | ** ** | **2008**   | ** **  |
|------------------------------------------|------------|-------------------------|------------|------------|-------------|
| ** **                               | ** ** | **No. of********loans** | ** ** | **Amount** | ** **  | **Weighted********average********interest rate** | ** ** | **No. of********loans** | ** ** | **Amount** | ** ** | **Weighted********average********interest rate** | ** ** |
| Euro-denominated  (maturity 2011-2020)   |       | 2                       |       | $          | 3,013       |   | 1.76 | % | 2 | ** ** | **$** | 4,730 |   | 1.83 | % |
| Ruble-denominated  (maturity 2010-2012)  |       | 29                      |       | 55,293     |        | 8.46 | % | 32 |   | 81,059 |   | 9.84 | % |
| U.S.  dollar-denominated (maturity 2011) |       | 1                       |       | 250,000    |        | 2.02 | % | 1 |   | 250,000 |   | 4.42 | % |
| **Total amount of long-term borrowings** | ** ** | ** **              | ** ** | **$**      | **308,306** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **335,789** | ** ** | ** ** | ** ** |
| Less  current portion of long-term loans |       |                    |       | (22,308    | )           |   |   |   |   | (8,632 | ) |   |   |
| **Total long-term loans**                | ** ** | ** **              | ** ** | **$**      | **285,998** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **327,157** | ** ** | ** ** | ** ** |

 

Ourshort-term debt balance as of December 31, 2009 consisted of loans grantedto our agricultural entities. The following table sets forth our short-termdebt structure as of December 31, 2009 and 2008.

 
| ** **                 | ** ** | **2009**                | ** ** | **2008**   | ** ** |
|----------------------------|------------|-------------------------|------------|------------|------------|
| ** **                 | ** ** | **No. of********loans** | ** ** | **Amount** | ** ** | **Weighted********average********interest rate** | ** ** | **No. of********loans** | ** ** | **Amount** | ** ** | **Weighted********average********interest rate** | ** ** |
| Euro-denominated           |       |                    |       | $          | —     |   | — |   |   |   | $ | 355 |   | 16.00 | % |
| Ruble-denominated          |       | 5                       |       | 4,521      |       | 6.66 | % | 7 |   | 65,923 |   | 14.97 | % |
| U.S.  dollar-denominated   |       |                    |       | —     |       | — |   |   |   | — |   | — |   |
| **Total short-term loans** | ** ** | ** **              | ** ** | **$**      | **4,521**  | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **66,278** | ** ** | ** ** | ** ** |

 

On April 25,2008, we entered into an unsecured $250.0 million syndicated loan agreement with ING Bank N.V., ABN Amro N.V. and CALYON as mandated leadarrangersmaturing on April 25, 2011. The loan bears interest at an annual rate ofLIBOR plus 1.5% (2.02% as of December 31, 2009), payable every threemonths. The proceeds of the loan were used for the refinancing of existing debtand general corporate purposes. The loan agreement contains a number ofcovenants including requirements to maintain certain financial ratios which arebeing maintained by us.

 

From April throughDecember 2009 a number of our subsidiaries entered into unsecuredshort-term ruble-denominated loan agreements with Alfa Bank borrowing 136.7million rubles ($4.5 million at the exchange rate as of December 31, 2009)at an average annual interest rate of 6.7%. In addition, on August 28,2009, one of our subsidiaries has borrowed 200 million rubles ($6.6 million atthe exchange rate as of December 31, 2009) pursuant to a secured loan agreementwith Alfa Bank maturing in 2012 at a fixed annual interest rate of 18%, whichis subsidized by the local governmental authorities.

 

On June 3, 2009 we repaid in advance 1,250million rubles ($42.5 million at the exchange rate as of December 31, 2008or $40.7 million at the date of transaction) to Sberbank pursuant to a securedloan agreement.

 

In April and May 2009 we repaid 1,300million rubles ($44.2 million at the exchange rate as of December 31, 2008or $40.0 million at the exchange rate as of the dates of repayment) under ashort-term unsecured loan with Alfa Bank.

 

99

----

Table of Contents

 

**Guarantees**

 

At December 31, 2009 our major subsidiariesguaranteed certain short-term and long-term bank loans received by othersubsidiaries. The aggregate amount of such guarantees equaled the carryingamount of the respective short-term and long-term loans. We also guaranteedcertain short-term and long-term bank loans received by third parties in theamount of $0.2 million.

 

Theabove-mentioned $250.0 million syndicated loan is unconditionally andirrevocably guaranteed by Wimm-Bill-Dann and Wimm-Bill-Dann Beverages pursuantto guarantees dated April 25, 2008 entered into with ING Bank N.V. as theagent.

 

**Covenantsand other matters**

** **

Inthe syndicated loan agreement, we agreed to certain covenants in respect of,among other things, liens, asset sales and transactions with affiliates andrelated persons, change of control, mergers and similar transactions,limitation on dividend or other payments affecting our subsidiaries andmaintenance of certain financial ratios. In the guarantees, Wimm-Bill-Dann andWimm-Bill-Dann Beverages agreed to similar covenants. Both the syndicated loanagreement and the guarantees are governed by English law. We were in compliancewith the existing covenants as of December 31, 2009.

 

**VendorFinance**

** **

Wehave agreements with suppliers of equipment, which provide financing forperiods ranging from 1 to 9 years. As of December 31, 2009 and 2008, ourvendor financing obligations were $1.0 million and $6.0 million, respectively, 13.5 million euroand 12.1 million euro,respectively (equivalent to $19.4 million and $17.0 million as of December 31,2009 and 2008, respectively) and 147.3 million rubles and 11.1 million rubles,respectively (equivalent to $4.9 million and $0.4 million as of December 31,2009 and 2008, respectively). This financing is provided at average interestrate of 6.89%.

 

**CashFlows**

** **

Asummary of our cash flows is as follows:

 
| ** **                                                        | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                    | ** ** |
| Cash  provided by operating activities                            |       | $                                          | 312,296    |   | $ | 321,190 |   | $ | 96,804 |   |
| Cash  used in investing activities                                |       | (125,262                                   | )          | (181,681 | ) | (183,481 | ) |
| Cash  provided (used in) by financing activities                  |       | (187,336                                   | )          | 162,499 |   | 71,869 |   |
| Impact  of exchange rate differences on cash and cash equivalents |       | (28,429                                    | )          | (58,208 | ) | 7,950 |   |
| Net  increase (decrease) in cash                                  |       | $                                          | (28,731    | ) | $ | 243,800 |   | $ | (6,858 | ) |
| Cash  paid for acquisition of property, plant and equipment       |       | $                                          | (128,846   | ) | $ | (189,003 | ) | $ | (189,049 | ) |
| Cash  paid for acquisition of subsidiaries, net of cash acquired  |       | —                                     |       | (327 | ) | (5,290 | ) |
| Vendor  financed acquisitions of property, plant and equipment    |       | 15,533                                     |       | 6,967 |   | 6,860 |   |

 

In2009, we financed our capital expenditures and noncontrolling interestacquisitions primarily through operating cash flows, vendor financing and bankloans (mainly at our agricultural subsidiaries).

 

Wespent $125.3 million on our investment activities in 2009, includingacquisitions of property, plant and equipment of $128.8* million, investmentsin direct finance leases of $0.9 million and $2.7 million proceeds fromdisposal of property, plant and equipment.

 

----

* Cash paid forproperty, plant and equipment in the amount of $128.8 million, which differsfrom our capital investments of $121.8 million due to change in payables forproperty, plant and equipment and capitalized interest cost in the amount of$2.3 million and $4.7 million, respectively.

 

100

----

Table of Contents

 

Weused $187.3 million in our financing activities in 2009, including netrepayment of long-term notes payable of $153.5 million, proceeds from long-termnotes payable, net of debt issuance costs of $95.8 million, net repayment ofshort-term loans of $56.3 million and treasury stock acquisition of $58.6million and acquisitions of noncontrolling interests of $2.3** million.

 

**WorkingCapital**

** **

Ourshort-term demands for liquidity, including seasonal fluctuations in workingcapital requirements are met by cash flows from operations.

 

Inevaluating our working capital requirements, we exclude the impact of currencytranslation as our primary working capital accounts are denominated in Russianrubles so it is more meaningful to evaluate these balances without the impactof currency.  In order to exclude currencytranslation effects, we compare the current balance to the prior year using afixed exchange rate.

 

In2009, depreciation of the ruble against the U.S. dollar did not affect ourworking capital as significantly as in 2008. The ruble depreciated by 2.9%against the U.S. dollar as of December 31, 2009 as compared to December 31,2008. This generally resulted in a decrease in the reported U.S. dollar valueof our ruble-denominated assets and liabilities. We recalculated the turnoverratios using ruble-denominated balances in order to eliminate the foreignexchange effects.

 

Asof December 31, 2009, our cash and cash equivalents balance was $248.5million, of which $79.6 million was ruble-denominated, $164.1 million was euroand U.S. dollar-denominated and $4.8 million was denominated in other currencies.Net cash provided by operating activities was $312.3 million and $321.2 millionfor the year ended December 31, 2009 and 2008. The operating cash inflowswere derived from payments received from our sales in dairy, beverages andbabyfood segments, reduced by cash disbursements for direct labor, productionmaterials, selling, distribution and other operating expenses. The decrease innet cash provided by operating activities was primarily caused by adverseeffect of ruble depreciation against the U.S. dollar.

 

Netcash used in investing activities was $125.3 million and $181.4 million for theyear ended December 31, 2009 and 2008, respectively. The investing cashoutflows arose primarily from purchase of property, plant and equipment as partof our capital expenditure program, which was reduced in 2009.

 

Net cash flow used for financing activities in 2009amounted to $187.3 million compared to $162.5 million earned from financingactivities in 2008. In 2009 payments from cash flow were used to service ourlong term borrowings, the settling of bond issue and the purchase of treasurystock. In 2008 net cash flow from financing activities was supplemented bysyndicated loan and ruble bond issue.

 

Wedefine net working capital as total current assets net of cash and cashequivalents less the sum of trade accounts payable, advances received taxespayable, accrued liabilities and other current payables. Net working capital is a non-U.S. GAAPfinancial measure. The following table reconciles net working capital toconsolidated balance sheet captions as of December 31, 2009 and 2008.

 
| ** **                       | ** ** | **December 31,**                  | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| ** **                       | ** ** | **(in millions of U.S. dollars)** | ** ** |
| Total  current assets            |       | $                                 | 641.5      |   | $ | 734.7 |   |
| Less:  Cash and cash equivalents |       | (248.5                            | )          | (277.3 | ) |
| Less:  Trade accounts payable    |       | (135.8                            | )          | (133.9 | ) |
| Less:  Advances received         |       | (10.8                             | )          | (8.3 | ) |
| Less:  Taxes payable             |       | (13.7                             | )          | (19.0 | ) |
| Less:  Accrued liabilities       |       | (55.0                             | )          | (33.9 | ) |
| Less:  Other payables            |       | (28.2                             | )          | (43.1 | ) |
| Total  net working capital       |       | $                                 | 149.5      |   | $ | 219.2 |   |

 

----

** This amount consistssolely of cash consideration, paid for OJSC WBD noncontrolling interestacquisition.

 

101

----

Table ofContents

 

Asof December 31, 2009 our net working capital balance was $149.5 million.Our working capital position as of December 31, 2009 decreased from$219.2 million as of December 31, 2008 primarily due to decrease intaxes receivables (not taking into account currency translation effect). Ournet working capital, excluding currency translation effects, decreased by $65.8million or by 30.0% as of December 31, 2009 in comparison with that as of December 31,2008. We believe that our working capital is sufficient for our present requirements.

 

Taxesreceivable decreased by $32.6 million, or 50.2% to $32.3 million as of December 31,2009 from $64.9 million as of December 31, 2008. Excluding currencytranslation effects, taxes receivable decreased by $31.7 million or by 48.8% incomparison with the balance as of December 31, 2008. Taxes receivablerepresent VAT and other taxes owed to us by the state budget. Under existingtax legislation, we are able to offset this VAT receivable against income taxand other taxes payable to the state budget or to recover from the state budgetin cash. We are taking all legally available steps, including filing litigationclaims, to facilitate the recovery of tax receivables from the state budget. In2009, $27.5 million of taxes were recovered from the state budget in cash.

 

Tradeaccounts payable increased by $1.9 million, or 1.5% to $135.8 million at December 31,2009 from $133.9 million at December 31, 2008. Excluding currencytranslation effects, trade accounts payable increased by $5.9 million or by4.4%. Trade payables turnover* averaged 32 days as of December 31, 2009and 27 days as of December 31, 2008, this was achieved throughmanagement of working capital requirements. Following these requirements, weextended our payment period in contracts with suppliers of goods and services.

 

Tradereceivables decreased by $13.4 million, or 10.7% from $125.5 million as ofDecember 31, 2008 to $112.1 million as of December 31, 2009 after theallowance for bad debts of $9.3 million, as compared to $5.8 million as ofDecember 31, 2008. Trade receivables, excluding currency translationeffects, decreased by $10.1 million or by 8.1%. Trade receivables turnover**averaged 19 days as of December 31, 2009 and 20 days as of December 31,2008 as a result improved collectability of receivables.

 

Inventorydecreased by $32.4 million, or 14.5% from $223.8 million as of December 31,2008 to $191.3 million as of December 31, 2009. Excluding currencytranslation effects, the inventory balance decreased by $29.1 million, or12.9%. Turnover*** of inventory in days as of December 31, 2009 amountedto 48 days, as compared to 50 days as of December 31, 2008 as aresult of a reduction in our stock of raw materials and finished goods.

** **

**CreditRating Discussion**

** **

Ourcredit ratings impact our ability to obtain short- and long-term financing, andthe cost of such financing. In determining our credit ratings, the ratingagencies consider a number of factors, including our operating cash flows,total debt outstanding, commitments, interest requirements, liquidity needs andavailability of liquidity. Other factors considered may include our businessstrategy, the condition of our industry and our position within the industry.Although we understand that these and other factors are among those consideredby the rating agencies, each agency might calculate and weigh each factordifferently.

 

----

* Trade payablesturnover is calculated as the average trade payables balance, denominated inrubles for the years ended December 31, 2008 and 2009 divided byruble-denominated cost of sales for 2009 and the average trade payablesbalance, denominated in rubles for the years ended December 31, 2007 and2008 divided by ruble-denominated cost of sales for 2008 for the years ended December 31,2009 and 2008, respectively.

** Trade receivablesturnover is calculated as the average trade receivables balance, denominated inrubles for the years ended December 31, 2008 and 2009 divided byruble-denominated sales for 2009 and the average trade receivables balance,denominated in rubles for the years ended December 31, 2007 and 2008divided by ruble-denominated sales for 2008 for the years ended December 31,2009 and 2008, respectively.

*** Inventory turnover is calculated as the average inventory balance,denominated in rubles for the years ended December 31, 2008 and 2009divided by ruble-denominated cost of sales for 2009 and the average inventorybalance, denominated in rubles for the years ended December 31, 2007 and2008 divided by ruble-denominated cost of sales for 2008 for the years endedDecember 31, 2009 and 2008, respectively.

 

102

----

Table of Contents

 

In 2009, both Standard &Poor’s (S&P) and Moody’s ratings agencies confirmed our credit ratingswhich are BB- by S&P and Ba3 by Moody’s. On December 18, 2009 Moody’schanged the outlook on our Ba3 corporate family rating to stable. Moody’sstated that the stable outlook factors in the established assurance factorsunder the company’s financial metrics and expectation of continuous relativeresilience and capacity to generate stable operating cash flows in weakeconomic conditions. The outlook captures the performance challenges includingthe uncertainty of the recovery of consumer demand, input cost pressures andthe risk of depreciation of the domestic currency.

 

| **Rating Agency**              | ** ** | **Company’s rating** | ** ** | **Outlook/Watch** |
|-------------------------------------|------------|--------------------------------|------------|-------------------|
| Moody’s(1)                     |       | Ba3                            |       | stable            |
| Standard &  Poor’s(2) |       | BB-                            |       | stable            |

 

----

(1) Rated on July 16, 2007, updated in December 2009.

(2) Rated on July 13, 2007, updated in December 2009.

 

Asof the date of this annual report, none of our existing indebtedness had anytriggers related to our credit ratings.

 

**CriticalAccounting Policies and Estimates**

** **

Criticalaccounting policies are those policies that require the application ofmanagement’s most challenging, subjective or complex judgments, often as aresult of the need to make estimates about the effect of matters that areinherently uncertain and may change in subsequent periods. Critical accountingpolicies involve judgments that are sufficiently sensitive to give materiallydifferent results under different assumptions and conditions. We believe thatour most critical accounting policies are those described below. For additionaldiscussion of these and other accounting policies, see Note 2 to ourConsolidated Financial Statements included elsewhere herein.

 

**Estimatesand Assumptions**

** **

Thepreparation of the consolidated financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. We believe that the critical accounting policies andestimations underlining the financial statements are provisions for allowancefor doubtful accounts, inventory valuation, impairment, share appreciationrights, fair value, uncertain tax position and valuation allowance for deferredtax assets. Actual results could differ from those estimates.

 

**Allowancefor Doubtful Accounts**

** **

Allowancefor doubtful accounts is established if there is objective evidence that wewill not be able to collect the amounts due according to original contractualterms and it reduces receivables to amounts expected to be collected. Inestimating uncollectible amounts, we consider factors such as current overalleconomic conditions, industry-specific economic conditions, historical customerperformance and anticipated customer performance. Our provisions coverindividual balances where there is evidence that losses are probable as at thebalance sheet date. We use significant judgment in estimating uncollectibleamounts. Our allowance for doubtful accounts amounted to $9.3 million andrepresented 7.7% of trade receivables as of December 31, 2009 and $5.8million and 4.4% of trade receivables of December 31, 2008. The 3.3%increase in 2009 was due to the general economic downturn and marketinstability. We recognized $4.5 million bad debt expense, representing 0.2% ofour sales and $8.2 million bad debt expense, representing less than 0.3% of oursales as part of our selling and distribution expenses in 2009 and 2008, respectively.

 

103

----

Table of Contents

 

**Accountingfor Income Taxes and Tax Uncertainties**

 

Theprovision for income taxes is made for taxation of profits in the financialstatements in accordance with the applicable legislation in force. We accountfor income taxes in accordance with provisions of ASC 740, *Income Taxes*(“ASC 740”), and related interpretations. We account for income taxes using anasset and liability approach for reporting purposes. We estimate the temporarydifferences (sometimes accumulated for more than one year) resulting from thetiming differences of certain items for tax and accounting purposes. Thesedifferences arise between the years in which transactions affect taxable incomeand the years in which they enter into the determination of pretax financialincome. Temporary differences ordinarily become taxable or deductible when therelated asset is recovered or the related liability is settled. A deferred taxliability or asset represents the increase or decrease in taxes payable orrefundable in future years as a result of temporary differences and carryforwards at the end of the current year.

 

Weassess our deferred tax assets on an ongoing basis by assessing our valuationallowance and adjusting the valuation allowance appropriately. A valuationallowance is recognized if, based on the weight of available evidence, it is more likely than not that someportion or all of the deferred tax asset will not be realized. This analysis isbased on our best estimate, whether the entity will be in a position to recoverthe deferred tax asset in the future through its operations.

 

Ourdeferred tax assets were $16.6 million and $13.3 million as of December 31,2009 and 2008, respectively. The benefits of tax loss carryforwards arerecognized as deferred tax assets, when it is more likely than not that theywill be fully utilized in the future. If it was determined it is not morelikely than not that tax loss carryforwards will be utilized in the future,losses were provided as part of the deferred tax asset valuation allowance. Asof December 31, 2009 and 2008 the tax effect of tax losses carryforwardswere $7.0 million and $4.1 million, respectively. Out of this amount lossesthat were provided as a part of the deferred tax asset valuation allowance were$3.2 million and $2.0 million as of December 31, 2009 and 2008,respectively.

 

Thedeferred tax assets utilization is dependent upon the generation of futuretaxable income during the periods in which those temporary differences becomedeductible or in which tax losses can be utilized. In making this assessment,we consider our projected taxable income and future probability of deferred taxassets utilization against deferred tax liabilities. As of December 31,2009, based on the level of historical taxable income and projections forfuture taxable income over the periods in which the deferred tax assets aredeductible, we believe that it is more likely than not that we will realize thebenefits of these deductible differences. The amount of the deferred tax assetconsidered realizable could however be reduced in subsequent years if estimatesof future taxable income during the carry forward period are reduced, orrulings by the tax authorities are unfavorable. Estimates are therefore subjectto change due to both market-related and government-related uncertainties, aswell as our management’s own future decisions. We are not able to quantifyaccurately the amount of any future potential deferred income tax expense whichmight be recorded as a result.

 

Theprovisions of ASC 740 also prescribe a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return and provide guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. Our policy is to comply fully withapplicable tax regulations in all regions where our operations are subject toincome taxes. However, there may be distinct interpretations of applicable taxlegislation by local tax authorities on how the regulations should be appliedin actual transactions. Our estimates of current income tax expense andliabilities are calculated on the assumption that all tax computations filed byour subsidiaries will be subject to review or audit by the relevant taxauthorities. Current income tax liabilities include our best estimate of thetax that will ultimately be payable when the reviews or audits have beencompleted, including allowances for interest and penalties which we may berequired to pay if the authorities assess additional tax payments for prioryears. Actual outcomes and settlements may differ significantly from theestimates recorded in the consolidated financial statements. This may affectincome tax expense, profit or loss, effective tax rates and earnings per 

 

104

----

Table ofContents

 

share reported in futureyears’ consolidated income statements. Several prior years’ tax statements arestill open for tax audit for most of our subsidiaries at the balance sheetdate. Our estimates of income tax expense and liabilities at each year endinclude significant management judgments about the eventual outcome of the taxaudits of all open years based on the latest information available about thepositions taken by each tax authority. We accrued $0.3 million and $0.5million, including tax fines and penalties of $0.1 million and $0.1 million asa component of accrued liabilities as of December 31, 2009 and 2008,respectively.

 

Themeasurement effect on deferred tax assets and liabilities of changes in lawsand rates is made in the period of enactment of the effect of an enactmentchange in the tax laws and rates. The effect is recognized in income fromcontinuing operations.

 

**InventoryValuation**

** **

Wereview our inventory balances to determine if inventories can be sold atamounts equal to or greater than their carrying amounts. The review includesidentification of slow moving inventories, obsolete inventories, expiredinventories and discontinued products or lines of products. The identificationprocess also includes historical performance of the inventory, currentoperational plans for the inventory, as well as industry and customer-specifictrends and current market situation and prices. If our actual results differfrom our expectations with respect to the selling of our inventories at amountsequal to or greater than their carrying amounts, we would be required to adjustour inventories accordingly. Our inventory valuation allowance was $2.4million, representing 1.3% of net inventories and $2.8 million, representing1.2% of net inventories as of December 31, 2009 and 2008, respectively.

 

**Property,Plant and Equipment**

** **

Depreciationperiods of property, plant and equipment are based on the estimated useful lifeof related assets. The adoption of depreciation periods requires judgment indetermining the appropriate estimated useful life over which the related assetswill be utilized. In estimating useful life, we consider factors such as ourhistorical experience and the industry, manufacturers’ estimates, anticipateduse and our maintenance policies. As these factors change, management estimatesmay change and we could be required to reassess depreciation periods forproperty, plant and equipment and consider impairment. Generally we estimateuseful lives for property, plant and equipment as follows:

 

| Buildings                |   | 10-50 years |   |
|--------------------------|--------|-------------|--------|
| Machinery  and equipment |   | 5-25  years |   |
| Computer  hardware       |   | 2-7  years  |   |
| Other                    |   | 2-30  years |   |

 

Assets acquired under capital leases are included inproperty, plant, and equipment and relate to machinery and equipment.Depreciation of capital lease assets is included in depreciation expense.Assets recorded under capital leases are included in machinery and equipment atthe gross book value of $15.3 million with respective accumulated depreciationof $11.1 million as of December 31, 2009. The net present values ofamounts due under capital leases are recorded as liabilities and included inother payables and other long-term payables.

 

Expenditures incurred after the assets havebeen put into operation, such as repairs and maintenance costs, are normallyexpensed in the period the costs are incurred. In situations where it can beclearly demonstrated that the expenditures have resulted in an increase in thefuture economic benefits expected to be obtained from the use of an item ofproperty, plant and equipment beyond its originally assessed standard ofperformance, the expenditures are capitalized as an additional cost ofproperty, plant and equipment.

 

105

----

Table of Contents

 

**StockOption Plans**

 

Wefollow the provisions of ASC 718, *Compensation — StockCompensation*, (“ASC 718”), to account for our share-based awards.The Company’s shared-based awards have been accounted for as a liability and,as such, the awards’ fair value is remeasured at each reporting date until thedate of settlement.

 

Asrecommended by ASC 718, we use closed-form model Black-Sholes to estimate fairvalue of share-based awards.

 

Thedetermination of fair value of share-based awards on the date of grant and eachsubsequent reporting date, using an option valuation model, is affected by ourstock price as well as assumptions regarding a number of complex and subjectivevariables. These variables include, but are not limited to, the expected stockprice volatility over the term of the awards and projected employee exercisebehaviors.

 

A summary of the assumptions used in theapplication of the Black-Sholes option valuation model for grants of stockappreciation rights outstanding as of December 31 were as follows:

 

| ** **                  | ** ** | **2009**        | ** ** | **2008** | ** ** | **2007** |
|-----------------------------|------------|-----------------|------------|----------|------------|----------|
| Volatility (1)              |       | 61.00%-87.90%   |       | 66.22%   |       | 44.46%   |
| Risk-free interest rate (2) |       | 0.58%-1.69%     |       | 8.39%    |       | 6.08%    |
| Dividend yield (3)          |       | 1.049%          |       | 0%       |       | 0.41%    |
| Expected life (years) (4)   |       | 0.25-2.25 years |       | 3 years  |       | 3 years  |

 

----

(1)                          The volatility is based on historical volatility of our common stockover the same term as the expected term of the award. ASC 178 requires the useof expected rather then historical volatility. Volatility affects the expectedterm because although option pricing theory contends that the optimal time toexercise an option is at the end of its term, the option holder may exercise theoption early if the price of the stock price reaches a certain level. Employeeexercise behavior is described as a suboptimal exercise factor. ASC 178 doesnot specify a method for estimating expected share price volatility, but itdoes require a process for making such estimates and for evaluating factorsincorporated in that process.

(2)                          The risk-free rate is based on the Russian Federation Government Bondwith expected term similar to the expected term of the award. The basis for itis the assumption that participants will exercise their awards as soon as theymature.

(3)                        The dividendyield is based on expected annual dividends per share and the share price as ofthe measurement date.

(4)                        The expected lifeis based on the contractual term of the outstanding share based awards andassumption that the share based awards will be exercised after the vestingperiod but before end of contractual term.

 

**Impairmentof Goodwill and Long-Lived Assets**

** **

Wefollow the requirements of ASC 360, *Property, Plant and Equipment*(“ASC 360”), which addresses financial accounting and reporting forthe impairment and disposal of long-lived assets, and ASC 350, *Intangibles — Goodwill and Other*(“ASC 350”)** in respect toimpairment of goodwill and other intangible assets.

 

Inaccordance with ASC 350, we classify intangible assets into three categories: (1) intangibleassets with definite lives subject to amortization; (2) intangible assetswith indefinite lives not subject to amortization; and (3) goodwill.

 

Forintangible assets with indefinite lives and goodwill, tests for impairment areperformed at least annually or more frequently if events or circumstancesindicate that assets might be impaired.

 

106

----

Table ofContents

 

Weuse a relief-from-royalty methodology to determine fair value in conductingimpairment assessments of trademarks, which are our indefinite-lived intangibleassets. For indefinite-lived intangible assets, if the fair value is less thanthe carrying amount, an impairment charge is recognized in an amount equal tothat excess. In 2009 we recognized $2.9 million impairment loss, included inamortization expense. We have determined that these assets will have a finitelife, going forward, which we estimate to be four to seven years and we nowclassify these as definite lived intangibles with a net value of $13.3 millionat December 31, 2009.

 

Weperform impairment tests of goodwill at our reporting unit level, which for usis the same as our operating segment. The goodwill impairment test consists ofa two-step process, if necessary. The first step is to compare the fair valueof each of the three reporting units to its carrying value, including goodwill.We use discounted cash flow models to determine the fair value of a reportingunit. If the estimated fair value of the reporting unit is less than itscarrying value, the second step of the impairment test must be performed. Thesecond step compares the implied fair value of the reporting unit goodwill withthe carrying value of that goodwill to measure the amount of impairment, ifany. The implied fair value of goodwill is determined in the same manner as theamount of goodwill recognized in a business combination. In other words, theestimated fair value of the reporting unit is allocated to all of the assetsand liabilities of that unit (including any unrecognized intangible assets) asif the reporting unit had been acquired in a business combination and the fairvalue of the reporting unit was the purchase price paid. If the carrying amountof the reporting unit’s goodwill exceeds the implied fair value of thatgoodwill, an impairment is recognized in an amount equal to that excess.

 

Goodwillwas $105.6 million and $108.7 million as of December 31, 2009 and 2008,respectively, of which $97.8 million was allocated to the dairy segment and$7.8 million was allocated to the beverages segment as of December 31,2009 and $100.8 million and $7.9 million as of December 31, 2008,respectively. Other intangible assets with indefinite useful lives were $0.6and $18.2 million as of December 31, 2009 and 2008, respectively.

 

Indetermining the fair value of the reporting unit it is necessary to make aseries of assumptions to estimate future cash flows. The main assumptions inrespect of reporting units includes future sales prices and volumes, the futuredevelopment expenditure required to maintain the products’ marketability andthe products’ lives.

 

Thecash flow forecasts, supporting $97.8 million goodwill allocated to the dairyreporting unit and $7.8 million allocated to the beverages reporting unitdemonstrated stable cash inflows based on the five year management forecast.The average selling price growth for the next five years was assessed at 7.4%for the dairy reporting unit and 3.2% for beverages, which we believe will notexceed the forecasted inflation rate. The terminal value of the reporting unitsat the end of year five assumes a 3.0% long-term annual growth rate, which isin line with our management’s view on the long-term growth rate for eachreporting unit. The discount rates used for the estimated future cash flowsincluded in the value in use calculations are based on our estimated weightedaverage cost of capital. The discount rate was estimated at 14.5%.

 

Basedon the results of the first step of our impairment test, the fair value of thereporting units was greater than the carrying value.

 

Forintangible assets with definite lives, tests for impairment are performed ifconditions exist that indicate the carrying value may not be recoverable. Whenfacts and circumstances indicate that the carrying value may not berecoverable, we assess the recoverability of the carrying value by preparingestimates of future cash flows. These estimated future cash flows areconsistent with those we use in our internal forecasting. If the sum of theexpected future cash flows (undiscounted and without interest charges) is lessthan the carrying amount, we recognize an impairment loss. The impairment lossrecognized is the amount by which the carrying amount exceeds the fair value.We use a variety of methodologies to determine the fair value of these assets,including

 

107

----

Table of Contents

 

discounted cash flowmodels, which are consistent with the assumptions we believe hypotheticalmarketplace participants would use.

 

Weperform impairment testing of long-lived assets in accordance with ASC 360. Ifthe undiscounted cash flows are less than long-lived asset (group) carryingamount, we determine the fair value of the asset (group) and recognize theimpairment loss, if the carrying value exceeds the fair value of the asset(group).

 

Asof December 31, 2009, we believe our intangible assets with definiteuseful lives and long-lived assets will generate enough cash flows to recovertheir carrying value. No impairment test was performed for these assets as noimpairment indicators were identified.

 

Impairmentcharges, if identified, are generally recorded in the line item other operatingexpenses, net in the consolidated statements of income. No impairment lossesfor long-lived assets with definite useful life and goodwill were recognized asof December 31, 2009, 2008 and 2007.

 

**New andRecently Adopted Accounting Pronouncements**

** **

In January 2010,the FASB issued ASU 2010-6, *Fair Value Measurementsand Disclosures (Topic 820)*: *Improving Disclosuresabout Fair Value Measurements* (“ASU 2010-6”) that amends Topic 820, *Fair Value Measurements and Disclosures*, of the FASBCodification. ASU 2010-6 requires separate disclosure of significant transfersbetween Level 1 and Level 2 fair value measurement inputs and a description ofthe reasons for the transfers. An entity is also required to present separatelyinformation about purchases, issuance, and settlements in the reconciliationfor fair value measurements using Level 3 inputs. ASU 2010-6 amends existingdisclosure requirements in regards of level of disaggregation and inputs andvaluation techniques. ASU 2010-6 is effective for interim and annual reportingperiods beginning after December 15, 2009, except for the disclosuresabout activity in Level 3 fair value measurements that are effective forinterim and annual periods beginning after December 15, 2010. The Companywill adopt ASU 2010-6 from January 1, 2010. The Company does not expectASU 2010-6 to have a material impact on the Company’s consolidated financialposition and results of operations.

 

In January 2010,the FASB issued ASU 2010-2, *Consolidation (Topic 810):Accounting and Reporting for Decreases in Ownership of a Subsidiary—a ScopeClarification* (“ASU 2010-2”) that amends Topic 810, Consolidation,of the FASB Codification. ASU 2010-2 clarifies the list of operations that arewithin the scope of Subtopic 810-10, Consolidation—Overall, and relatedguidance. ASU 2010-2 also clarifies that if a decrease in ownership occurs in asubsidiary that is not a business or nonprofit activity, an entity first needsto consider whether the substance of transaction is addressed in other topicssuch as transfers of financial assets, revenue recognition, exchange ofnonmonetary assets, sales of real estate, conveyances of oil and gas mineralrights. If no other guidance exists, an entity should apply guidance inSubtopic 810-10, Consolidation — Overall. ASU 2010-2 expands the disclosurerequirements about the deconsolidation of a subsidiary or derecognition of agroup of assets within the scope of Subtopic 810-10, Consolidation — Overall.ASU 2010-2 is effective for interim and annual reporting periods ending on orafter December 15, 2009, and should be applied retrospectively to thefirst period that an entity adopted SFAS 160 Noncontrolling Interests inConsolidated Financial Statements — an amendment of ARB No. 51. TheCompany adopted ASU 2010-2 starting from annual consolidated financialstatements as of and for the year ended December 31, 2009 retrospectivelyto January 1, 2009. Adoption of ASU 2010-2 did not have a material impacton the Company’s consolidated financial position and results of operations.

 

In August 2009,the FASB issued ASU 2009-05, *Fair Value Measurementsand Disclosures (Topic 820): Measuring Liabilities at Fair Value* (“ASU2009-05”) that amends Subtopic 820-10, *Fair value measurementsand disclosures, Overall of Topic 820*, of the FASB Codification. ASU2009-05 provides clarification that in circumstances in which a quoted price inactive market is not 

 

108

----

 

Table of Contents

 

available,a reporting entity is required to use one or more of the following valuationtechniques: valuation based on quoted price of identical liability when tradedas an asset; quoted prices of similar liabilities or similar liabilities whentraded as an assets, or any other technique consistent with the principles ofTopic 820, such as present value technique. ASU 2009-05 also clarifies that areporting entity is not required to include a separate input to existence ofrestriction that prevents the transfer of the liability. ASU 2009-05 iseffective for the first reporting period (including interim periods) beginningafter issuance. Early application is permitted if financial statements forprior period have not been issued. The Company will adopt ASU 2009-05 from January 1,2010. The Company does not expect ASU 2009-05 to have a material impact on theCompany’s consolidated financial position and results of operations.

 

In May 2009,the FASB issued FASB ASC 855, *Subsequent Events*.FASB ASC 855 establishes the accounting for, and disclosure of, material eventsthat occur after the balance sheet date but before the financial statements areissued or are available to be issued. In general, these events are recognizedif the condition existed at the balance sheet date, and are not recognized ifthe condition did not exist at the balance sheet date. Disclosure is requiredfor unrecognized material events to keep the financial statements from beingmisleading.

 

In February 2010FASB issued ASU 2010-09 to amend ASC 855, *Subsequent Events,*that removes the requirement to disclose the date through which subsequentevents were evaluated. The guidance in ASC 855 as revised by the ASU iseffective immediately (i.e., for financial statements available to be issuedafter 24 February 2010.).The Company adopted ASU 2010-09 amended ASC 855starting from annual consolidated financial statements as of and for the yearended December 31, 2009. Adoption of ASU did not have a material impact onthe Company’s consolidated financial position and results of operations.

 

EffectiveJanuary 1, 2009, the Company adopted FASB ASC 820, *Fair ValueMeasurements and Disclosures*for non-financial assets and liabilities, which defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements. Because there usually is a lack of quoted marketprices for long-lived assets, the Company determines fair value using thepresent value of estimated future net cash flows from using these assets or byusing historical data of market transactions with similar assets wherepossible. Adoption of FASB ASC 820 for nonfinancial assets and liabilities didnot have a material impact on the Company’s consolidated financial position andresults of operations.

 

In December 2007,the FASB issued FASB Statement 141R *Business Combinations*(now ASC 805, *Business Combinations)*, which wassubsequently amended in April 2009. FASB ASC 805 retains the fundamentalrequirements in SFAS 141, *Business Combinations*,that acquisition method of accounting be used for all business combinations andfor an acquirer to be identified for each business combination, but expands thescope of acquisition accounting to all transactions and circumstances underwhich control of business is obtained. FASB ASC 805 requires an acquirer torecognize the assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree at the acquisition date, measured at their fair valuesas of that date. This replaces SFAS 141’s cost-allocation process, whichrequired the cost of an acquisition to be allocated to the individual assetsacquired and liabilities assumed based on their estimated fair values. FASB ASC805 shall be applied prospectively to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. The Company adopted FASBASC 805 (as amended) from January 1, 2009. Adoption of FASB ASC 805 didnot have a material impact on the Company’s consolidated financial position andresults of operations.

 

In December 2007,the FASB issued FASB Statement 160 *Noncontrolling Interestsin Consolidated Financial Statements (now* FASB ASC 810 *Consolidation)*. FASB ASC 810 requires noncontrollinginterest, previously called minority interest, to be presented as a separateitem in the 

 

109

----

Table of Contents

 

equitysection of the consolidated balance sheet. It also requires the amount ofconsolidated net income attributable to noncontrolling interest to be clearlypresented on the face of the consolidated statements of income andcomprehensive income. FASB ASC 810 was effective for fiscal periods beginningon or after December 15, 2008. The Company adopted the provisions of FASBASC 810 from January 1, 2009.  The adoption of FASB ASC 810resulted in the reclassification of noncontrolling interests of $11,863 as of December 31,2008, $13,862 as of December 2007, and $18,977 as of December 31,2006 to equity as part of noncontrolling interests. Cash paid for acquisitionof noncontrolling interests was also reclassified in Consolidated Statements ofCash Flows for years ended 2008 and 2007 from cash flows from investingactivities to cash flows from financing activities in the amount $3,723 and$19,560, respectively.

 

**C.Research and Development, Patents and Licenses, etc.**

** **

Wecontinue to invest financial and human resources in new product development,focusing on long-term strategic projects aimed at creating innovative productsand technologies and new food categories. Our research and developmentdepartment focuses on new project development for all three of our businesssegments. It is located at Lianozovsky Dairy Plant and has 20 employees.However, we did not incur significant research and development costs, which arenormally reported as part of our cost of sales. For a more detailed discussionof new product development see “Item 4. Information on Our Company - B.Business Overview-New Product Development.”

 

**D.Trend Information**

** **

**Markets**

** **

Accordingto the Ministry of Economic Development and Trade of the Russian Federation,gross domestic product (GDP) in Russia declined by 7.9% in 2009, followinggrowth of 5.6% and 8.1% in 2008 and 2007, respectively. In 2010 GDP is forecastto increase by approximately 1.3%* in comparison with 2009 in accordance withthe Ministry of Economic Development. Despite the decline in GDP disposableincome levels continued to increase in 2009, although disposable income levelsin the regions continued to lag behind those in Moscow. The Ministry forEconomic Development predicts a moderate economy recovery over the period2010-2012. Over the last decade preceding the economic downturn, improvementsin Russia’s macroeconomic situation generally supported favorable trends in ourkey market segments. Dairy consumption has been shifting towards packagedproducts whereas the share of unpackaged dairy products has been steadilydecreasing. In addition, consumers in Russia have, in recent years, consumedmore fruit-containing, dessert and enriched products. We have seen anincreasing preference for juice over fresh fruit, which generally accompaniesincreases in income. This has resulted in the growth in consumption ofvitamin-rich products with varying tastes and nutritional characteristics,including increased demand for juice-containing beverages.

 

Althoughprice inflation and the economic downturn which began in 2008, have had anegative effect on these trends, we believe that these positive tendencies inconsumption will continue to develop as the economy recovers and resumesgrowth. At the same time, both the dairy and juice markets will continue tobecome more competitive, with producers engaging in aggressive advertising andmarketing strategies. In addition, the economic downturn accelerated thedevelopment of lower-cost products positioned as value-for-money alternativesHowever, we believe further growth will be driven by the global trends inhealth and wellness and convenience trends, which will be reflected in productlaunches and marketing campaigns in the coming years.

 

Consumptionof babyfood continued to rise showing double digit growth in 2009, and webelieve it will continue to grow in 2010. The increased production, variety andavailability of babyfood, the trend for mothers to return to work more quicklyfollowing childbirth and the active promotion of babyfood and education effortssponsored by the government and producers of specialized babyfood have alsocontributed to increasing product awareness and consumption.

 

----

* According to revised Development Plan for 2010 bythe Russian Ministry of Economic Develeopment.

 

110

----

Table ofContents

** **

**DairySegment**

** **

Duringthe 1990s and the first part of this decade, raw milk volumes decreased inRussia due primarily to a fall in livestock numbers. However, from 2006 throughthe fourth quarter of 2009, raw milk supply grew consistently. In 2007 the rawmilk supply increased by 2.3% , in 2008 supply increased by 1.1%  and in 2009 by 0.7% due to significantinvestments into farm development by major dairy producers, the enhancedeffectiveness of cattle-breeding methods, the application of moderntechnologies by Russian farms and the National Program of Agro-IndustrialDevelopment, a government sponsored initiative offering interest free loans forthe development of agriculture and the creation of large farming enterprisesand regional milk collection centers.

 

Whileraw milk prices decreased during the first three quarters of 2009, theysignificantly increased in the fourth quarter of 2009, as a result of raw milkshortage on the Russian market.

 

Dairyproduct consumption was not significantly affected by the economic downturn, astraditional dairy products are generally considered to be staple consumergoods, and yogurts and dairy deserts were heavily promoted by producersthroughout the year along with generous price discounting.

 

Ourmarket leadership in the Russian dairy market depends on our ability to adaptto a rapidly changing marketplace. Until 2008, we were focused on capturingmarket opportunities generated by the emergence of a middle class, not only inMoscow and a handful of large cities, but across the country. This translatedinto greater health awareness and busier lifestyles. Our wide productsportfolio, strategically positioned in different price segments, supported oursales during the economic downturn.

 

Accordingto our estimates, the total market for packaged dairy products in Russia was9.6 billion liters in 2007 and 9.3 billion liters in 2008. The decline in2008 was due to significant price increases in retail product prices caused bythe growth of global raw milk prices at the end of 2007. Despite the economicdownturn in 2009, the market for packaged dairy products increased to 9.5billion liters which was driven by increased consumption of traditional dairyproducts. Over the short-term, we believe that consumption may stay flat ordecline due to another wave of raw milk price increases that began at the endof 2009 as well as a continued decline in disposable incomes. At the same time,given existing low per capita consumption, we believe that the Russian dairymarket continues to provide a long-term opportunity for growth. In particular,Russian households have proven receptive to yogurt, enriched dairy products anddairy-dessert products. We also expect continued growth in the consumption ofproducts with extended shelf life, including sterilized milk.

 

**BeveragesSegment**

** **

Atthe end of 2008, depreciation of the ruble led to growth in the cost ofimported juice concentrate, thus driving up the average market price for juiceproducts. Combined with the weakened consumer purchasing power, the beveragesmarket generally declined in volume and value terms in 2009. Despite thesignificant market slowdown, we managed to increase our beverage sales volumesin 2009 due to the launch of new products, strong marketing campaigns and thedevelopment of our distribution network.

 

Inrecent years, we have observed growing price awareness among consumers and thishas led us to be more active in the lower-middle and economy price segments. Weexpect further growth in juice sales in these segments. We also believe thatthe average selling prices in the regions will, as a whole, continue to belower than the average selling prices in Moscow and St. Petersburg, due tolower household incomes. Thus demand in the regions is higher for brands like “LovelyGarden” and the new “100% Gold Classic”, which delivered an outstandingperformance in the deteriorating economic environment. In the Central region ofRussia, where incomes are higher, we are focusing our efforts on providingbeverage products in the upper-middle and premium segments like “J7”, ourflagship upper-middle brand, “Wonder Berry” and the new “Zdraivery” brand.

 

111

----

Table ofContents

 

Beforethe global economic downturn, the mineral water market in Russia grew rapidly.The market declined in 2009, as consumers replaced mineral water with muchcheaper tap water. Notwithstanding this decline, we believe that the water marketwill deliver positive long-term growth due to increasing concerns about waterquality among consumers and we plan to continue to grow our presence in thissegment. Our water offerings include the premium “Essentuki” brand, which istraditionally known for its use for medicinal purposes and the new mid-price “RodnikiRossii” brand, which allowed us to double the volume of our water portfolio in2009. In the short term, however, we expect that the economic downturn maycontinue to cause the water market to shrink.

 

**BabyfoodSegment**

** **

Babyfoodconsumption in Russia increased during 2009, and we expect this growth tocontinue in 2010. The growth is driven by a number of factors: increasedproduction, variety and availability of babyfood, the trend for mothers toreturn to work more quickly and the active promotion of babyfood. Governmentsponsored educational efforts coupled with the active position of babyfoodproducers have contributed to increased awareness of critical importance ofproper nutrition in the earliest years for later life. Currently, higher andupper-middle income groups are driving consumption, with income growth inrecent years increasing the demand for healthy, specialized products for babiesacross Russia, which are mostly in the premium price category. However, thelower price segment has started to emerge in the babyfood market as well.

 

Witha growing middle class, Russian per capita consumption of babyfood is expectedto rapidly catch up with Central and Eastern European levels. In addition,purchases by publicly owned institutions such as hospitals and children’s homesand targeted state-run programs aimed at childhood nutrition continue to playan important role, although the share of government purchases of the overallmarket is expected to decline.

 

Thebabyfood market is already consolidated, with the top five players accountingfor approximately 74% of the total value in 2009, according to MEMRB. However,new players, foreign and domestic, continue to enter the market. Expansion intoregional markets will require increased marketing and sales expenditure as wellas higher transportation costs. We continue to review our options for expandingour babyfood production capacity in terms of volume and type of production aswell as geographic location.

 

Seealso “Item 4. Information on Our Company—B. Business—Business Overview” for adiscussion of trends in the dairy, beverages and babyfood markets.

 

**E.Off-balance Sheet Arrangements**

** **

Asof December 31, 2009, we did not have any off-balance sheet arrangements.

** **

**F.Contractual Obligations**

** **

Wehave various contractual obligations and commercial commitments to make futurepayments, including capital commitments, notes payable and vendor equipmentfinancing obligations.

 

Thefollowing table summarizes our future obligations and commitments under thesecontracts due by the periods indicated as of December 31, 2009.

 

112

----

Table ofContents

 
| ** **                   | ** ** | **Payments due by periods  At December 31, 2009** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Contractual Obligations**  | ** ** | **Total**                                                                       | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5  years** | ** ** |
| ** **                   | ** ** | **In thousands of U.S.  Dollars**                                               | ** ** |
| Notes payable                |       | $                                                                               | 185,835    |   | $ | 185,835 |   | $ | — |   | $ | — |   | $ | — |   |
| Vendor financing obligations |       | 25,278                                                                          |       | 7,843 |   | 15,227 |   | 2,208 |   | — |   |
| Long-term loans              |       | 308,306                                                                         |       | 22,308 |   | 274,232 |   | 8,859 |   | 2,907 |   |
| Short-term loans             |       | 4,521                                                                           |       | 4,521 |   | — |   | — |   | — |   |
| Purchase obligations         |       | 33,793                                                                          |       | 33,793 |   | — |   | — |   | — |   |
| Estimated interest expense   |       | 40,326                                                                          |       | 27,583 |   | 10,579 |   | 1,841 |   | 324 |   |
| Total                        |       | $                                                                               | 598,059    |   | $ | 281,883 |   | $ | 300,038 |   | $ | 12,908 |   | $ | 3,231 |   |

 

For additionalinformation, see “Item 11. Quantitative and Qualitative Disclosures aboutMarket Risk—Interest Rate Risk.”

 

113

----

Table of Contents

 

## ***Item6. Directors, Senior Management and Employees***

## *** ***

**A.Directors and Senior Management**

** **

Ourdirectors and executive officers, and their respective ages and positions as ofthe date of this annual report were as follows:

 
| **Name**                | ** ** | **Year of Birth** | ** ** | **Position**                                                                              |
|-------------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------------------------|
| David Iakobachvili(1)   |       | 1957                        |       | Chairman                                                                                  |
| Sergei A. Plastinin(1)  |       | 1968                        |       | Director                                                                                  |
| Guy de Selliers         |       | 1952                        |       | Director                                                                                  |
| Mikhail V. Dubinin(1)   |       | 1969                        |       | Director                                                                                  |
| Igor V. Kostikov (2)    |       | 1958                        |       | Director                                                                                  |
| Michael A. O’Neill |       | 1945                        |       | Director                                                                                  |
| Alexander S. Orlov(1)   |       | 1948                        |       | Director                                                                                  |
| Marcus J. Rhodes(2)     |       | 1961                        |       | Director                                                                                  |
| Jacques Vincent         |       | 1946                        |       | Director                                                                                  |
| Evgeny G. Yasin (2)     |       | 1934                        |       | Director                                                                                  |
| Gavril A. Yushvaev(1)   |       | 1957                        |       | Director                                                                                  |
| Tony D. Maher           |       | 1956                        |       | Chief Executive Officer, Chairman of the Management  Board                                |
| Dmitry V. Ivanov        |       | 1967                        |       | Chief Financial Officer, Management Board Member                                          |
| Silviu Popovici         |       | 1968                        |       | Head of Foods Business Unit (incorporating Dairy and  Baby Food), Management Board Member |
| Gary Sobel              |       | 1967                        |       | Head of Beverages Business Unit, Management Board  Member                                 |
| Oleg E. Kuzmin          |       | 1969                        |       | Head of Agricultural Business Unit, Management Board  Member                              |
| Marina G. Kagan         |       | 1968                        |       | Head of Public Affairs, Management Board Member                                           |
| Gennady K. Krainov      |       | 1951                        |       | Head of Information, Analysis and Control  Department, Management Board Member            |
| Roman V. Bolotovsky     |       | 1969                        |       | Head of Legal Office                                                                      |
| Timofei V. Tarasov      |       | 1978                        |       | Director of International Unit                                                            |

 

----

(1)   Party to the Amended and Restated Partnership andCooperation Agreement. See “Item 7. Major Shareholders and Related PartyTransactions—B. Related Party Transactions” and “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Business and Industry—We arecontrolled by a group of shareholders whose interests could conflict with thoseof the holders of our securities.”

 

(2)   Member of the Audit Committee.

 

**DavidIakobachvili** has served as Chairman of Wimm-Bill-Dann’s Board ofDirectors since May 2001. He is also founder and member of the board ofdirectors of a number of businesses that he founded and developed into largeagricultural, real estate, mining and entertainment holdings, includingRusAgroProject CJSC, Agrocomplex Gorki-2 CJSC, Mill Plant #4 OJSC, Coal mineKolmogorovskaya-2 LLC, Managing Company Promuglesbyt LLC, Kolmogorovskoeshahtoupravlenie LLC and Metelitsa-Club CJSC. He also serves as the director ofAirport Financial Services Limited, a financial services company. Mr. Iakobachvilialso serves on the board of directors of a number of our subsidiaries,including Wimm-Bill-Dann OJSC, Wimm-Bill-Dann Ukraine OJSC, Bishkeksut OJSC,and Gulkevichi Creamery CJSC, Atamanskoe LLC, Zavety Ilicha OJSC, Niva CJSC,Trud OJSC. He is the Chairman of the Board of directors of RusBrand non-profitpartnership and the Chairman of Committee on Social and Demographic Policy,member of the Presidium Office and the Vice-President of the Russian Union ofIndustrialists and Entrepreneurs. David Iakobachvili is the member of theGlobal Leadership Group in BASCAP (Business Action to Stop Counterfeiting andPiracy), and is the only representative from the Russian Federation. Inaddition, Mr. Iakobachvili plays an active role in the Russian Chamber ofCommerce and Industry, the National Corporate Governance Council, theRussian-American Business Council, the Russo-British Chamber of Commerce, theSenate of Economic Advisers of the European Democracy Forum, the World EconomicForum and Monaco World Summit.

 

114

----

Table ofContents

** **

**Sergei A.Plastinin** has served as a member of our Board of Directorssince May 2001. He served as the Chairman of the Management Board,which is our chief executive officer position, from 2001 to April 2006.Mr. Plastinin is also a founder and the chief executive officer of anumber of businesses in the agricultural, real estate and fashion industries,including, among others, Kira Plastinina Style LLC, and AgropromholdingRazvitie Regionov CJSC. Mr. Plastinin also serves on the board ofdirectors of a number of our subsidiaries including Wimm-Bill-Dann OJSC,Wimm-Bill-Dann Ukraine OJSC, Bishkekesut OJSC, Karasuk CJSC and GulkevichiCreamery CJSC. Mr. Plastinin has served as the Chairman of Council of the RussianDairy Union since August 2000.

 

**Guy de Selliers** has served as anindependent member of our Board of Directors since December 2001.Currently, Mr. de Selliers serves as a member of the board ofdirectors of Solvay S.A., a global group of pharmaceutical and chemicalcompanies, Wessex Grain (UK) and as a member of supervisory board of AMGAdvanced Metallurgical Group N.V. Mr. de Selliers is also theVice-Chairman of the Board at Fortis Group, an international financial servicesprovider, the chairman of the board at HB Advisers/Hatch Corporate finance (UK)and Fortis (UK). From 2002 until 2008 Mr. de Selliers served as a memberof the board of directors at MMC Norilsk Nickel. And from 2003 until 2008 Mr. deSelliers served as a member of the board of directors at furniture manufacturerShatura OJSC.  During 2004 and 2005, Mr. de Sellierswas a member of the international supervisory board at Fortis Group, aninternational financial services provider and, from 2001 through 2003 heserved as Chairman of Leader Capital equity fund. During 1998 to 2000, heheaded up the European business of Fleming Investment Bank. Mr. deSelliers served as chief executive officer of MC BBL investment bank from1997 to 1998. Mr. de Selliers was also a deputy vice president ofEuropean Bank for Reconstruction and Development (the EBRD) from 1991 to 1997.He received a degree in engineering in 1975 and in economics in 1977 atthe University of Louvain.

 

**Mikhail V. Dubinin** has served as a memberof our Board of Directors since May 2001. Currently, Mr. Dubininserves on the board of directors of several real estate companies that hefounded or co-founded, namely Istra Springs LLC, Nadezhny Fundament LLC,Petri-trade LLC, Non-commercial partnership Benelux Residence and the m***ember of the Steering Committee*** ofnon-commercial organization International community council on “Golden Falcon”order awarding.

 

****Igor V. Kostikov**** has served as anindependent member of our Board of Directors since June 2007. Mr. Kostikovserves as the chairman of the management board of the Institute of Stock.Market and Governance, as the general director of Almaz-Antey ThomsonBroadcast, general director of the Institute of World’s Economic andInternational Relations, Chairman of the Board of Directors of BV Media CJSC,member of ICGN, member of academic council of the Russian Academy of State’sGovernance and member of the ACPO, international advisory council. Since 2005, Mr. Kostikovhas been a professor at the Moscow State University Business School, with afocus on world economy and finance and credit. From 2000 to 2004, Mr. Kostikovserved as Chairman of the Federal Commission of the Securities Market. He isone of the authors of the Russian Corporate Governance Code. Between 1999 and2000, Mr. Kostikov was Deputy Chairman of the Finance Committee in the StPetersburg City Administration. Between 1992 and 1993, he served as a managingdirector at UK-based Friends Providence Asset Management. He activelyparticipates in the work of international organizations, including the OECD,EES, IBRD and EBRD, among others. Mr. Kostikov is a graduate of theeconomics department of Leningrad State University.

 

**Michael A. O’Neill** has served as anindependent member of our Board of Directors since December 2001.Currently, Mr. O’Neil serves as a member of the board of directors andchief executive officer of Coca-Cola Icecek in Turkey. . From 1989 to 2000, Mr. O’Neillheld various executive positions within the Coca-Cola Company. He received adegree in Industrial Engineering from the College of Commerce Rathmines in1967.

 

115

----

Table of Contents

** **

**Alexander S. Orlov** has served as a memberof our Board of Directors since May 2001. Mr. Orlov serves onthe management board of Non-commercial partnership Benelux Residence. He alsoserves on the board of directors of our subsidiary: Wimm-Bill-Dann UkraineOJSC. From 1992 and 1997, he was director of the dairy department and thegeneral director of the Moscow Baby Food Plant. From 1997 to 1998, he wasgeneral director of the Lianozovsky Dairy Plant. Mr. Orlov graduatedfrom the Moscow Technology Institute of Meat and Dairy Industry in 1975with a degree in engineering.

 

**Marcus J. Rhodes** has served as anindependent member of our Board of Directors since June 2008. He alsoserves as an independent director for Rosinter Group, Cherkizovo Group, WWPPapa John’s, Tethys Petroleum and Rusagro Group. Mr. Rhodes has 20 yearsof professional experience in auditing work. He has held various auditingpositions with well-recognized financial services and consulting firms indifferent countries, including Poland and Russia. From 2002 to 2008, Mr. Rhodesacted as an audit partner for Ernst & Young and, in this capacity, wasthe audit partner in charge of the audit of Wimm-Bill-Dann Foods OJSC from 2002to 2005. Mr. Rhodes earned degrees in accounting from LoughboroughUniversity in England in 1982, and from the Institute of Chartered Accountantsin England & Wales in 1986.

 

****Jacques Vincent****has served as anindependent member of our Board of Directors since June 2007. Mr. Vincentalso serves as a member of the Board of Directors of Danone S.A., Syngenta(Switzerland), Cereplast, Inc. (USA) and Yakult Honsa Co. Ltd. (Japan),Yakult Honsa India, Institute Biophytis, Mediaperf (France) and Weight WatchesDanone China Limited Chine. He also serves as well as a non-executive vice-chairman of Danone(France). Mr. Vincent was appointed vice chairman andchief operating officer of Groupe Danone in 1998. Prior to this, he was vicepresident of the Fresh Dairy Products division of Groupe Danone. Having spentmost of his career with Groupe Danone, he occupied various positions as generalmanager of certain of its subsidiaries in France, Germany, Italy and the UnitedStates in the water and dairy businesses. He holds an engineering degree fromEcole Centrale de Paris, as well as a degree in economics and a Master ofScience from Stanford University.

 

**Evgeny G. Yasin** has served as anindependent member of Wimm-Bill-Dann Foods’ Board of Directors since December 2001.He has been a professor of the State University—High School of Economics since July 1998.Mr. Yasin also serves on the board of directors of an independent radiostation Echo of Moscow CJSC. He also serves as the president ofnon-governmental fund Expert Institute and is the Chairman of expert council ofVnesheconombank. From 1994 to 1998, Mr. Yasin was Russia’s Ministerof the Economy. He graduated from the Hydrotechnical Institute in 1957with a degree in engineering and in 1963 from Moscow State University witha degree in economics.

 

**Gavril A. Yushvaev** has served as a memberof our Board of Directors since June 2005. He is also a founder andmember of the board of directors of agricultural, mining and real estateholdings, including RusAgroProject CJSC, Agrocomplex Gorki-2 CJSC, Mill Plant#4 OJSC, Coal mine Kolmogorovskaya-2 LLC, Managing Company Promuglesbyt LLC,Kolmogorovskoe Shahtoupravlenie LLC and Cattle Farm Naroosanovsky OJSC. Mr. Yushvaevalso serves as the president of RusAgroProject CJSC.

 

**Tony D. Maher** hasserved as our Chief Executive Officer and Chairman of the Management Boardsince April 2006. Prior to joining Wimm-Bill-Dann, he served as chairmanof the board of directors of Multon, a Russian juice company. He also held avariety of senior positions in Western, Central and Eastern European marketswithin the Coca-Cola group of companies, including region managing director forCoca-Cola HBC, one of the largest bottlers of non-alcoholic beverages inEurope.

 

**Dmitry V. Ivanov**has served as our Chief Financial Officer since May 2008 and as a memberof our Management Board since 2008. Heis also director of our subsidiary Wimm-Bill-Dann Finance LLC. Between 2003 and2008, Mr. Ivanov served as first vice president of finance at 

 

116

----

Table of Contents

 

Sitronics, a publicly listed company within the AFK Sistema Group, wherehe was responsible for capital market transactions and corporate financialstrategy. Prior to this, he worked in a variety of senior finance posts withinthe AFK Sistema Group, Multon, Creditanstalt Investment Bank and SmallEnterprise Assistance Funds, a U.S. private equity fund. Mr. Ivanov graduated fromthe St. Petersburg Shipbuilding University in 1991 and in the same yearreceived a Certificate in Accounting from the St Petersburg University ofEconomics. He holds an MBA from Vlerick Leuven Gent Management School.

 

**Silviu Popovici** hasserved as our Head of Foods Business Unit (which includes our dairy andbabyfood businesses) since December 2008 and as a member of our ManagementBoard since 2007. He also serves as the general director of our Moscow-basedsubsidiary Wimm-Bill-Dann OJSC. Prior to this, Mr. Popovici was the headof our Beverages Business Unit, a post he held upon joining us in September 2006.  He is also a member of the board of directorsof the Russian organization Efficient Consumer Response. Mr. Popovici hasextensive experience in sales, marketing, operations and general managementwith Bristol-Myers Squibb and Coca-Cola in Romania, Russia and Ukraine. From2004 to 2006, Mr. Popovici worked as country manager for Coca-Cola HBCUkraine.  He has a degree in physics fromthe University of Bucharest and an MBA from the London Business School.

 

**Gary Sobel** hasserved as our Head of Beverages Business Unit since December 2008 and as amember of our Management Board since 2008. Prior to this, Mr. Sobel servedin several top-level positions within the company.  He joined us as the head of our BabyfoodBusiness Unit in March 2007 and, thereafter he led our Marketing andInnovation group. Mr. Sobel began his career at Procter & Gamble,where for over 13 years he worked in various positions in Canada, the U.S., UKand Russia.  At Procter &Gamble, he worked on the Wal-Mart Customer Team, and headed up the In-storeMarketing and New Product Performance for their Baby Care Division.  Mr. Sobel also led Dirol Cadbury (adivision of Cadbury Schweppes) in Russia. Mr. Sobel graduated with a B.A from Concordia University (Montreal,Canada) with a gold medal for highest standing in the Business Administrationprogram. He received an MBA from the University of Western Ontario (Canada),where he graduated with Honors.

 

**OlegE. Kuzmin** has served as Head of theAgricultural Business Unit since December 2008 and as a member of ourManagement Board since 2005. Mr. Kuzmin has been with us since 1995. Heserved as Head of the Dairy Business Unit between 2004 and November 2008and as Head of Operations of the Dairy Business Unit from September 2003to August 2004. Prior to that he served in various managerial positions,including head of the cheese project, director of the Nizhny Novgorod DairyPlant, strategy director of the Lianozovsky Dairy Plant and marketing directorof Wimm-Bill-Dann’s Trading Company. He also serves on the board of directorsof a number of our subsidiaries, including Wimm-Bill-Dann Ukraine OJSC, TuimazyDairy Plant OJSC, Bishkeksut OJSC, Karasuk CJSC, Atamanskoe LLC, Zavety IlichaOJSC, Niva CJSC and Trud OJSC. Mr. Kuzmin graduated from Moscow StateBauman Technical University and Moscow State University. He also received anMBA from the Academy of the National Economy of the Government of the RussianFederation.

 

**Marina G. Kagan** hasserved as Head of Public Affairs and a member of the Management Board since May 2004.From 2001 to 2004 Ms. Kagan was a partner at Shared Value, a London-basedinternational financial public and investors’ relation firm. From 1998 through2001 she was at Gavin Anderson & Co, an international investor andpublic relations consultancy, where she served on the board of directors. Ms. Kaganworked for BBC World Service from 1995 to 1998. Ms. Kagan graduated fromWestminster University in London, England.

 

**Gennady K. Krainov** has served as Head ofthe Information, Analysis and Control Department since December 2003 andas a member of the Management Board since June 2005. Mr. Krainov isalso a member of board of directors of our subsidiary Gulkevichi Dairy PlantCJSC. From 1975 until 2003, Mr. Krainov held managerial positions withinnational security bodies and at the tax police. He also worked for the RussianExternal Trade Ministry and Chamber of

 

117

----

Table of Contents

 

Commerce and Industry. Mr. Krainovgraduated from the Moscow Geology Institute and the Higher School of Committeefor State Security, where he received a legal degree.

**** ****

****Roman V. Bolotovsky**** has served as our Head of Legal Office since January 1993. Mr. Bolotovskyhas played a vital role in establishing and implementing our compliance andcorporate governance policies throughout the group. He was also actively involvedin our initial public offering and listing on the NYSE as well as numerousmergers with subsidiaries we have undertaken in recent years in order tostreamline our corporate structure and operations. Mr. Bolotovskygraduated from the Moscow State Legal Academy in 1994, where he received a lawdegree.  He is currently a member of theMoscow City Bar.

 

****Timofei V. Tarasov**** has served as our Director of International Unit since November 2008,where he has direct responsibility for all of our businesses in Ukraine,Central Asia and the Caucasus. Prior to joining us, Mr. Tarasov worked asa Project leader for the Boston Consulting Group, and held a number of keyposts in sales and marketing at British American Tobacco and Honda Motors Co.Ltd., where he worked both in Moscow and certain regions of the RussianFederation. Mr. Tarasov graduated with distinction from Moscow StateUniversity of International Relations (MGIMO) in 2002 with a degree ininternational economic affairs. He also holds an MBA with distinction fromINSEAD.

 

Allof our directors were elected on June 19, 2009 and, pursuant to Russianlaw, their terms will expire on the date of our next annual shareholders’meeting, which will take place in May, 2010.

 

**B.Compensation of Directors and Senior Management**

** **

In2009, the aggregate amount of compensation to the directors and ManagementBoard members of Wimm-Bill-Dann Foods OJSC as a group for services in allcapacities was $33.3 million.

 

Nofunds were set aside for pension, retirement and other similar benefits for thesame directors and Management Board as of December 31, 2009, except thoserequired by Russian legislation.

 

Wecompensate each member of the board of directors $100,000 annually (commencingin July of each year), plus transportation and lodging expenses incurredin connection with their attendance at board meetings, and up to $2,000 peryear for other expenses incurred in connection with board-related activities.The Chairman of the Board is compensated $440,000 annually (commencing in July ofeach year) plus transportation and lodging expenses incurred in connection withboard meeting attendance, and up to $2,000 per year for other expenses incurredin connection with board-related activities. In 2009 we also compensated eachmember of the Personnel and Compensation Committee $12,000 (4 meetings), eachmember of the Investment and Strategic Planning Committee $15,000 (5 meetings),each member of the Corporate Governance Committee $9,000 (3 meetings) and eachmember of the Audit Committee $25,000 (5 meetings) for participation in eachplanned and directly attended Committee meeting.

 

In2006, we established a stock option plan for some of our executives. Theexercise price of the options equals the average closing price of the stockover the 90 trading days period preceding each annual grant. Each tranchevests one-third annually over a three year period and can be settled in cash.The contractual terms of options are three to five years from grant date.One-third of each tranche vests annually over a three-year period and can besettled in cash.  The contractual termsof the options range from three to five years from the grant date.

 

InApril 2007, we approved a Stock Appreciation Rights incentive program formembers of our senior management. According to this program, certain members ofour senior management are awarded Stock Appreciation Rights, or SARs, with anexercise price per SAR determined based on 

 

118

----

 

Table of Contents

 

the average market valueof our ADR. The exercise price of SARs equals the average closing price of thestock over the 90 trading days period preceding each annual grant.

 

Followinga resolution by the Board of Directors on October 16, 2009 to amend itsDepository Receipt program, Wimm-Bill-Dann Foods has completed a four-to-onesplit of its Depository Receipts. Before split one SAR represented one ADR,afterwards one SAR represents four ADR.

 

Theexercise price of SARs granted in 2009 is $26.85. One-third of each tranchevests annually over a three-year period and is settled in cash. The contractualterms of the SARs are five years from the grant date. Cash paid by us to settleSARs exercised in 2009, 2008 and 2007 amounted to $6.4 million, $17.9 millionand $0.6 million, respectively.  See alsoNote 20 to our Consolidated Financial Statements included elsewhere herein.

 

**C.Board Practices**

* *

**Boardof Directors**

** **

Membersof our Board of Directors are elected by a majority vote of shareholders at ourannual general meeting using a cumulative voting system. Each director iselected for a term that lasts until the next annual general meeting and may bere-elected an unlimited number of times. Our Board of Directors currentlyconsists of eleven members, including six independent directors. The Board ofDirectors has the authority to make overall management decisions for theCompany, except those matters reserved to the shareholders. See “Item 10. AdditionalInformation—B. Charter and Certain Requirements of Russian Legislation—GeneralMeetings of Shareholders” for more information regarding the competence of ourshareholders’ meetings.

 

Themembers of our Board of Directors serve pursuant to a contract. The contractsdo not provide for benefits to the board members upon termination of theiremployment. We indemnify each member of our Board of Directors pursuant toagreements, under which we indemnify them against, among others, expenses andcosts incurred by them in connection with any claims, suits or proceedingsarising out of or as a result of their service as a director, subject tocertain limitations. The agreements also limit the liability of the directorsto compensate us for any losses caused by them, as well as our ability to takeany action against them, subject to certain exclusions.

 

Thebusiness address for all of our officers and directors is 16/15 YauzskyBoulevard, Moscow 109028, Russian Federation.

 

**ManagementBoard**

** **

Thecomposition of our Management Board, which consists of our executive officers,is determined by the Board of Directors and consists of seven members: Tony D.Maher, Marina G. Kagan, Oleg E. Kuzmin, Gary Sobel, Silviu Popovici, Dmitry V.Ivanov and Gennady K. Krainov. Members of the Management Board are nominated bythe Chairman of the Management Board and confirmed by our Board of Directorsfor a term of three years. The Management Board is the collective executivebody of the Company and, under the direction of the Chairman of the ManagementBoard, is responsible for our day-to-day management. We indemnify each memberof our Management Board pursuant to agreements, under which we indemnify themagainst, among others, expenses and costs incurred by them in connection withany claims, suits or proceedings arising out of or as a result of their serviceas a Management Board member, subject to certain limitations. The agreementsalso limit the liability of the Management Board members to compensate us forany losses caused by them, as well as our ability to take any action againstthem, subject to certain exclusions.

 

119

----

Table of Contents

 

**Chairmanof the Management Board**

** **

Inaccordance with our charter, the Board of Directors appoints the Chairman ofour Management Board, our chief executive officer, for a term of five years.The rights, obligations and the times and amounts of payment for the Chairman’sservices are determined pursuant to our charter and by contract. The Chairmanof the Management Board is responsible for day-to-day management of ouractivities.

 

**Boardof Directors Committees**

** **

**AuditCommittee**

** **

TheAudit Committee of our Board of Directors was established on April 24,2003 by a decision of our Board of Directors and functions pursuant to bylawsapproved by the Board. It is currently comprised of three independentdirectors, M. Rhodes, E. Yasin and I Kostikov. Our Board of Directors hasdetermined that Marcus J. Rhodes is an “audit committee financial expert” asdefined in Item 16A of Form 20-F.

 

Thegoals and objectives of the Audit Committee, as set forth in the bylaws, are toassist the Board of Directors in carrying out its oversight responsibilities inthe areas of:

 

·                  our financialstatements and the processes of their preparation;

 

·                  our internalaccounting and financial control system;

 

·                  work of theinternal audit service and independent auditors;

 

·                  monitoring ofcrucial financial risks

 

·                  qualificationsand independence of the independent auditors;

 

·                  our compliancewith ethical principles; and

 

·                  requirements oflegislative and normative acts.

 

Accordingto the bylaws, the Audit Committee shall meet, separately from thenon-independent directors, at least once during each fiscal quarter and morefrequently as the Committee deems desirable.

 

**Investmentand Strategic Planning Committee**

** **

TheInvestment and Strategic Planning Committee of our Board of Directors wasformed on April 24, 2003 by a decision of our Board of Directors andfunctions pursuant to bylaws approved by the Board. It is composed of M. O’Neill,an independent director who serves as the Committee Chairman, S. Plastinin andM. Dubinin. According to its bylaws, the Investments and Strategic Planning Committeeis designed to assist the Board of Directors in approving and carrying out itsoversight responsibilities in relation to significant investment programs,mergers and acquisitions and strategic planning.

 

Accordingto the bylaws, the Investment and Strategic Planning Committee shall meet notless than once during each fiscal quarter.

 

**Personneland Compensation Committee**

** **

ThePersonnel and Compensation Committee of our Board of Directors was formed on April 24,2003 by a decision of our Board of Directors and functions pursuant to bylawsapproved by the Board. It is composed of E. Yasin, an independent directorwho serves as Committee Chairman, G. Yushvaev and A. Orlov. According to thebylaws, the Personnel and Compensation 

 

120

----

Table of Contents

 

Committee is tasked withassisting in the selection of Board of Directors candidates. Its members alsoassist the Management Board in formulating and implementing:

 

·                  a uniformpersonnel policy for all of our subsidiaries;

·                  a personnelappraisal, rotation, dismissal, education and training policy and administrativeaccounting standards;

·                  a remunerationand compensation policy, as well as other incentive programs (stock option andpension plans, social programs); and

·                  a corporateethics and communications policy.

 

Accordingto the bylaws, the Personnel and Compensation Committee shall meet not lessthan once during each fiscal quarter.

 

**CorporateGovernance Committee**

** **

TheCorporate Governance Committee of our Board of Directors was formed on June 1,2007 by a decision of our Board of Directors and functions pursuant to bylawsapproved by the Board. It is composed of G. de Selliers, who serves asCommittee Chairman, D. Iakobachvili and M. O’Neill. According to the bylaws,the Corporate Governance Committee is tasked with assisting to the Board ofDirectors in implementing its functions in the following areas:

 

·                  compliance withthe principles of corporate governance;

·                  development ofthe principles of corporate governance;

·                  evaluation of theindependence of the members of the Board of Directors;

·                  anticipating,avoiding and solving in case of necessity the conflicts of interests betweenthe Company and the Management Board, the Board of Directors and shareholders;

·                  determination ofthe best ways of interaction of the Board of Directors and /or its members withofficials and employees;

·                  organizing annualself-assessment of Board of Directors members.

 

Accordingto the bylaws, the Corporate Governance Committee shall meet not less than onceduring each fiscal quarter.

 

**CompanyCommittees**

 

**DisclosureCommittee**

 

OurDisclosure Committee was formed on March 24, 2003 by the order of theChairman of our Management Board. It is currently composed of our ChiefFinancial Officer, Head of PR, Head of the Legal Office, Head of the Treasury,Financial Comptroller, Heads of our Business Units, Financial and Head of theReporting, Budgeting and Analysis Department. The Committee’s activities arecoordinated by the senior investor relations manager.

 

TheDisclosure Committee functions pursuant to bylaws and meets as determined bythe Committee. It is directly supervised by and reports to the Chairman of theManagement Board and Chief Financial Officer.

 

Accordingto its bylaws, the Disclosure Committee is tasked with:

 

·                  overseeing thecollecting, evaluating and reporting of information relating to our disclosureobligations;

 

·                  evaluating oursystem of disclosure controls and procedures; and

 

121

----

Table of Contents

 

·                  preparing writtenconfirmations relating to our observance of the information disclosure rules andprinciples.

 

Asset forth in the bylaws, the Disclosure Committee is also responsible for allaspects of information disclosure, including ensuring proper documentaryexecution, transmission, implementation and performance of our rules andprinciples of information disclosure, as well as for coordinating the work ofour legal department, external and internal auditors and our other departmentsfor the purpose of preparation of our annual reports and other disclosuredocuments in accordance with applicable law.

 

**AuditCommission (for financial reporting under Russian law)**

 

TheAudit Commission verifies the accuracy of our financial reporting under Russianlaw and generally supervises our financial activity. The members of our AuditCommission are nominated and elected by our shareholders for a term of oneyear. A Director may not simultaneously be a member of the Audit Commission.Our Audit Commission currently has seven members: N. B. Volkova, I.A.Vershinina, N.L. Polikarpova, T.V. Propastina, E.S. Solntseva, G.S. Sergeev andT.V. Shavero. The Commission operates in accordance with terms set forth inspecific guidelines. The terms of all of our Audit Commission members expire onthe date of our next annual shareholders’ meeting, which will take place in May 2010.

 

**CorporateGovernance**

 

Weare required under the listing rules of New York Stock Exchange todisclose any significant differences between the corporate governance practicesthat we follow under Russian law and applicable listing standards and thosefollowed by U.S. domestic companies under New York Stock Exchange listingstandards. This disclosure is posted on our websitehttp://www.wbd.com/profile/governance/ and appears in section 16G in thisreport.

 

**D.Employees**

* *

In2009, we had an average of 16,299 employees within Russia and the othercountries of the CIS, including 8,828 production employees, 5,224 marketing,sales and distribution employees and 2,247 general and administrativeemployees. We do not employ a significant number of part-time employees. Ouremployee headcount declined in both 2008 and 2009 as a result of our headcount optimizationeffort. We have not experienced any work stoppages, and we consider our relationswith employees to be strong. Some of our employees are unionized and areemployed pursuant to collective labor agreements.

 
| **Average for the year ended********December 31,** | ** ** | **Production** | ** ** | **Marketing Sales********and********Distribution** | ** ** | **General and********Administrative** | ** ** | **Percent Change********over Prior Year** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|------------|----------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
|   2009                                                            |       | 8,828          |       | 5,224                                              |       | 2,247                                      |       | -12                                       | %          |
|   2008                                                            |       | 9,822          |       | 6,005                                              |       | 2,658                                      |       | -7                                        | %          |
|   2007                                                            |       | 11,076         |       | 5,712                                              |       | 3,008                                      |       | 2                                         | %          |

 

Our personnel enjoy a relatively high level of socialbenefits. We provide subsidies for meals, medical care and summer vacations foremployees and their children. Our employees have opportunities to upgrade theirqualifications by participating in professional and management educationprograms. We seek to maintain effective management teams at our plants byrecruiting qualified new employees, as well as through customized retrainingprograms and on-site training in our leading plants. Programs for trainingpersonnel have been developed and implemented at all our regional plants aswell as at our sales offices and corporate headquarters. In addition, since2005, our corporate university has provided our personnel with professionaltraining, development and advancement opportunities as well as a forum forsharing their knowledge and experience. In 2009, we focused on professional education and development for bothsales and production personnel. We also implemented performance appraisalprocedures in accordance with the Hay 

 

122

----

Table of Contents

 

Guide Chart,allowing us to assess the individual performance of our employees and areas fortheir further development.

 

**E. Share Ownership**

 

Theaggregate beneficial interest of our directors, senior management and employeesas of April 20, 2010 was as follows:

 
| **Number of Shares of********Common Stock** | ** ** | **Number of GDSs** | ** ** | **% Capital Stock Outst********anding** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|
| 16,140,110                                                      |       | 9,116,780                    |       | 41.9                                                   |       |

 

For further descriptionof the individual interest of our directors and senior management, see “Item 7.Major Shareholders and Related Party Transactions—A. Major Shareholders.”

 

## ***Item7.  Major Shareholders and Related PartyTransactions***

 

**A. MajorShareholders**

 

The following table setsforth information regarding the beneficial ownership of our common stock as of April 20,2010:

 
| **Name of Beneficial Owner**    | ** ** | **Number of********shares********owned** | ** ** | **Percentage********of Shares********Outstanding** | ** ** | **Number of********Shares********Owned in the********Form of********ADSs/GDSs*** | ** ** | **Percentage********of Shares********Outstanding** | ** ** | **Total Number of********Shares Owned********(Shares+Shares********Owned in the form********of ADSs/GDSs)** | ** ** | **Total Percentage********of Shares********Outstanding********(Shares +********ADSs/GDSs)** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| Gavril A. Yushvaev(1)(2)                       |       | 7,590,880                                     |       | 17.3                                                    | %          | 1,038,638                                                                                  |       | 2.4                                                     | %          | 8,629,518                                                                                                   |       | 19.6                                                                                                       | %          |
| Sergei A. Plastinin(1)(2)                      |       | 1,713,604                                     |       | 3.9                                                     | %          | —                                                                                     |       | —                                                  |       | 1,713,604                                                                                                   |       | 3.9                                                                                                        | %          |
| David Iakobachvili(1)(2)                       |       | 3,814,852                                     |       | 8.7                                                     | %          | 803,783                                                                                    |       | 1.8                                                     | %          | 4,618,635                                                                                                   |       | 10.5                                                                                                       | %          |
| Mikhail V. Dubinin(1)(2)                       |       | 1,809,260                                     |       | 4.1                                                     | %          | 264,112                                                                                    |       | 0.6                                                     | %          | 2,073,372                                                                                                   |       | 4.7                                                                                                        | %          |
| I.M. Arteks Holdings Limited                   |       | 183,639                                       |       | 0.4                                                     | %          | —                                                                                     |       | —                                                  |       | 183,639                                                                                                     |       | 0.4                                                                                                        | %          |
| Alexander S. Orlov(1)(2)                       |       | 1,201,064                                     |       | 2.7                                                     | %          | 172,662                                                                                    |       | 0.4                                                     | %          | 1,373,726                                                                                                   |       | 3.1                                                                                                        | %          |
| Mikhail I. Vishnyakov(2)                       |       | 200,000                                       |       | 0.5                                                     | %          | 100,000                                                                                    |       | 0.2                                                     | %          | 300,000                                                                                                     |       | 0.7                                                                                                        | %          |
| Viktor E. Evdokimov(2)                         |       | —                                        |       | —                                                  |       | 22,178                                                                                     |       | 0.1                                                     | %          | 22,178                                                                                                      |       | 0.05                                                                                                       | %          |
| Dmitry V. Ivanov                               |       | 10,450                                        |       | 0.02                                                    | %          | —                                                                                     |       | —                                                  |       | 10,450                                                                                                      |       | 0.02                                                                                                       | %          |
| Wimm-Bill-Dann Finance LLC (treasury stocks)   |       | 2,539,478                                     |       | 5.8                                                     | %          | —                                                                                     |       | —                                                  |       | 2,539,478                                                                                                   |       | 5.8                                                                                                        | %          |
| Wimm-Bill-Dann Beverages LLC (treasury stocks) |       | 100,000                                       |       | 0.2                                                     | %          | —                                                                                     |       | —                                                  |       | 100,000                                                                                                     |       | 0.2                                                                                                        | %          |
| Other holders of ordinary shares               |       | 7,241,873                                     |       | 16.5                                                    | %          | —                                                                                     |       | —                                                  |       | 7,241,873                                                                                                   |       | 16.5                                                                                                       | %          |
| Holders of American Shares(3)                  |       | —                                        |       | —                                                  |       | 15,193,527                                                                                 |       | 34.5                                                    | %          | 15,193,527                                                                                                  |       | 34.5                                                                                                       | %          |
| **Total**                                      | ** ** | **26,405,100**                                | ** ** | **60.0**                                                | **%**      | **17,594,900**                                                                             | ** ** | **40.0**                                                | **%**      | **44,000,000**                                                                                              | ** ** | **100.0**                                                                                                  | **%**      |

 

----

* -The number and percentage of ordinary sharesunderlying the ADSs and GDSs are presented in these columns. The actual numberof ADSs and GDSs owned can be derived by dividing the number of ordinary sharespresented by four, reflecting the ratio change that took effect on November 17,2009 (whereby the former ratio of 1 ADS/GDS per 1 ordinary share was changed to4 ADSs/GDSs per 1 ordinary share).

 

(1) Member of our Board of Directors.

 

(2) Party to the Amended and Restated Partnershipand Cooperation Agreement.

 

(3) To the best to our knowledge, Groupe Danone,together with its subsidiaries, holds an 18.4% stake in Wimm-Bill- Dann FoodsOJSC.

 

As of April 20, 2010, we had 44,000,000 shares ofauthorized and issued common stock, and 41,360,522 outstanding shares. On October 16,2009, we amended our deposit agreement in order to change the ratio of our ADSsand GDSs from 1 Russian ordinary share represented by 1 depositary share (DS)to 1 Russian ordinary share represented by 4 DSs. The ratio change became 

 

123

----

Table of Contents

 

effective as of November 17, 2009.  As of April 20,2010, the total number of ADSs outstanding was 65,045,688 representingunderlying ownership of 16,261,422 shares, or 36.96 % of our outstanding shares.The total number of GDSs outstanding was 5,333,912 representing underlyingownership of 1,333,478 shares, or 3.03 % of our outstanding shares. The sharesunderlying the ADSs and GDSs are deposited with Deutsche Bank Trust CompanyAmericas and the local custodian is Deutsche Bank LLC. According to CapitalBridge Analytics, based on to the latest reported ownership available with theSEC, we have 79 record holders in the U.S., holding ADSs and/or sharescomprising at least 10.93% of our total outstanding share capital.

 

Basedon our share register, we believe we are not directly or indirectly owned orcontrolled by another corporation or government, and that there are noarrangements the operation of which may result in a change of control.

 

In 2006 through 2009, our shareholders entered intoseveral transactions thus changing their shareholdings as follows: Gavril A.Yushvaev increased his shareholding from 19.45% in 2006 to 19.61% in 2009;Sergei A. Plastinin decreased his shareholding from 8.58% in 2006 to 5.95% in2007, to 5.11% in 2008, to 4.08% in 2009 and to 3.9% in 2010; DavidIakobachvili increased his shareholding from 10.14% in 2006 to 10.34% in 2007and 10.50% in 2008; Mikhail V. Dubinin decreased his shareholding from 4.92% in2006 to 4.71% in 2007; Alexander S. Orlov increased his shareholding from 3.02%in 2006 to 3.12% in 2007; and Mikhail I. Vishnyakov decreased his shareholdingfrom 1.00% in 2006 to 0.68% in 2007.

 

In the period December 2008 through February 24,2010, our 100% subsidiary Wimm-Bill-Dann Finance LLC acquired 2,639,478 of ourordinary shares, amounting to 6.0% of our total share capital. In addition,from December 2009 through February 2010, our 100% subsidiaryWimm-Bill-Dann Beverages OJSC received from Wimm-Bill-Dann Finance LLC 100,000ordinary shares, amounting to 0.23% of our outstanding share capital.  For more information, see “Item16E.  Purchases of Equity Securities by the Issuer and AffiliatedPurchasers.”

 

**B.Related Party Transactions**

** **

Wehave engaged in a number of transactions with companies directly or indirectlycontrolled by us as well as with companies directly or indirectly controlled byor affiliated with certain of our directors and key shareholders. Thesetransactions included the following:

 

***Milk Suppliers.*** During 2009, 2008 and 2007, we purchased milk fromcertain milk supplying companies, which are controlled by members of ourcontrol group of shareholders, amounting to $18.8 million, $15.3 million and$17.5 million, respectively. As of December 31, 2009 and 2008 accountspayable to these milk-supplying companies in respect of milk received amountedto $0.9 million and $0.5 million, respectively. We believe these transactionswere on market terms.

 

**C.Interests of Experts and Counsel**

** **

Notapplicable.

 

## ***Item8. Financial Information***

## *** ***

**A.Consolidated Statements and Other Financial Information**

** **

**8.A.1-4**See “Item 18. Financial Statements”

** **

**8.A.5**Not applicable.

 

**8.A.6Export Sales**

** **

“SeeItem 4. Information on Our Company—B. Business—Sales and Distribution—Distribution—Exportprogram” for a description of our export sales and activity.

 

124

----

Table of Contents

 

**8.A.7 Litigation**

** **

Other than the legal claims and proceedings describedbelow, we are not involved in any claims or legal proceedings that we believeto be material.

 

FAS Claims

 

Following the sudden and, in some cases, substantialincreases in food prices in 2007, FAS initiated inspections of food producers,including us, as well as distributors and retail chains throughout Russia inorder to determine whether these price increases were caused by price collusionamong producers and retailers. We and most of our key competitors in the dairysegment have been subject to several regional and federal FAS investigationssince 2007.  For a description of pastand pending investigations and litigation, see “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business and Industry—Any finding by FAS that ourbusinesses have acted in violation of the antimonopoly laws may result in theimposition of substantial fines and the imposition of government-determinedprices, restrictions on our activities or expansion, or government-mandated withdrawalfrom regions or markets where we currently operate, which could have a materialadverse effect on our business, financial condition, results of operations andprospects.”

 

Tax Claims

 

In2008, the Russian tax authorities carried out an audit of Wimm-Bill-Dann OJSCfor fiscal years 2004 through 2006 and found some of our suppliers negligent inpaying or complying with their tax obligations. As a result, the authoritiesdemanded that we reimburse VAT and income tax in the aggregate amount ofapproximately $7.8 million. In November 2008, we appealed this decision tohigher tax authorities and in the court of first instance. The higher taxauthorities partially invalidated these claims and reduced the total claims toapproximately $2.0 million. In March 2010, the court of first instanceupheld claim of tax authorities in the amount of $2.0 million. We plan toappeal this ruling. For a description of this and certain other tax-relatedrisks, see “Item 3. Key Information—D. Risk Factors—Risks Relating to OurFinancial Condition—Failures or alleged failures by our suppliers to complywith their tax obligations may negatively affect our ability to recover VAT andincrease our tax liabilities” and “—If the various initiatives we have used toreduce our tax burden are successfully challenged and/or our ability to recoverVAT and take advantage of certain tax benefits are disallowed by the Russiantax authorities, we may face significant losses associated with the assessedamount of tax deemed underpaid and related interest and penalties, which wouldhave a material adverse effect on our financial condition and results ofoperations.”

 

**8.A.8Dividend Distribution Policy**

** **

Wehave a formal dividend policy, approved by our Board of Directors. Dividendpayments, if any, must be recommended by our board of directors and approved byour shareholders. In particular, dividends may be paid only out of net profitsfor the current year calculated under Russian accounting principles and as longas the following conditions have been met:

 

·                  our chartercapital has been paid in full;

·                  the value of ournet assets, minus the proposed dividend payment, is greater than the total ofour charter capital and our reserve fund;

·                  we haverepurchased all shares from shareholders having the right to demand repurchase;and

·                  we are not, andwould not become as the result of payment of dividends, insolvent.

 

125

----

Table of Contents

 

InJune 2007, the Annual General Meeting of Shareholders approved payment ofdividends, recommended by the board, for the full year 2006 in the amount ofRUR 3.18 (approximately $0.12) per share. The preceding dividends have, in eachcase, been paid to shareholders.

 

Weanticipate that any dividends we may pay in the future on the sharesrepresented by the ADSs will be declared and paid to the depositary in rublesand will be converted into U.S. dollars by the depositary and distributed toholders of ADSs, net of the depositary’s fees and expenses. Accordingly, thevalue of dividends received by holders of ADSs will be subject to fluctuationsin the exchange rate between the ruble and the U.S. dollar. For a discussion ofour policy on dividend distributions, see “Item 10. Additional Information—B.Charter and Certain Requirements of Russian Legislation—Dividends.”

 

**B.Significant Changes**

** **

In February 2010 wepurchased from the open market 485,500 shares into treasury, which constitute1.10% of the Company’s share capital, for total consideration of $22.8 million.

 

On February 10, 2010 theCompany repaid ruble loan to Moscow Production Resources Department in the amount of 411.5 million rubles, theequivalent of $13.6 million and $13.5 million at the exchange rates at December 31,2009 and February 10, 2010, respectively.

 

## ***Item9. Offer and Listing Details***

## *** ***

(Onlyitems 9.A.4 and 9.C are applicable.)

 

**A. MarketPrice Information**

** **

Thefollowing table sets forth the monthly high and low market closing prices perADS on the New York Stock Exchange for each of the most recent six months; thequarterly high and low market closing prices per ADS for each quarter of 2008and 2009, the first quarter of 2010 and for the period April 1, 2010through April 20, 2010; and the annual high and low market closing pricesper ADS during 2005, 2006, 2007, 2008, 2009 and 2010. Also set forth are thehigh and low market closing prices for shares of our common stock on the RTS.

 

126

----

Table of Contents

 
| ** **          | ** ** | **Shares of Common Stock** | ** ** | **ADS** | ** ** |
|---------------------|------------|----------------------------|------------|---------|------------|
| ** **          | ** ** | **High**                   | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| April 2010     |       | $                          | 58.19      |    | $          | 52.50 |   | $ | 23.93 |   | $ | 21.84 |   |
| March 2010     |       | $                          | 55.81      |    | $          | 50.19 |   | $ | 23.30 |   | $ | 18.50 |   |
| February 2010  |       | $                          | 66.15      |    | $          | 43.56 |   | $ | 22.43 |   | $ | 19.78 |   |
| January 2010   |       | $                          | 52.89      |    | $          | 43.47 |   | $ | 25.97 |   | $ | 18.88 |   |
| December 2009  |       | $                          | 52.24      |    | $          | 40.11 |   | $ | 24.00 |   | $ | 19.68 |   |
| November 2009  |       | $                          | 44.30      |    | $          | 33.33 |   | $ | 78.77 |   | $ | 18.95 |   |
| First Quarter 2010  |       | $                          | 66.15      |    | $          | 43.47 |   | $ | 25.97 |   | $ | 18.50 |   |
| Fourth Quarter 2009 |       | $                          | 52.24      |    | $          | 33.33 |   | $ | 84.94 |   | $ | 18.95 |   |
| Third Quarter 2009  |       | $                          | 40.89      |    | $          | 28.55 |   | $ | 73.07 |   | $ | 49.30 |   |
| Second Quarter 2009 |       | $                          | 41.92      |    | $          | 16.99 |   | $ | 63.98 |   | $ | 30.70 |   |
| First Quarter 2009  |       | $                          | 17.50      |    | $          | 11.47 |   | $ | 36.60 |   | $ | 21.50 |   |
| Fourth Quarter 2008 |       | $                          | 32.28      |    | $          | 11.02 |   | $ | 64.04 |   | $ | 13.68 |   |
| Third Quarter 2008  |       | $                          | 71.02      |    | $          | 31.76 |   | $ | 105.25 |   | $ | 63.87 |   |
| Second Quarter 2008 |       | $                          | 83.41      |    | $          | 72.35 |   | $ | 138.85 |   | $ | 104.58 |   |
| First Quarter 2008  |       | $                          | 92.79      |    | $          | 69.83 |   | $ | 144.40 |   | $ | 90.00 |   |
| 2009                |       | $                          | 52.24      |    | $          | 11.47 |   | $ | 84.94 |   | $ | 18.95 |   |
| 2008                |       | $                          | 92.79      |    | $          | 11.02 |   | $ | 144.40 |   | $ | 13.68 |   |
| 2007                |       | $                          | 88.88      |    | $          | 49.13 |   | $ | 134.93 |   | $ | 56.49 |   |
| 2006                |       | $                          | 56.24      |    | $          | 25.20 |   | $ | 66.59 |   | $ | 22.60 |   |
| 2005                |       | $                          | 19.25      |    | $          | 15.50 |   | $ | 24.10 |   | $ | 14.42 |   |

 

**C.Markets**

 

InRussia, our common stock is listed on the RTS under the symbol “WBDF,” and isadmitted for trading on the Moscow Interbank Currency Exchange (MICEX).American Depositary Receipts, each representing one share of our common stock,have been listed on the New York Stock Exchange under the symbol “WBD” since February 8,2002. Our American Depositary Receipts are also traded on the Frankfurt StockExchange pursuant to a broker-established unsponsored facility.

 

## ***Item10. Additional Information***

 

**A.Share Capital**

 

Notapplicable.

 

**B.Charter and Certain Requirements of Russian Legislation**

 

Wedescribe below material provisions of our charter in effect on the date of thisdocument and certain requirements of Russian legislation. In addition to thisdescription, we urge you to review our charter to learn its complete terms.

 

**OurPurpose**

 

Article 4.1of our charter provides that our main goal is to provide the fullest andhighest-quality satisfaction of the needs of legal entities and individuals forthe products and services we offer, as well as to generate profits.

 

Weare registered with the Moscow Inter-District Inspectorate No. 39 of theRussian Ministry of Taxes and Duties under the state registration number1037700236738.

 

**GeneralMatters**

** **

Pursuantto our charter, we have the right to issue registered shares of common stock,shares of preferred stock and other securities provided for by legal acts ofthe Russian Federation with respect to securities. Our capital stock currentlyconsists of 44,000,000 common shares, each with a nominal value of 20 rubles,all of which are fully paid and issued. Our outstanding stock as of December 31,2009 consisted of 41,846,022 shares. Under Russian legislation, charter capitalrefers to the aggregate nominal value of the issued and outstanding shares. Weare also authorized

 

127

----

Table of Contents

 

to issue 44,000,000common shares with a nominal value of 20 rubles each. No preferred shares are authorizedor outstanding. Preferred shares may only be issued if corresponding amendmentshave been made to our charter pursuant to a resolution of the general meetingof shareholders. We have issued only shares of common stock. The Federal Law onJoint Stock Companies requires us to dispose of any of our shares that weacquire within one year of their acquisition or, failing that, reduce ourcharter capital. We refer to such shares as treasury shares for the purposeshereof. Russian legislation does not allow for the voting of such treasuryshares.

 

**RightsAttaching to Shares**

** **

Holdersof our common stock have the right to vote at all shareholders’ meetings. Asrequired by the Federal Law on Joint-Stock Companies and our charter, allshares of our common stock have the same nominal value and grant identicalrights to their holders. Each fully paid share of common stock, except fortreasury shares, gives its holder the right to:

 

·                  freely transferthe shares without consent of other shareholders;

 

·                  receivedividends;

 

·                  participate inshareholders’ meetings and vote on all matters within shareholders’ competence;

 

·                  transfer votingrights to its representative on the basis of a power of attorney;

 

·                  participate inthe election and dismissal of members for the board of directors and reviewcommission;

 

·                  if holding, aloneor with other holders, 2% or more of the voting stock, within 30 days afterthe end of our fiscal year, make proposals for the agendas of the annualshareholders’ meeting and nominate candidates to the board of directors,counting commission, review commission;

 

·                  if holding, aloneor with other holders, 10% or more of the voting stock, demand from the boardof directors the calling of an extraordinary shareholders’ meeting or anunscheduled audit by the review commission or an independent auditor;

 

·                  demand, under thefollowing circumstances, the repurchase by us of all or some of the sharesowned by it, as long as such holder voted against or did not participate in thevoting on the decision approving the following:

 

·                  any reorganization;

 

·                  the conclusion of a majortransaction, as defined under Russian law; and

 

·                  any amendment of ourcharter or approval of a restated version of our charter in a manner thatrestricts the holder’s rights;

 

·                  upon liquidation,receive a proportionate amount of our property after our obligations arefulfilled;

 

·                  have access tocertain company documents, receive copies for a reasonable fee and, if holdingalone or with other holders, 25% or more of the voting stock, have free accessto accounting documents and minutes of the company’s management board meetings;and

 

·                  exercise otherrights of a shareholder provided by our charter, Russian legislation and decisionsof shareholders’ meeting approved in accordance with its competence.

 

**PreemptiveRights**

 

TheFederal Law on Joint Stock Companies and our charter provide existingshareholders with a preemptive right to purchase shares or securitiesconvertible into shares during an open subscription in the amount proportionateto their existing shareholdings. In addition, the Federal Law on Joint StockCompanies provides shareholders with a preemptive right to purchase shares or

 

128

----

Table of Contents

 

securities convertibleinto shares, in an amount proportionate to their existing shareholdings, duringa closed subscription if the shareholders voted against or did not participatein the voting on the decision approving such subscription. The preemptive rightdoes not apply to a closed subscription to existing shareholders provided thatsuch shareholders may each acquire a whole number of shares or securitiesconvertible into shares being placed in an amount proportionate to theirexisting shareholdings. We must provide shareholders with written notice oftheir preemptive right to purchase shares and the period during whichshareholders can exercise their preemptive rights. Such period may not be lessthan 20 or, under certain circumstances, 45 days. We cannot sell theshares or securities convertible into shares which are subject to preemptiverights during this period.

 

**Dividends**

** **

TheFederal Law on Joint Stock Companies and our charter set forth the procedurefor determining the interim and annual dividends that we may distribute to ourshareholders. We may declare dividends based on our first quarter, six month,nine month or annual results. Dividends are recommended to a shareholders’meeting by a majority vote of the board of directors, and approved by theshareholders’ meeting by a majority vote. A decision on quarterly, six monthand nine month dividends must be taken within three months of the end of therespective period at the shareholders’ meeting; and a decision on annualdividends must be taken at the annual general shareholders’ meeting. Thedividend approved at the shareholders’ meeting may not be more than the amountrecommended by the board of directors. Dividends are distributed to holders ofour shares as of the record date for the shareholders’ meeting approving thedividends. See “—General Meetings of Shareholders—Notice and Participation.”Dividends are not paid on treasury shares.

 

TheFederal Law on Joint Stock Companies allows dividends to be declared only outof net profits calculated under Russian accounting standards and as long as thefollowing conditions have been met:

 

·                  the chartercapital of the company has been paid in full;

 

·                  the value of thecompany’s net assets on the date of adoption of a decision to pay dividends isnot less (and would not become less as a result of the proposed dividend payment)than the sum of the company’s charter capital, the company’s reserve fund andthe difference between the liquidation value and the par value of the issuedand outstanding preferred shares of the company;

 

·                  the company hasrepurchased all shares from shareholders having the right to demand repurchase;and

 

·                  the company isnot, and would not become, insolvent as the result of the proposed dividendpayment.

 

**Distributionsto Shareholders on Liquidation**

** **

UnderRussian legislation, liquidation of a company results in its terminationwithout the transfer of rights and obligations to other persons as legalsuccessors. The Federal Law on Joint-Stock Companies and our charter allow usto be liquidated:

 

·                  by a three-quartersmajority vote of a shareholders’ meeting; or

 

·                  by a court order.

 

Followinga decision to liquidate us, the right to manage our affairs would pass to aliquidation commission appointed by a shareholders’ meeting. In the event of aninvoluntary liquidation, the court may vest the duty to liquidate the companyto its shareholders. Creditors may file claims within a period to be determinedby the liquidation commission, but such period must not be less than two monthsfrom the date of publication of notice of liquidation by the liquidation commission.

 

129

----

Table of Contents

 

TheCivil Code of the Russian Federation gives creditors the following order ofpriority during liquidation:

 

·                  individuals owedcompensation for injuries, deaths or moral damages;

 

·                  employees;

 

·                  federal and localgovernmental entities claiming taxes and similar payments to the federal andlocal budgets and to non-budgetary funds; and

 

·                  other creditorsin accordance with Russian legislation.

 

Claimsof creditors in obligations secured by a pledge of the company’s property (“securedclaims”) are satisfied out of the proceeds of sale of the pledged property priorto claims of any other creditors except for the creditors of the first andsecond priorities described above, provided that claims of such creditors arosebefore the pledge agreements in respect of the company’s property were made. Tothe extent that the proceeds of sale of the pledged property are not sufficientto satisfy secured claims, the latter are satisfied simultaneously with claimsof the fourth priority creditors as described above.

 

TheFederal Law on Insolvency (Bankruptcy), however, provides for a different orderof priority for creditors’ claims in the event of bankruptcy.

 

Theremaining assets of a company are distributed among shareholders in thefollowing order of priority:

 

·                  payments torepurchase shares from shareholders having the right to demand repurchase;

 

·                  payments ofdeclared but unpaid dividends on preferred shares and the liquidation value ofthe preferred shares determined by the company’s charter, if any; and

 

·                  payments toholders of common and preferred shares.

 

**Liabilityof Shareholders**

 

TheCivil Code of the Russian Federation and the Federal Law on Joint StockCompanies generally provide that shareholders in a Russian joint stock companyare not liable for the obligations of a joint stock company and bear only therisk of loss of their investments. This may not be the case, however, when oneperson or entity is capable of determining decisions made by another person orentity. The person or entity capable of determining such decisions is called an“effective parent.” The person or entity whose decisions are capable of beingso determined is called an “effective subsidiary.” The effective parent bearsjoint and several responsibility for transactions concluded by the effectivesubsidiary in carrying out these decisions if:

 

·                  thisdecision-making capability is provided for in the charter of the effectivesubsidiary or in a contract between such persons; and

 

·                  the effectiveparent gives binding instructions to the effective subsidiary.

 

Thus,a shareholder of an effective parent is not itself liable for the debts of theeffective parent’s effective subsidiary, unless that shareholder is itself aneffective parent of the effective parent. Accordingly, a shareholder will notbe personally liable for our debts or those of our effective subsidiariesunless such shareholder controls our business and the conditions set forthabove are met.

 

Inaddition, an effective parent is secondarily liable for an effective subsidiary’sdebts if an effective subsidiary becomes insolvent or bankrupt resulting fromthe action or omission of an effective parent only when the effective parenthas used the right to give binding instructions knowing that they would resultin insolvency of the effective subsidiary. This is the case no matter how theeffective parent’s capability to determine decisions of the effectivesubsidiary arises, such as through ownership of voting securities or bycontract. In these instances, other shareholders of the effective subsidiarymay claim compensation for the effective subsidiary’s losses from the

 

130

----

Table of Contents

 

effective parent thatcaused the effective subsidiary to take any action or fail to take any actionknowing that such action or failure to take action would result in losses.

 

**Alterationof Capital**

** **

**CharterCapital Increase**

** **

Wemay increase our charter capital by:

 

·                  issuing newshares, or

 

·                  increasing thenominal value of previously issued shares.

 

Adecision on any issuance of shares or securities convertible into shares byclosed subscription, or an issuance by open subscription of common shares orsecurities convertible into common shares constituting 25% or more of thenumber of issued common shares, requires a three-quarters majority vote of ashareholders’ meeting. In addition, a decision to increase the charter capitalby increasing the nominal value of issued shares requires a majority vote of ashareholders’ meeting. In addition, the issuance of shares above the number ofauthorized and non-issued shares provided in our charter necessitates a charteramendment, which requires a three-quarters majority vote of a shareholders’meeting.

 

TheFederal Law on Joint Stock Companies requires that the value of newly issuedshares be determined by the board of directors based on their market value butnot less than their nominal value. The price of newly issued shares forexisting shareholders exercising their preemptive right to purchase sharescould be less than the price paid by third parties, but not less than 90% ofthe price paid by third parties. Fees paid to intermediaries may not exceed 10%of the shares placement price. The board of directors shall value any in-kindcontributions for new shares, based on the appraisal report of an independentappraiser.

 

Russiansecurities regulations set out detailed procedures for the issuance andregistration of shares of a Joint-Stock company. These procedures require:

 

·                  priorregistration of a share issuance with the FSFM;

 

·                  public disclosureof information relating to the share issuance; and

 

·                  following theplacement of the shares, registration and public disclosure of the results ofthe placement of shares.

 

**CharterCapital Decrease; Share Buy-Backs**

 

TheFederal Law on Joint-Stock Companies does not allow a company to reduce itscharter capital below the minimum charter capital required by law, which is100,000 rubles for an open Joint-Stock company. The Federal Law on Joint StockCompanies requires that any decision to reduce our charter capital, whetherthrough the repurchase and cancellation of shares or a reduction in the nominalvalue of the shares, be made by a three-quarter majority vote of a shareholders’meeting. Additionally, within 30 days of a decision to reduce our chartercapital, we must issue a written notice to our creditors and publish thisdecision. Our creditors would then have the right to demand, within30 days of publication or receipt of our notice, early termination ordischarge of relevant obligations by us, as well as compensation for damages.

 

TheFederal Law on Joint-Stock Companies and our charter allow our shareholders orour board of directors to authorize the repurchase of up to 10% of our sharesin exchange for cash. The repurchased shares must be resold at market valuewithin one year of their repurchase or, failing that, the shareholders mustdecide to cancel such shares and decrease the charter capital. The sharesrepurchased pursuant to a decision of our shareholders’ meeting to decrease theoverall number of shares, are canceled at their redemption. Repurchased sharesdo not bear voting rights.

 

131

----

Table of Contents

 

TheFederal Law on Joint-Stock Companies allows us to repurchase our shares onlyif, at the time of repurchase:

 

·                  our chartercapital is paid in full;

 

·                  we are not andwould not become, as a result of the repurchase, insolvent;

 

·                  the value of ournet assets at the time of repurchase of our shares is not less (and would notbecome less, as a result of the proposed repurchase) than the sum of ourcharter capital, the reserve fund and the difference between the liquidationvalue and par value of our issued and outstanding preferred shares; and

 

·                  we haverepurchased all shares from shareholders having the right to demand repurchaseof their shares in accordance with Russian law, as described immediately below.

 

TheFederal Law on Joint-Stock Companies and our charter provide that ourshareholders may demand repurchase of all or some of their shares so long asthe shareholder demanding repurchase voted against or did not participate inthe voting on the decision approving any of the following actions:

 

·                  reorganization;

 

·                  conclusion of amajor transaction, as defined under Russian law; or

 

·                  amendment of ourcharter or approval of a restated version of our charter in a manner whichrestricts shareholders’ rights.

 

Wemay spend up to 10% of our net assets calculated under Russian AccountingStandards on the date of the adoption of the decision which gives rise to ashare redemption demanded by the shareholders. If the value of the shares inrespect of which shareholders have exercised their right to demand repurchaseexceeds 10% of our net assets, we will repurchase shares from each suchshareholder on a pro-rata basis.

 

**Registrationand Transfer of Shares**

** **

Russianlegislation requires that a Joint-Stock company maintain a register of itsshareholders. Ownership of our registered shares is evidenced solely by entriesmade in such register. Any of our shareholders may obtain an extract from ourregister certifying the number of shares that such shareholders hold. Since July 14,2001, Central Moscow Depository OJSC has maintained our register ofshareholders.

 

Thepurchase, sale or other transfer of shares is accomplished through theregistration of the transfer in the shareholder register, or the registrationof the transfer with a depositary if shares are held by a depositary. Theregistrar or depositary may not require any documents in addition to thoserequired by Russian legislation in order to transfer shares in the register.Refusal to register the shares in the name of the transferee or, upon request ofthe beneficial holder, in the name of a nominee holder, is not allowed exceptin certain instances provided for by Russian legislation, and may be challengedin court.

 

**ReserveFund**

** **

Russianlegislation requires that each Joint-Stock company establish a reserve fund tobe used only to cover the company’s losses, redeem the company’s bonds andrepurchase the company’s shares in cases when other funds are not available.Our charter provides for a reserve fund of 5% of our charter capital, thereserve fund is fully paid.

 

132

----

Table of Contents

 

**Disclosureof Information**

** **

Russiansecurities regulations require us to make the following periodic publicdisclosures and filings:

 

·                  filing quarterlyreports with the Federal Financial Market Service (FSFM) and posting on ourwebsite quarterly reports containing information about us, our shareholders anddepositary, the structure of our management bodies, the members of the board ofdirectors, our branches and representative offices, our shares, bank accountsand auditors, important developments during the reporting quarter and otherinformation about our financial and business activity;

 

·                  filing with theFSFM and publishing any information concerning material facts and changes inour financial and business activity, including our reorganization, certainchanges in the amount of our assets, decisions on share issuances, certainchanges in ownership and shareholding, as well as shareholder and certain boardof director resolutions;

 

·                  disclosing ourcharter and internal corporate governance documents on our website;

 

·                  disclosinginformation on various stages of share placement, issuance and registrationthrough publication of certain data as required by the securities regulations;

 

·                  disclosing ourannual report and annual financial statements prepared in accordance withRussian accounting standards;

 

·                  filing with theFSFM on a quarterly basis a list of our affiliated persons and disclosing thesame on our website, on the same basis; and

 

·                  other informationas required by applicable Russian securities legislation.

 

**GeneralMeetings of Shareholders**

** **

***Procedure***

 

Thepowers of a shareholders’ meeting are set forth in the Federal Law onJoint-Stock Companies and in our charter. A shareholders’ meeting may notdecide on issues that are not included in the list of its competence by theFederal Law on Joint-Stock Companies and our charter. Among the issues whichthe shareholders have the power to decide are:

 

·                  charteramendments;

 

·                  reorganization orliquidation;

 

·                  election andremoval of the members of the board of directors;

 

·                  determination ofthe number, nominal value, category/type of authorized shares and rightsgranted by such shares;

 

·                  changes in ourcharter capital;

 

·                  appointment andremoval of the members of our review commission and counting commission;

 

·                  approval of ourexternal auditor;

 

·                  approval ofcertain interested party transactions and major transactions;

 

·                  distribution ofprofits and losses, including approval of dividends;

 

·                  redemption by thecompany of issued shares in cases provided for by the Federal Law on JointStock Companies;

 

·                  decision on ourparticipation in holding companies, commercial or industrial groups or otherassociations of commercial entities;

 

·                  approval ofcertain internal documents and corporate records; and

 

133

----

Table of Contents

 

·                  other issues, asprovided for by the Federal Law on Joint-Stock Companies and our charter.

 

Votingat a shareholders’ meeting is generally based on the principle of one vote pershare of common stock, with the exception of the election of the board ofdirectors, which is done through cumulative voting. Decisions are generallypassed by a majority vote of the voting shares present at a shareholders’meeting. However, Russian law requires a three-quarters majority vote of thevoting shares present at a shareholders’ meeting to approve the following:

 

·                  charteramendments;

 

·                  reorganization orliquidation;

 

·                  majortransactions involving assets in excess of 50% of the balance sheet value ofthe company’s assets;

 

·                  determination ofthe number, nominal value and category (type) of authorized shares and therights granted by such shares;

 

·                  repurchase by thecompany of its issued shares;

 

·                  any issuance ofshares or securities convertible into shares of common stock by closedsubscription;

 

·                  issuance by opensubscription of shares of common stock or securities convertible into commonstock, in each case, constituting 25% or more of the number of issued and outstandingshares of common stock; or

 

·                  reduction of thecharter capital through reduction of the nominal value of shares.

 

Thequorum requirement for our shareholders’ meetings is met if shareholders (ortheir representatives) accounting for more than 50% of the issued voting sharesare present. If the 50% quorum requirement is not met, another shareholders’meeting with the same agenda may (and, in the case of an annual shareholders’meeting, must) be scheduled and the quorum requirement is satisfied ifshareholders (or their representatives) accounting for at least 30% of theissued voting shares are present at that meeting.

 

Theannual shareholders’ meeting must be convened by the board of directors betweenMarch 1 and June 30 of each year, and the agenda must include thefollowing items:

 

·                  election ofmembers of the board of directors;

 

·                  approval of theannual report and the annual financial statements, including the balance sheetand profit and loss statement;

 

·                  approval ofdistribution of profits, including approval of annual dividends and losses, ifany;

 

·                  appointment of anindependent auditor; and

 

·                  appointment ofthe member of the review commission.

 

Ashareholder or group of shareholders owning in the aggregate at least 2% of theissued voting shares may introduce proposals for the agenda of the annualshareholders’ meeting and may nominate candidates to the board of directors,management board, counting commission, review commission and for the generaldirector. Any agenda proposals or nominations must be provided to the companyno later than 30 calendar days after the preceding financial year end.

 

Extraordinaryshareholders’ meetings may be called by the board of directors on its own initiative,or at the request of the review commission, independent auditor or ashareholder or group of shareholders owning, in the aggregate, at least 10% ofthe issued voting shares as of the date of the request.

 

Ageneral meeting of shareholders may be held in the form of a meeting or byabsentee ballot. The form of a meeting contemplates the adoption of resolutionsby the general meeting of

 

134

----

Table of Contents

 

shareholders through theattendance of the shareholders or their authorized representatives for thepurpose of discussing and voting on issues of the agenda, provided that if aballot is mailed to shareholders for participation at a meeting convened insuch form, the shareholders may complete and mail the ballot back to thecompany without personally attending the meeting. A general meeting of theshareholders by absentee ballot contemplates the determination of shareholders’opinions on issues on the agenda by means of a written poll.

 

Thefollowing issues cannot be decided by a shareholders’ meeting by absenteeballot:

 

·                  election of themembers of the board of directors;

 

·                  election of thereview commission;

 

·                  approval of acompany’s independent auditor; and

 

·                  approval of theannual report, the annual financial statements, including balance sheet, profitand loss statement and any distribution of profits and losses, includingapproval of annual dividends, if any.

 

***Notice and Participation***

*** ***

Allshareholders entitled to participate in a general shareholders’ meeting must benotified of the meeting, whether the meeting is to be held in the form of ameeting or by absentee ballot, no less than 30 days prior to the date ofthe meeting, and such notification shall specify the agenda for the meeting.However, if it is an extraordinary shareholders’ meeting to elect the board ofdirectors, shareholders must be notified at least 70 days prior to the date ofthe meeting. Only those items that were set out in the agenda to shareholdersmay be voted upon at a general shareholders’ meeting.

 

Thelist of shareholders entitled to participate in a general shareholders’ meetingis to be compiled on the basis of data in our shareholders register on the dateestablished by the board of directors, which date may neither be earlier thanthe date of adoption of the board resolution to hold a general shareholders’meeting nor more than 50 days before the date of the meeting (or, in thecase of an extraordinary shareholders’ meeting to elect the board of directors,not later than 85 days before the date of the meeting).

 

Theright to participate in a general meeting of shareholders may be exercised by ashareholder as follows:

 

·                                  by personallyparticipating in the discussion of agenda items and voting thereon;

 

·                                  by sending anauthorized representative to participate in the discussion of agenda items andto vote thereon;

 

·                                  by absenteeballot; or

 

·                                  by delegating theright to fill out the absentee ballot to an authorized representative.

 

**Boardof Directors**

 

TheFederal Law on Joint-Stock Companies and our charter provide that our entireboard of directors is up for election at each annual general shareholders’meeting and that our board of directors is elected through cumulative voting.Under cumulative voting, each shareholder may cast an aggregate number of votesequal to the number of voting shares held by such shareholder multiplied by thenumber of persons to be elected to our board of directors, and the shareholdermay give all such votes to one candidate or spread them between two or morecandidates. Before the expiration of their term, the directors may be removedas a group at any time without cause by a majority vote of a shareholders’meeting.

 

TheFederal Law on Joint-Stock Companies requires at least a five-member board ofdirectors for all Joint-Stock companies, at least a seven-member board ofdirectors for a Joint-Stock company with more than 1,000 holders of voting shares,and at least a nine-member board of directors for a joint stock company withmore than 10,000 holders of voting shares. Only natural

 

135

----

Table of Contents

 

persons (as opposed tolegal entities) are entitled to sit on the board. Members of the board ofdirectors are not required to be shareholders of the company. The actual numberof directors is determined by the company’s charter or a decision of theshareholders’ meeting. Our charter provides that our board of directors shallconsist of eleven members.

 

TheFederal Law on Joint Stock Companies generally prohibits a board of directorsfrom acting on issues that fall within the competence of the generalshareholders’ meeting. Our board of directors has the power to perform thegeneral management of the company, and decide, among others, the followingissues:

 

·                                  determination ofour business priorities;

 

·                                  convening annualand extraordinary shareholders’ meetings, except in certain circumstancesspecified in the Federal Law on Joint Stock Companies;

 

·                                  approval of theagenda of a shareholders’ meeting and determination of the record date forshareholders entitled to participate in a shareholders’ meeting;

 

·                                  placement of ourbonds and other securities in cases specified in the Federal Law on Joint StockCompanies;

 

·                                  determination ofthe price of our property and of our securities to be placed or repurchased, asprovided for by the Federal Law on Joint Stock Companies;

 

·                                  repurchase of ourshares, bonds and other securities in certain cases provided for by the FederalLaw on Joint Stock Companies;

 

·                                  formation of ourexecutive bodies and early termination of their powers;

 

·                                  the establishmentof compensation for our management board and its chairman;

 

·                                  recommendationson the amount of remuneration and compensation to be paid to the members of ourreview commission and on the fees payable for the services of an independentauditor;

 

·                                  recommendationson the amount of the dividend and the payment procedure thereof;

 

·                                  the use of ourreserve and other funds;

 

·                                  approval of ourinternal documents, except for those documents whose approval falls within thecompetence of our shareholders or executive bodies;

 

·                                  the creation ofbranches and representative offices;

 

·                                  approval of majorand interested party transactions in certain cases as provided for by theFederal Law on Joint Stock Companies;

 

·                                  approval of ourshare registrar;

 

·                                  our participationin, or exit from, other companies, unless such matters fall under the jurisdictionof our shareholders or executive bodies;

 

·                                  other issues, asprovided for by the Federal Law on Joint Stock Companies and our charter.

 

Ourcharter generally requires a majority vote of the directors present for anaction to pass, with the exception of actions for which Russian legislationrequires a unanimous vote or a majority vote of the disinterested andindependent directors, as described herein. A board meeting is considered dulyassembled and legally competent to act when at least six directors are present.

 

**InterestedParty Transactions**

 

Underthe Federal Law on Joint-Stock Companies, certain transactions defined as “interestedparty transactions” require approval by disinterested directors or shareholdersof the company. “Interested party transactions” include transactions involvinga member of the board of directors or

 

136

----

Table of Contents

 

a member of anyexecutive body of the company (including the company’s chief executive officerand/or the company’s managing organization), any person that owns, togetherwith any affiliates, at least 20% of a company’s issued voting shares or anyperson who is able to direct the actions of the company, if that person and/orthat person’s spouse, parents, children, adoptive parents or children, brothersor sisters or affiliates, is/are:

 

·                                  a party to, orbeneficiary of, a transaction with the company, whether directly or as arepresentative or intermediary;

 

·                                  the owner of atleast 20% of the issued shares of a legal entity that is a party to, or beneficiaryof, a transaction with the company, whether directly or as a representative orintermediary; or

 

·                                  a member of theboard of directors or a member of any management body of a company that is aparty to, or beneficiary of, a transaction with the company, whether directlyor as a representative or intermediary, or a member of the board of directorsor any management body of a management organization of such a company.

 

TheFederal Law on Joint-Stock Companies requires that an interested partytransaction by a company with more than 1,000 shareholders be approved by amajority vote of the independent directors of the company who are do not havean interest in the transaction. For the purposes of this rule, “an independentdirector” is a person who is not, and within the year preceding the decision toapprove the transaction was not, the general director, a member of anyexecutive body or an affiliate of the company, or a member of the board ofdirectors or any management body of the company’s management organization.Additionally, such person’s spouse, parents, children, adoptive parents orchildren, brothers or sisters may not, and within the year preceding the dateof the decision to approve the transaction, did not, occupy positions in theexecutive bodies of the company or positions on the board of directors or ofany management body of the company’s management organization. For companieswith 1,000 or fewer shareholders, an interested party transaction must beapproved by a majority vote of the directors who are not interested in thetransaction if the number of these directors is sufficient to constitute aquorum.

 

Approvalby a majority of shareholders who are not interested in the transaction isrequired if:

 

·                                  the value of suchtransaction or a number of interrelated transactions is 2% or more of thebalance sheet value of the company’s assets determined under Russian accountingstandards;

 

·                                  the transactionor a number of interrelated transactions involves the issuance, by subscription,of voting shares or securities convertible into voting shares, or secondarymarket sale of such securities, in an amount exceeding 2% of the company’sissued voting stock;

 

·                                  the number ofdirectors who are not interested in the transaction is not sufficient to constitutea quorum; or

 

·                                  all the membersof the board of directors of the company are interested parties, or none ofthem is an independent director.

 

Approvalby a majority of shareholders who do not have an interest in the transactionmay not be required, until the next annual shareholders’ meeting, for aninterested party transaction if such transaction is substantially similar totransactions concluded by the company and the interested party in the ordinarycourse of business before such party became an interested party with respect tothe transaction.

 

Theapproval of interested party transactions is not required in the followinginstances:

 

·                                  the company hasonly one shareholder that simultaneously performs the functions of theexecutive body of the company;

 

·                                  all shareholdersof the company are deemed interested in such transactions;

 

137

----

Table of Contents

 

·                                  the transactionsarise from the shareholders executing their preemptive rights to purchase newlyissued shares of the company;

 

·                                  the transactionsarise from the repurchase, whether mandatory or not, by the company of itsissued shares;

 

·                                  the transactionsthat are mandatory for a company pursuant to Russian law and must be concludedon the basis of fixed prices and tariffs adopted by a competent state body.

 

**MajorTransactions**

 

TheFederal Law on Joint-Stock Companies defines a “major transaction” as atransaction, or a number of interrelated transactions, involving theacquisition or disposal, or a possibility of disposal (whether directly orindirectly) of property having a value of 25% or more of the balance sheetvalue of the assets of a company determined under Russian accounting standards,with the exception of transactions conducted in the ordinary course of businessor transactions involving the placement of shares of common stock, orsecurities convertible into shares of common stock. Major transactionsinvolving assets having a value ranging from 25% to 50% of the balance sheetvalue of the assets of a company require unanimous approval by all members of theboard of directors or, failing to receive such approval, a simple majorityvotes of a shareholders’ meeting. Major transactions involving assets having avalue in excess of 50% of the balance sheet value of the assets of a companyrequire a three-quarters vote by a shareholders’ meeting.

 

**Changein Control**

 

***Anti-takeover Protection***

 

Russian legislationprovides as follows:

 

·                  Aperson intending to acquire more than 30% of an open joint stock company’sordinary shares and voting preferred shares (including, for such purposes,shares already owned by such person and its affiliates), will be entitled tomake a public tender offer to other holders of such shares or securitiesconvertible into such shares.

 

·                  Aperson that has acquired more than 30% of an open joint stock company’sordinary shares and voting preferred shares (including, for such purposes,shares already owned by such person and its affiliates) will, except in certainlimited circumstances, be required to make, within 35 days of acquiringsuch shares, a public tender offer for other shares of the same class and forsecurities convertible into such shares, at the price which is not less thanthe price determined based on a weighted average market price of the sharesover the six month period before the filing of the offer with the FSFM asdescribed below, if the shares are publicly traded, or on a price supplied byan independent appraiser if the shares have no or insufficient trading history.The public tender offer price may not be less than the highest price at whichthe offerer or its affiliated persons purchased or undertook to purchase therelevant securities over the six month period before the offer was sent to thecompany. From the moment of acquisition of more than 30% (or 50% and 75% in casesreferred to in the next sentence) of the shares until the date the offer wassent to the company, the person making the offer and its affiliates will beable to register for quorum purposes and vote only 30% of the company’sordinary shares and voting preferred shares (regardless of the size of theiractual holdings). These rules also apply to acquisitions resulting in aperson or a group of persons owning more than 50% and 75% of a company’s issuedordinary shares and voting preferred shares.

 

·                  Aperson that as a result of an offer described in either of the precedingparagraphs becomes (individually or with its affiliates) the owner of more than95% of the company’s ordinary shares and voting preferred shares, must buy outthe remaining shares of the company as well as other securities convertibleinto such shares upon request of the holders of such shares or othersecurities, and may require such holders to sell such shares and other

 

138

----

Table of Contents

 

securities, at the price determined in the mannerdescribed in the preceding paragraph but not less than the highest price of thepreceding acquisitions by the offerer.

 

·                  Anoffer of the kind described in any of the preceding three paragraphs must beaccompanied by a bank guarantee of payment. If the company is publicly traded,prior notice of the offer must be filed with the FSFM; otherwise, notice mustbe filed with the FSFM no later than the date of the offer. The FSFM may orderamendments to the terms of the offer (including price) in order to bring theminto compliance with the rules.

 

·                  Oncesuch an offer has been made, competing offers for the same securities can bemade by third parties and, in certain circumstances, acceptance of the initialoffer may be withdrawn by the security holders who choose to accept suchcompeting offer. From the making of such an offer until 20 days after itsexpiry (which period may in certain cases exceed 100 days), the company’sshareholders meeting will have the sole power to make decisions on chartercapital increase, issuance of securities, approval of certain majortransactions, and on certain other significant matters.

 

Theabove rules may be supplemented through FSFM rulemaking, which may resultin a wider, narrower or more specific interpretation of these rules by thegovernment and judicial authorities, as well as by market participants.

 

***Approval of the Federal Antimonopoly Service***

*** ***

Pursuantto the Federal Law on Competition, acquisitions of voting stock capital of ajoint-stock company, involving companies with a combined value of assets orannual revenues, exceeding a certain threshold under Russian AccountingStandards, or companies registered as having more than a 35% share of a certaincommodity market, and which would result in a shareholder (or a group ofaffiliated shareholders) holding more than 25%, 50% or 75% of the votingcapital stock of such company, or in a transfer between such companies ofassets or rights to assets, the value of which exceeds a certain amount, mustbe approved in advance by the Federal Antimonopoly Service.

 

**Disclosureof Ownership**

 

UnderRussian law, a holder of our common shares is required to publicly disclose anacquisition of 5% or more of the outstanding common shares of the company, aswell any change in the amount of common shares held by such holder, if as aresult of such change the percentage of common shares held by the holder becomesgreater or lesser than 5, 10, 15, 20, 25, 30, 50 or 75% of the outstandingcommon shares of the company.

 

**Notificationof Foreign Ownership**

** **

Foreignpersons registered as individual entrepreneurs in Russia who acquire shares ina Russian joint-stock company and foreign companies that acquire shares in aRussian joint-stock company may need to notify the Russian tax authoritieswithin one month following such acquisition. However, the procedure ofnotifying the Russian tax authorities by foreign companies that are notregistered with such tax authorities at the time of their share acquisitionremains unclear.

 

**C.Material Contracts**

** **

Thefollowing is a description of contracts that have been entered into by usand/or our subsidiaries or shareholders that may be material to our business.

 

#### **Loan Agreementrelating to the Loan Participation Notes and Guarantees**

#### ** **

On April 25,2008, we entered into a syndicated loan agreement with ING Bank N.V., ABN AmroN.V. and CALYON as mandated lead arrangers, pursuant to which mandated leadarrangers

 

139

----

Table of Contents

 

andsyndicate lent to us a principal amount of $250.0 million on May 8, 2008.The loan matures on April 25, 2011, and interest is payable by usquarterly in arrears at an annual rate of LIBOR+1.75%.

 

Theabove-mentioned loan is unconditionally and irrevocably guaranteed byWimm-Bill-Dann and Wimm-Bill-Dann Beverages pursuant to guarantees dated April 25,2008 entered into with ING Bank N.V. as the agent.

 

Boththe loan agreement and the guarantees are governed by English law. In the loanagreement, we agreed to certain covenants in respect of, among other things,liens, asset sales, transactions with affiliates and related persons, change ofcontrol, mergers and similar transactions, limitation on dividends or otherpayments affecting our subsidiaries and maintenance of certain ratios.Wimm-Bill-Dann and Wimm-Bill-Dann Beverages agreed to similar covenants in theguarantees.

 

**RubleBonds**

** **

On December 21,2005, we issued five-year, 3.0 million non-convertible ruble-denominated notesat a face value of 1,000 rubles each. The issue raised a total of approximately$104.2 million at the exchange rate as of December 31, 2005. The notes areredeemable by us on December 15, 2010. The issue was priced at par with acoupon of 9% payable semi-annually.

 

On March 6, 2009, we repaid a portion of our ruble-denominatedbonds in the amount of 4,660.3 million rubles ($129.9 at the exchange rates asof March 6, 2009) from our operating cash flow. The balance outstanding asof March 6, 2009 was 15.7 million rubles ($0.4 million at the exchangerate as of March 6, 2009). The interest rates for the three subsequentcoupons over the next 18 months are 15% annually.

 

In May and June 2009, we issued bonds onMICEX raising cash of 3 billion rubles, ($96.9 million at the exchange rates atthe dates of transactions). The bonds are due in February 2013, andbondholders have a put option exercisable in September, 2010, at 100% ofnominal value plus accrued interest. The annual interest rate of the coupon is15% for the next one and half years. The interest is payable semi-annually,commencing in September, 2009.

 

**TetraPak Agreements**

** **

Eachof Wimm-Bill-Dann (formerly Lianozovsky Dairy Plant) and Wimm-Bill-DannBeverages entered into a supply agreement dated January 1, 2009 topurchase packages for our products from JSC Tetra Pak AO of Moscow. Thecontracts were originally to terminate on December 31, 2009 but wereextended through December 31, 2010. Total combined expenditures underthese two contracts in 2009 amounted to €113.0 million ($157.1 million ataverage exchange rate as of December 31, 2009), excluding VAT. The totalcombined amount of our purchases in 2010 is estimated under the contracts atapproximately €102 million, excluding VAT. In 2009, we purchased approximately62.7% of our total packaging materials (including carton, plastic, foil andother materials) from Tetra Pak.

 

**Amendedand Restated Partnership and Cooperation Agreement**

 

Ourcurrent shareholders Gavril Yushvaev, Mikhail Dubinin, Sergei Plastinin, AlexanderOrlov, David Iakobachvili, Mikhail Vishnyakov, Viktor Evdokimov and I.M. ArteksHoldings Limited are parties to an Amended and Restated Partnership andCooperation Agreement which requires the parties to vote the same way, as wellas:

 

*Independent Directors.*The parties to theagreement undertake to use their best efforts to ensure that a majority of ourdirectors are “independent.” A director is considered “independent” if thatperson is not:

 

·                                  our employee oran employee or director of any of our subsidiaries;

 

·                                  a party to theagreement;

 

140

----

Table of Contents

 

·                                  an employee ordirector of a party to the agreement; a family member of a party to theagreement; a person or entity controlled by a party to the agreement; any otherperson or entity controlled by a family member of a party to the agreement; ora person or entity controlled by any employee or director of any of the partiesto the agreement; or

 

·                                  a person orentity controlled by any family member of a party to the agreement or a personor entity controlled by any employee or director of a party to the agreement.

 

*Voting.*The parties to the agreement are required to vote allof our shares that they own in the same way. In order to determine how theparties will vote, the agreement requires them to attempt to agree unanimouslyon a single voting position on each item on the agenda for a shareholders’meeting. If they are unable to do so, then the following procedures arefollowed:

 

·             The parties willvote their shares as determined by parties holding a two-thirds majority of theshares held by the parties;

 

·             If there is notwo-thirds majority among the parties, then the parties will vote their sharesconsistent with the recommendation of the majority of individuals who are onour board of directors; and

 

·                                  If no votingposition can be determined using the procedures noted above, then the partieswill abstain from voting on that issue, in which case a quorum will not bepresent under Russian law and the issue would fail to be adopted.

 

*Third-Party Beneficiaries.*Beneficial owners of ourADSs are third-party beneficiaries of the agreement and are entitled to enforceand bring actions in respect of the agreement. An action may only be brought,however, if beneficial owners of ADSs constituting more than 50% of ouroutstanding ADSs, excluding any ADSs held by the parties to the agreement, areparties to such action.

 

*Dispute Resolution.*The governing law of theagreement is the law of the State of New York. Any dispute, controversy orcause of action brought arising under the agreement will be settled byarbitration under the Commercial Arbitration Rules of the AmericanArbitration Association. Any cause of action brought by beneficial owners ofmore than 50% of the outstanding ADSs, excluding any ADSs held by parties tothe agreement, at the option of these owners, may be brought in arbitrationunder the Commercial Arbitration Rules of the American ArbitrationAssociation or may be litigated in the federal or state courts in the Boroughof Manhattan. The parties to the agreement expect to appoint CT CorporationSystem, 111 Eighth Avenue, New York, New York 10011, as agent for service ofprocess in New York.

 

*Term.*The agreement may not be terminated until the earlierto occur of:

 

·                  any party to theagreement owning all of our issued and outstanding shares;

 

·                  we are liquidatedpursuant to the laws of the Russian Federation; or

 

·                  January 16,2004 (provided that a party / the parties give 30 days’ prior writtennotice).

 

Uponthe occurrence of the first two events described above, the agreementautomatically terminates. Otherwise, the agreement continues in full force andeffect until terminated by any party to the agreement by giving 30 days’prior written notice to all other parties to the agreement and to us. See “Item3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—We are controlled by a group of shareholders whose interests couldconflict with those of the holders of our securities.”

 

**D.Exchange Controls**

** **

The FederalLaw on Currency Regulation and Currency Control which came into effect as of June 18,2004, sets forth certain restrictions on settlements between residents ofRussia with respect to transactions involving foreign securities (including ADSs),including requirements for settlement in Russian rubles.

 

141

----

Table of Contents

 

**Repatriationof Export Proceeds**

** **

Russian companies must repatriate 100% of theirreceivables from the export of goods and services (with a limited number ofexceptions concerning, in particular, certain types of secured financing).

 

**Restrictions on the remittance of dividends,interest or other payments to non-residents**

** **

TheFederal Law on Foreign Investments in the Russian Federation of July 9,1999, specifically guarantees foreign investors the right to repatriate theirearnings from Russian investments. However, the evolving Russian exchangecontrol regime may affect your ability to do so. Ruble dividends on commonshares may be paid to the depositary or its nominee and converted into U.S.dollars by the depositary for distribution to owners of ADSs withoutrestriction. Also, ADSs may be sold by non-residents of Russia for U.S. dollarsoutside Russia without regard to Russian currency control laws as long as thebuyer is not a Russian resident for currency control purposes. However, theability to convert rubles into U.S. dollars is also subject to the availabilityof U.S. dollars in Russia’s currency markets. Although there is an existingmarket within Russia for the conversion of rubles into U.S. dollars, includingthe interbank currency exchange and over-the-counter and currency futuresmarkets, the further development of this market is uncertain. At present, thereis no market for the conversion of rubles into foreign currencies outside ofRussia and a limited emerging market in which to hedge ruble andruble-denominated investments.

 

**E.Taxation**

** **

**Certain Russian TaxConsequences**

** **

The following discussiondescribes the material Russian corporate income tax and personal income taxconsequences to you if you are a U.S. holder of ADSs and a resident of theUnited States for purposes of the United States—Russia income tax treaty andare fully eligible for benefits under the United States—Russia income taxtreaty. Subject to certain provisions of the United States—Russia income taxtreaty relating to limitations on benefits, a U.S. resident under the treaty isgenerally defined as a person liable, under the laws of the United States, toU.S. tax (other than taxes with respect to only of income from sources in theUnited States or capital situated therein) by reason of your domicile,residence, citizenship, place of incorporation, or any other similar criterion(and, for income derived by a partnership, trust or estate, residence isdetermined in accordance with the residence of the person liable to tax withrespect to such income). The treaty provides for a procedure to resolve matterswhere a resident of the United States qualifies as a Russian tax resident underRussian domestic rules. The treaty also provides for the non-application oftreaty benefits to certain types of entities.

 

Additionally, the benefitsunder the United States—Russia income tax treaty discussed in this documentgenerally are not available to U.S. persons who hold ADSs in connection withthe conduct of a business in the Russian Federation through a permanentestablishment as defined in the United States— Russia income tax treaty.Subject to certain exceptions, a U.S. person’s permanent establishment underthe United States-Russia income tax treaty is a fixed place of business throughwhich such person carries on business activities in the Russian Federation(generally including, but not limited to, a place of management, a branch, anoffice and a factory). Under certain circumstances, a U.S. person may be deemedto have a permanent establishment in the Russian Federation as a result of activitiescarried on in the Russian Federation through agents of the U.S. person. Thissummary does not address the treatment of holders described in this paragraph.

 

Treaty benefits may bepotentially available to U.S. tax residents that are not subject to limitationson treaty benefits under the treaty, do not operate through a permanentestablishment in Russia and are foreign legal entities (*i.e.,* a legal entity or organizationin each case not organized under Russian law) or individuals not considered Russiantax residents under Russian law. Under current Russian law, the Russian taxresidency for individuals is generally determined based on the

 

142

----

Table of Contents

 

number of days a person spends in Russia in a 12-monthperiod. While the current version of the law specifies that an individualpresent in Russia for an aggregate period of 183 days in any consecutive12-month period will be considered as a tax resident, exactly how to apply the12-month rule is the subject of debate and is not entirely clear. TheMinistry of Finance of the Russian Federation has issued several lettersimplying that the final tax status of an individual taxpayer shall still bedefined for a whole calendar year by counting the days spent in Russia withinthe relevant calendar year. Accordingly, the approach used, in practice, todetermine the tax residence of an individual for a given tax year (calendar year)remains the same as under the previous legislation *i.e.,* to be considered a Russian tax resident, thetaxpayer should spend at least 183 days in Russia in a calendar year.

 

The following discussion isbased on:

 

·               Russiantax legislation; and

 

·               theUnited States—Russia income tax treaty (and judicial and administrativeinterpretations thereof by the Russian authorities);

 

all as in effect on the date of this document. All ofthe foregoing is subject to change, possibly on a retroactive basis, after thedate of this document. This discussion is also based, in part, onrepresentations of the depositary, and assumes that each obligation in thedeposit agreement and any related agreements will be performed in accordancewith its terms. The discussion with respect to Russian legislation is based onour understanding of current Russian law and Russian tax rules, which aresubject to frequent change and varying interpretations.

 

The following discussion isnot intended as tax advice to any particular investor. It is also not acomplete analysis or listing of all potential Russian corporate income andpersonal income tax consequences to you of ownership of ADSs. We urge you toconsult your own tax adviser regarding the specific Russian tax consequences ofthe ownership and disposition of ADSs under your own particular factualcircumstances.

 

***Specificuncertainties associated with the tax treatment of ADS holders***

 

The Russian tax rules inrelation to ADS holders (that would affect U.S. holders) are characterized bysignificant uncertainties and limited interpretive guidance. Russian taxauthorities have provided limited guidance regarding the treatment of ADSarrangements, and there can be no certainty as to how the Russian taxauthorities will ultimately treat those arrangements. In a number ofclarifications, the Russian Ministry of Finance stated that ADS holders must betreated as the beneficial owners of income from the underlying shares forpurposes of the double tax treaty provisions applicable to taxation of dividendincome from the underlying shares. However, double tax treaty relief isavailable only if the tax treaty residence of the holder is duly confirmed. Itis currently unclear whether depositories will be willing or able to provideresidency certificates for ADS holders or implement procedures for holders tobenefit from applicable tax treaties. Thus, while a U.S. holder may technicallybe entitled to benefit from the provisions of the United States—Russia incometax treaty, in practice such relief may be difficult or impossible to obtain.

 

If the Russian taxauthorities were not to treat U.S. holders as the beneficial owners of incomefrom the underlying shares, then the benefits discussed below regarding theUnited States—Russia income tax treaty would not be available to U.S. holders.Russian tax law and procedures are also not well developed, and local taxinspectors have considerable autonomy and often interpret tax rules withoutregard to the rule of law. Both the substantive provisions of Russian taxlaw and the interpretation and application of those provisions by the Russiantax authorities may be subject to more rapid and unpredictable change than injurisdictions with more developed capital markets.

 

143

----

Table of Contents

 

***Taxation ofDividends***

*** ***

Dividends paid to U.S.holders generally will be subject to Russian withholding tax at a 15% rate. Thetax burden may be reduced to 5% or 10% under the United States—Russia incometax treaty for eligible U.S. holders; a 5% rate may potentially apply for U.S.holders who are legal entities owning 10% or more of the company’s votingshares, and a 10% rate applies to dividends paid to eligible U.S. holders inother cases, including dividend payments to individuals and legal entitiesowning less than 10% of the company’s voting shares. See also “—United States—RussiaIncome Tax Treaty Procedures.”

 

Notwithstanding theforegoing, treaty relief may not be available to U.S. holders of ADSs. In anumber of clarifications, the Ministry of Finance expressed an opinion that ADSholders (rather than the depositary) should be treated as the beneficial ownersof dividends for the purposes of the double tax treaty provisions applicable totaxation of dividend income from the underlying ordinary shares, provided thatthe tax residencies of the ADS holders are duly confirmed and information onthe number of shares and data on the beneficiaries is available in theappropriate form. However, in the absence of any specific provisions in theRussian tax legislation with respect to the concept of tax treaty beneficialownership and taxation of income of beneficial owners, it is unclear how theRussian tax authorities and courts would ultimately treat the ADS holders inthis regard. Moreover, from a practical perspective, it may not be possible forthe depositary to collect residence confirmations from all ADS holders andsubmit such information to us and, in addition, we may be unaware of the exactamount of income payable to each holder.

 

Therefore, with respect tolegal entities or organizations who are U.S. holders, we may be obligated towithhold income tax at a rate of 15% from dividend payments made to thedepositary, unless prior to making such dividend payments to the depositary, weare provided with confirmation that U.S. holders are beneficial owners ofdividends within the meaning of the United States—Russia income tax treaty andall administrative requirements for claiming treaty benefits are met. Althoughnon-resident holders of ADSs may apply for a refund of a portion of the taxwithheld under an applicable tax treaty, the procedure to do so may be timeconsuming and no assurance can be given that the Russian tax authorities willgrant a refund. See “—United States—Russia Income Tax Treaty Procedures.”

 

With respect to individualswho are U.S. holders of ADSs, we may also be obligated to withhold income taxat the rate of 15% from dividend payments made to the depositary. Wherewithholding of personal income tax is not performed, individuals who are U.S.holders of ADSs will then be required to submit an annual personal tax returnto the Russian tax authorities and pay Russian income tax at a rate of 15% asunder Russian law an individual should report on his or her tax liabilities incase the relevant tax was due but not withheld by a tax agent from the relevantpayment. When submitting the tax return, individuals who are U.S. holders mayclaim an application of the reduced rates of withholding tax established by therelevant treaty, provided that the procedures described in “—United States—RussiaIncome Tax Treaty Procedures” are complied with. Obtaining the respectiveapprovals from the tax authorities may be time-consuming and burdensome.

 

If the appropriatedocumentation has not been provided to us before the start of the payment ofdividends by us (*i.e.*, before thesecond half of August) date, we will withhold tax at the full rate, and U.S.holders that are legal entities qualifying for a reduced rate under the UnitedStates—Russia income tax treaty then may file claims for refund within threeyears with the Russian tax authorities.

 

For individuals claimingtreaty relief, the documents substantiating the right for treaty benefitsshould be submitted to the Russian tax authorities within one year after theend of the year to which these benefits relate. In practice, where withholdingis performed, the tax authorities may refuse to refund or credit the 15% taxwithheld from payment of dividends to the depositary and, therefore, it

 

144

----

Table of Contents

 

is possible that individuals who are U.S. holders maybe subject to up to a 30% effective tax rate on their share of dividends.

 

***Taxation ofCapital Gains***

*** ***

*Legalentities and Organizations*

* *

Generally, capital gainsarising from the sale, exchange or other disposition of securities by legalentities or organizations that are non-resident holders should not be subjectto tax in Russia if immovable property located in Russia constitutes 50% orless of our assets. If more than 50% of our assets were to consist of immovableproperty located in Russia, legal entities or organizations that arenon-resident holders of the securities should be subject to a 20% withholdingtax on the gross proceeds from the sale, exchange or other disposition ofsecurities or 24% withholding tax on the difference between the sales, exchangeor other disposition price and the acquisition costs of the ADSs, determined inaccordance with Russian tax deductibility rules. The corporate income taxshould decrease from 24% to 20% starting from January 1, 2009.

 

However, an exemptionapplies if immovable property located in Russia constitutes more than 50% ofour assets and the securities are traded on a foreign stock exchange. In thatcase, the proceeds from the sale of securities on that foreign stock exchangeshall not be deemed to be income from sources in Russia, and accordingly, willnot be subject to taxation in Russia. The determination of whether more than50% of our assets consist of immovable property located in Russia is inherentlyfactual and is made on an on-going basis and the relevant Russian legislationand regulations in this respect are not entirely clear. Hence, there can be noassurance that immovable property owned by us and located in Russia does notcurrently and will not constitute more than 50% of our assets as at the date ofthe sale of ADSs by non-residents.

 

Where the ADSs are sold bylegal entities or organizations to persons other than a Russian company or aforeign company or an organization with a registered permanent establishment inRussia, even if the resulting capital gain is considered taxable in Russia,there is currently no mechanism under which the purchaser will be able towithhold the tax and remit it to the Russian budget.

 

Under the United States—Russiaincome tax treaty, capital gains from the sale of shares and/or ADSs byeligible U.S. holders should be relieved from taxation in Russia, unless 50% ormore of our assets (the term “fixed assets” is used in the Russian version ofthe treaty) were to consist of immovable property located in Russia.

 

*Individuals*

* *

The taxation of the incomeof non-resident individuals depends on whether this income is received fromRussian or non-Russian sources. Russian tax law considers the place of sale asan indicator of source. Accordingly, the sale of securities outside of Russiaby individuals who are non-resident holders should not be considered Russiansource income and, therefore, should not be taxable in Russia. However, Russiantax law gives no clear indication as to how the place of sale of securitiesshould be defined in this respect. Therefore, the Russian tax authorities mayhave a certain amount of flexibility in concluding whether a transaction is inRussia or out of Russia.

 

The sale, exchange or otherdisposal of the shares and ADSs by non-resident individual holders in Russiawill be considered Russian source income and will be subject to tax at a rateof 30% on the difference between the sales price and the acquisition costs ofsuch securities, as well as other documented expenses, such as depositaryexpenses and broker fees, among others, defined by the tax rules.

 

145

----

Table of Contents

 

Under Russian law, the acquisitioncosts and related expenses can be deducted at the source of payment if the salewas made by a non-resident holder through a licensed Russian broker, trustmanager or other person that carries out operations under agency or commissionagreements, or other agreements in favor of a taxpayer. Such party (as definedabove) should also act as a tax agent and withhold the applicable tax. Such taxagent will be required to report to the Russian tax authorities the amount ofincome realized by the non-resident individual and tax withheld upon the saleof the securities.

 

Otherwise, if the sale ismade to individuals but not through a tax agent, generally no withholding needsto be made and the non-resident holder will have an obligation to file atax return, report his income realized and apply for a deduction of acquisitionexpenses (which includes filing of support documentation). Although Russian taxlaw imposes tax agent responsibility only on professional trustees, brokers ordealers, in practice, the tax authorities may require Russian legal entitiesand organizations or foreign companies with a permanent establishment in Russiathat are not professional trustees, dealers or brokers to act as tax agents andwithhold the applicable tax when purchasing securities from non-residentindividuals.

 

Under the United States—Russiaincome tax treaty, capital gains from the sale of the ADSs by eligible U.S.holders should be relieved from taxation in Russia, unless 50% or more of ourassets (the term “fixed assets” is used in the Russian version of the UnitedStates—Russia Tax Treaty) were to consist of immovable property located inRussia. If this 50% threshold is not met, individuals who are U.S. holders mayseek to obtain the benefit of the United States—Russia income tax treaty inrelation to capital gains resulting from the sale, exchange or otherdisposition of the ADSs.

 

In order to apply theprovisions of relevant double tax treaties, the individual holders shouldreceive clearance from the Russian tax authorities as described below. See “—UnitedStates—Russia Income Tax Treaty Procedures” below.

 

***UnitedStates—Russia Income Tax Treaty Procedures***

*** ***

The Russian Tax Code doesnot contain a requirement that a non-resident holder that is a legal entity ororganization must obtain tax treaty clearance from the Russian tax authoritiesprior to receiving any income in order to qualify for benefits under anapplicable tax treaty. However, a non-resident legal entity or organizationseeking to obtain relief from or reduction of Russian withholding tax under atax treaty must provide to a Russian company or foreign company or organizationacting through its Russian registered presence, which is a tax agent (*i.e.*, the entity paying income to anon-resident) a confirmation of its tax treaty residence that complies with theapplicable requirements and a notarized Russian translation attached to it inadvance of receiving the relevant income. The tax residency confirmation needsto be renewed on an annual basis and provided to the payer of income before thefirst payment of income in each calendar year.

 

A U.S. holder may obtain theappropriate certification by mailing completed forms, together with the holder’sname, taxpayer identification number, the tax period for which certification isrequired, and other applicable information, to the United States InternalRevenue Service. The procedures for obtaining certification are described ingreater detail in the instructions to Internal Revenue Service Form 8802.As obtaining the required certification from the Internal Revenue Service maytake at least six to eight weeks, U.S. holders should apply for suchcertification as soon as possible.

 

In accordance with theRussian Tax Code, to rely on tax treaty benefits, a non-resident holder who isan individual must present to the tax authorities an official documentconfirming his residency in the home country issued by the competentauthorities in his/her country of residence and also other supportingdocumentation including a statement confirming the income received and the taxpaid in the home country, also confirmed by the relevant foreign taxauthorities.

 

146

----

Table of Contents

 

Technically, such a requirement means that anindividual cannot rely on the tax treaty until he or she pays the tax in thejurisdiction of his or her residence. Therefore, advance relief from orreduction of withholding taxes for individuals will generally be impossible asit is very unlikely that the supporting documentation for the treaty relief canbe provided to the tax authorities and approval from the latter obtained beforeany payments are made to individuals. A non-resident holder which is anindividual may apply for treaty-based benefits within one year following theend of the tax period in which the relevant income was received and the tax waswithheld.

 

If a non-resident holderwhich is a legal entity or organization does not obtain double tax treatyrelief at the time that income or gains are realized and tax is withheld by aRussian tax agent, the non-resident holder may apply for a refund within threeyears from the end of the tax period (a calendar year) in which the tax waswithheld. To process a claim for a refund, the Russian tax authorities require (i) apostilledor legalized confirmation of the tax treaty residence of the non-resident atthe time the income was paid, (ii) an application for the refund of thetax withheld in a format provided by the Russian tax authorities and (iii) copiesof the relevant contracts under which the foreign entity received income, aswell as payment documents confirming the payment of the tax withheld to theRussian budget (Form 1012DT for dividends and interest and Form 1011DTfor other income are designed by the Russian tax authorities to combinerequirements (i) and (ii) specified above). The Russian taxauthorities may require a Russian translation of the above documents if theyare prepared in a foreign language. The refund of the tax withheld should begranted within one month of the filing of the above set of documents with theRussian tax authorities. However, procedures for processing such claims havenot been clearly established and there is significant uncertainty regarding theavailability and timing of such refunds.

 

The procedures referred toabove may be more complicated with respect to ADSs and no assurance can begiven that we will be able to apply the respective double tax treaties whenpaying dividends to non-resident holders or that ADS holders would besuccessful in receiving relevant tax refunds.

 

Neither the depositary norus has or will have any obligation to assist an ADS holder with the completionand filing of any tax forms.

 

***Stamp Duties***

*** ***

No Russian stamp duty willbe payable by the holders of ADSs upon carrying out of transactions with thesecurities as discussed above (*i.e.,* ona purchase of the securities, sale of the securities, etc.).

 

**Certain United States FederalIncome Tax Consequences**

** **

The following is a generaldescription of certain material United States federal income tax consequencesthat apply to you if you are, for United States federal income tax purposes, abeneficial owner of ADSs that is an individual who is a citizen or resident ofthe United States, a corporation created or organized in or under the laws ofthe United States, any state thereof or the District of Columbia, an estate theincome of which is subject to U.S. federal income tax regardless of its source,or a trust, if a United States court can exercise primary supervision over theadministration of the trust and one or more United States persons can controlall substantial trust decisions, or if the trust has a valid election in effectunder applicable U.S. Treasury Regulations to be treated as a United Statesperson (in each case, a “U.S. Holder”). This discussion is based on theInternal Revenue Code of 1986, as amended, or the Code, Treasury Regulationspromulgated thereunder, judicial decisions, and published rulings andadministrative pronouncements of the Internal Revenue Service, or the IRS, allas in effect as of the date of this document. These authorities are subject todiffering interpretations and may change, possibly retroactively, resulting inU.S. federal income tax consequences different from those discussed below. Noruling has been

 

147

----

Table of Contents

 

or will be sought from the IRS with respect to thematters discussed below, and there can be no assurance that the IRS will nottake a contrary position regarding the tax consequences of the acquisition,ownership or disposition of ADSs, or that any such contrary position would notbe sustained by a court. If a partnership (including any entity treated as apartnership for United States federal income tax purposes) is a beneficialowner of ADSs, the United States federal income tax treatment of a partner inthe partnership will generally depend on the status of the partner and theactivities of the partnership. Accordingly, partnerships that hold ADSs andpartners in such partnerships are urged to consult their tax advisors regardingthe specific U.S. federal income tax consequences to them. The followingdiscussion does not deal with the tax consequences to any particular investoror to persons in special tax situations such as:

 

·               aninsurance company;

 

·               atax-exempt organization;

 

·               afinancial institution;

 

·               aperson subject to the alternative minimum tax;

 

·               aperson who is a broker-dealer in securities or a trader subject to amark-to-market election;

 

·               an Scorporation;

 

·               aperson holding ADSs through a partnership or other pass-through entity;

 

·               anexpatriate subject to section 877 of the Code;

 

·               anowner of, directly, indirectly or by attribution, 10% or more of theoutstanding shares of our common stock; or

 

·               anowner holding ADSs as part of a hedge, straddle, synthetic security orconversion transaction.

 

In addition, this summary islimited to U.S. Holders holding ADSs as “capital assets” within the meaning of Section 1221of the Code and whose functional currency is the U.S. dollar. The discussionbelow does not address the effect of any United States state or local tax lawor foreign tax law. This discussion also does not address any tax consequencesrelating to the direct ownership of ordinary shares.

 

The discussion below assumesthat the representations contained in the deposit agreement are true and thatthe obligations in the deposit agreement and any related agreement will becomplied with in accordance with their terms. For purposes of applying UnitedStates federal income tax law, we believe, and the following discussionassumes, that a holder of an ADS should be treated as the owner of theunderlying shares of common stock represented by that ADS, although this matteris not free from doubt.

 

The U.S. Treasury hasexpressed concerns that intermediaries in the chain of ownership between theholder of an ADS and the issuer of the shares underlying the ADS may be takingactions that are inconsistent with the beneficial ownership of the underlying shares.Accordingly, the analysis of the creditability of Russian withholding taxesdescribed below and the availability of the reduced tax rate for dividendsreceived by certain non-corporate U.S. Holders (discussed below) could beaffected by actions taken by intermediaries in the chain of ownership betweenthe holder of ADSs and our company if as a result of such actions the holdersof ADSs are not properly treated as beneficial owners of underlying shares andfuture actions that may be taken by the U.S.

 

148

----

Table of Contents

 

Treasury. The remainder of this discussion assumesthat a holder of an ADS will be treated as the beneficial owner of theunderlying shares of common stock represented by such ADS for United Statesfederal income tax purposes.

 

***Taxation ofDistributions on ADSs***

*** ***

For United States federalincome tax purposes, the gross amount of a distribution, including any Russianwithholding taxes, paid by us with respect to ADSs will be treated as a taxableforeign source dividend on the date of actual or constructive receipt by thedepositary to the extent of our current and accumulated earnings and profits,computed in accordance with United States federal income tax principles. Fortaxable years beginning before January 1, 2011, if you are a non-corporateU.S. Holder such dividends may be “qualified dividend income” that is taxed atthe lower applicable capital gains rate provided that certain conditions aresatisfied, including (1) certain holding period requirements aresatisfied, (2) either (a) our ADSs continue to be listed on the NewYork Stock Exchange (or other national securities exchange that is registeredunder section 6 of the Securities Exchange Act of 1934, as amended, or theNasdaq Stock Market) or (b) we are eligible for the benefits of the UnitedStates—Russia income tax treaty, and (3) we are not, for the taxable yearin which the dividend was paid, or in the preceding taxable year, a “passiveforeign investment company” (as discussed below). Distributions with respect toADSs in excess of our current and accumulated earnings and profits will beapplied against and will reduce your tax basis in such ADSs and, to the extentin excess of such tax basis, will be treated as gain from a sale or exchange ofsuch ADSs. You should be aware that we do not intend to calculate our earningsand profits for United States federal income tax purposes and, unless we make suchcalculations, you should assume that any distributions with respect to ADSsgenerally will be treated as a dividend, even if such distributions wouldotherwise be treated as a return of capital or as capital gain pursuant to the rules describedabove. If you are a corporation, you will not be allowed a deduction fordividends received in respect of distributions on ADSs, which is generallyavailable for dividends paid by U.S. corporations. U.S. Holders are stronglyurged to consult their tax advisors as to the U.S. federal income tax treatmentof any distribution received with respect to ADSs.

 

The amount of anydistribution paid in rubles will equal the U.S. dollar value of such rubles,calculated using the exchange rate in effect on the date of receipt by thedepositary, regardless of whether the payment is actually converted into U.S.dollars. Generally, any gain or loss resulting from currency exchange ratefluctuations during the period from the date of receipt by the depositary tothe date the rubles are converted into U.S. dollars will be treated as ordinaryincome or loss from sources within the United States for foreign tax creditlimitation purposes. Additionally, you may be required to recognize foreigncurrency gain or loss on the receipt of a refund of Russian withholding taxpursuant to the United States—Russia income tax treaty to the extent the UnitedStates dollar value of the refund differs from the dollar equivalent of thatamount on the date of receipt of the underlying distribution.

 

Russian withholding tax atthe rate applicable to you under the United States— Russia income tax treatyshould be treated as a foreign income tax that, subject to generally applicablelimitations and conditions, is eligible for credit against your U.S. federalincome tax liability or, at your election, may be deducted in computing taxableincome. If Russian tax is withheld at a rate in excess of the rate applicableto you under the United States—Russia income tax treaty, you may not beentitled to credits for the excess amount, even though the procedures forclaiming refunds and the practical likelihood that refunds will be madeavailable in a timely fashion are uncertain. If the dividends are qualifieddividend income (as discussed above), the amount of the dividend taken intoaccount for purposes of calculating the foreign tax credit limitation willgenerally be limited to the gross amount of the dividend, multiplied by thereduced rate divided by the highest rate of tax normally applicable todividends.

 

149

----

Table of Contents

 

The limitation on foreigntaxes eligible for credit is calculated separately with respect to specificclasses of income. For United States foreign tax credit purposes, a dividenddistribution with respect to the ADSs will be treated as foreign source “passivecategory income” but could, in the case of certain U.S. Holders, constitute “generalcategory income.” The rules relating to the determination of the foreigntax credit, or deduction in lieu of the foreign tax credit, are complex and youshould consult your tax advisors with respect to those rules.

 

***Taxation onSale or Other Taxable Disposition of ADSs***

*** ***

The sale or other taxabledisposition of ADSs will generally result in the recognition of gain or loss inan amount equal to the difference between the amount realized on the sale orother taxable disposition and your adjusted basis in such ADSs. That gain orloss will be capital gain or loss and will be long-term capital gain or loss ifthe ADSs have been held for more than one year. If you are a non-corporate U.S.Holder, such realized long-term capital gain is generally subject to a reducedrate of United States federal income tax. Limitations may apply to your abilityto offset capital losses against ordinary income.

 

Gain or loss realized on thesale of ADSs will generally be treated as U.S. source income or loss forforeign tax credit purposes. The use of any foreign tax credits relating to anyRussian taxes imposed upon such sale may be limited. You are strongly urged toconsult your tax advisors as to the availability of tax credits for any Russiantaxes withheld on the sale of ADSs.

 

***PassiveForeign Investment Company Considerations***

*** ***

A foreign corporationgenerally will be a passive foreign investment company, or a PFIC, in anytaxable year in which, after taking into account the income and assets of thecorporation and certain subsidiaries pursuant to applicable “look-through”rules, either (i) at least 75% of its gross income is “passive income” or (ii) atleast 50% of the average value of its assets is attributable to assets whichproduce passive income or are held for the production of passive income.

 

We do not believe that wewere a PFIC for the year ended December 31, 2008. However, our possiblestatus as a PFIC must be determined annually and therefore may be subject tochange. Thus there can be no assurance that we will not be treated as a PFIC inour current taxable year or in the future. If we were to be treated as a PFIC,U.S. Holders generally would be required to pay additional taxes on certaindistributions and gains on sales or other dispositions (including pledges) ofthe ADSs, at tax rates that may be higher than those otherwise applicable. Youshould consult your tax advisors regarding the application of the PFIC rules toyour investment in the ADSs.

 

***InformationReporting and Backup Withholding***

*** ***

Dividend payments withrespect to ADSs and proceeds from the sale or exchange of ADSs may be subjectto information reporting to the IRS and possible U.S. backup withholding at acurrent rate of 28%. Backup withholding will not apply, however, to a U.S.Holder who furnishes a correct taxpayer identification number and makes anyother required certification or who is otherwise exempt from backupwithholding. U.S. Holders who are required to establish their exempt statusgenerally must provide such certification on IRS Form W-9. U.S. Holdersshould consult their tax advisors regarding the application of the U.S.information reporting and backup withholding rules.

 

Backup withholding is not anadditional tax. Amounts withheld as backup withholding may be credited againstyour U.S. federal income tax liability, and you may obtain a refund of anyexcess amounts withheld under the backup withholding rules by timelyfiling the appropriate claim for refund with the IRS and furnishing anyrequired information.

 

150

----

Table of Contents

 

**F.Dividends and Paying Agents**

** **

Notapplicable.

 

**G.Statement by Experts**

** **

Notapplicable.

 

**H.Documents on Display**

** **

Thedocuments that are exhibits to or incorporated by reference in this documentcan be read at the U.S. Securities and Exchange Commission’s public referencefacilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.You may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330 or, from outside the United States, at1-202-942-8090. Copies may also be obtained from the SEC website atwww.sec.gov.

 

**I.Subsidiary Information**

** **

Notapplicable.

 

## ***Item11. Quantitative and Qualitative Disclosures about MarketRisk***

## *** ***

In the normal course of business, our financialposition is routinely subject to a variety of risks. We are exposed to marketrisks associated with foreign currency exchange rates, interest rates andcommodity and equity prices. We are also subject to the risks associated withthe business environment in which we operate, including the collectability ofaccounts receivable.

 

Weare exposed to market risk from changes in both foreign-currency exchange ratesand interest rates. Foreign-currency exchange risks exist to the extent thatour revenues are primarily denominated in rubles and our costs are denominatedin rubles, U.S. dollars and euros and some of our debt denominated in foreigncurrency.

 

Weare subject to market risk deriving from changes in interest rates, which mayaffect the cost of our financing. We do not use financial instruments such asforeign currency options, interest rate swaps and forward rate agreements, tomanage these market risks, because the market for these types of financialinstruments in Russia is not well developed and the costs of these instrumentsis relatively high. We do not hold or issue derivative financialinstruments for trading purposes.

 

**InterestRate Risk**

** **

Ourinterest rate exposure results mainly from debt obligations. At December 31,2009, we had debt amounting to $523.9 million, which comprised variable-rateborrowings of $250.0 million and fixed-rate borrowings of $273.9 million.See also “Item 5. Operating and Financial Review and Prospects—E. ContractualObligations.”

 

Wehave not entered into transactions designed to hedge against interest raterisks, which may exist in connection with our current and future indebtedness.We monitor the market and assess our options for hedging interest rate risks andmay enter into such agreements in the future.

 

Thefollowing tables present our variable and fixed-rate debt obligations as of December 31,2009 by expected maturity dates and related weighted average interest rates.

 

151

----

Table of Contents

 
| ** **                   | ** ** | **Expected Maturity Date as of December 31, 2009** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Currency**                                                                          | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 and********thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** | **Interest********rates at********December********31, 2009** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Variable-rate loans(1)**   |       | Rubles                                                                                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| ** **                   |       | U.S. dollars                                                                          |       | — |   | $ | 250,000 |   | — |   | — |   | — |   | $ | 250,000 |   | $ | 243,985 |   | 2.0 | % |
| **Total variable rate debt** |       |                                                                                  |       | $ | — |   | $ | 250,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | 250,000 |   | $ | 243,985 |   | 2.0 | % |
|                              |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           Our variable rate loans are linked to three monthLIBOR +1.75% margin

 
| ** **                | ** ** | **Expected Maturity Date as of December 31, 2009** | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Currency**                                                                          | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 and********thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** | **Interest********rates at********December********31, 2009** | ** ** |
| ** **                | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Fixed-rate debt**       |       | Euro                                                                                  |       | $ | 9,013 |   | $ | 7,996 |   | $ | 3,306 |   | $ | 804 |   | $ | 1,291 |   | $ | 22,410 |   | $ | 22,277 |   | 6.4 | % |
|                      |       | U.S. dollars                                                                          |       | 533 |   | 327 |   | 148 |   | — |   | — |   | 1,008 |   | 1,008 |   | 3.3 | % |
|                      |       | Rubles                                                                                |       | 25,125 |   | 7,790 |   | 13,228 |   | 5,860 |   | 12,683 |   | 64,686 |   | 58,629 |   | 8.2 | % |
| **Fixed-rate Notes**      |       | U.S. dollars                                                                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                      |       | Rubles                                                                                |       | 185,835 |   | — |   | — |   | — |   | — |   | 185,835 |   | 181,381 |   | 12.2 | % |
| **Total fixed rate debt** |       |                                                                                  |       | $ | 220,506 |   | $ | 16,113 |   | $ | 16,682 |   | $ | 6,664 |   | $ | 13,974 |   | $ | 273,939 |   | $ | 263,295 |   | 10.8 | % |

 

During2009, our fixed-rate debt decreased to $273.9 million and our variable-ratedebt remained unchanged and amounted to $250.0 million. Our variable-ratedebt includes our U.S. dollar-denominated $250.0 million syndicatedfacility that we entered into on April 25, 2008. Our fixed-rate debt,which is mostly ruble-denominated and consists of loans rendered from AlfaBank, Sberbank and UniCredit Bank primarily by our agricultural subsidiariesfor construction purposes. A significant portion of these loans is subsidizedby the local governmental bodies.  SeeNotes 12, 13 and 14 to our Consolidated Financial Statements included under “Item18. Financial Statements.”

 

Thefollowing tables present our variable and fixed-rate debt obligations as of December 31,2008 by maturity dates and related weighted average interest rates*.

 

152

----

Table of Contents

 
| ** **                   | ** ** | **Expected Maturity Date as of December 31, 200****8** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Currency**                                                                              | ** ** | **20****09** | ** ** | **2****010** | ** ** | **201****1** | ** ** | **201****2** | ** ** | **201****3****and********thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** | **Interest********rates at********December********31, 200****8** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)**                                    | ** ** |
| **Variable-rate loans(1)**   |       | Rubles                                                                                    |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| ** **                   |       | U.S. dollars                                                                              |       | — |   | — |   | $ | 250,000 |   | — |   | — |   | $ | 250,000 |   | $ | 250,000 |   | 4.0 | % |
| **Total variable rate debt** |       |                                                                                      |       | $ | — |   | $ | — |   | $ | 250,000 |   | $ | — |   | $ | — |   | $ | 250,000 |   | $ | 250,000 |   | 4.0 | % |
|                              |            |                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           * Our variable rate loans are linked to three monthLIBOR +1.75% margin.

 
| ** **                | ** ** | **Expected Maturity Date as of December 31, 2008** | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Currency**                                                                          | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013 and********thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** | **Interest********rates at********December********31, 2008** | ** ** |
| ** **                | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Fixed-rate debt**       |       | Euro                                                                                  |       | $ | 11,073 |   | $ | 6,496 |   | $ | 3,775 |   | $ | 480 |   | $ | 275 |   | $ | 22,099 |   | $ | 21,939 |   | 7.6 | % |
|                      |       | U.S. dollars                                                                          |       | 5,547 |   | 384 |   | 153 |   | — |   | — |   | 6,084 |   | 5,885 |   | 4.8 | % |
|                      |       | Rubles                                                                                |       | 72,883 |   | 48,146 |   | 7,129 |   | 6,172 |   | 13,030 |   | 147,360 |   | 139,588 |   | 12.1 | % |
| **Fixed-rate Notes**      |       | U.S. dollars                                                                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                      |       | Rubles                                                                                |       | 159,153 |   | 88,494 |   | — |   | — |   | — |   | 247,647 |   | 219,260 |   | 9.2 | % |
| **Total fixed rate debt** |       |                                                                                  |       | $ | 248,656 |   | $ | 143,520 |   | $ | 11,057 |   | $ | 6,652 |   | $ | 13,305 |   | $ | 423,190 |   | $ | 386,672 |   | 10.1 | % |

 

During2008, our fixed-rate debt increased to $423.2 million and our variablerate debt increased to $250.0 million as a result of our incurrence ofadditional short-term and long-term debt. See also Notes 12, 13 and 14 to ourConsolidated Financial Statements included under “Item 18. FinancialStatements.”

 

**ForeignCurrency Risk**

 

Thefunctional currency of our Russian, Ukrainian, Georgian, Kazakh, Kyrgyz andUzbek subsidiaries are the ruble, hryvnia, lari, tenge, sum and som,respectively. Our reporting currency is the U.S. dollar.

 

Thenational currencies of our subsidiaries and the ruble are generally notconvertible outside the CIS, so our ability to hedge against furtherdevaluation by converting to other currencies is significantly limited. Inaddition, our ability to convert the rubles and other operating currencies ofour CIS subsidiaries into other currencies in Russia and CIS, respectively, issubject to rules that restrict the purposes for which conversion andpayment in foreign currencies are allowed.

 

Ourforeign-currency exchange risk exposure results from the fact that our revenuesare primarily denominated in Russian rubles and a significant portion of ourcosts is denominated in currencies other than Russian rubles and net monetaryliability position from our foreign currency denominated debt.

 

153

----

Table of Contents

 

Asof December 31, 2009, our U.S. dollar debt position amounted to $251.0million and our euro debt position amounted to $22.4 million, compared to aU.S. dollar debt position of $256.1 million and euro debt position of $22.1million as of December 31, 2008.

 
| ** **     | ** ** | **Expected Maturity Date as of December 31, 2009** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Currency**                                                                          | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 and********thereafter** | ** ** | **Total** | ** ** | **Fair********value** | ** ** |
| ** **     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Debt**       |       | Rubles                                                                                |       | $ | 210,960 |   | $ | 7,790 |   | $ | 13,228 |   | $ | 5,860 |   | $ | 12,683 |   | $ | 250,521 |   | $ | 240,010 |   |
|           |       | U.S. dollars                                                                          |       | 533 |   | 250,327 |   | 148 |   | — |   | — |   | 251,008 |   | 244,993 |   |
|           |       | Euro                                                                                  |       | 9,013 |   | 7,996 |   | 3,306 |   | 804 |   | 1,291 |   | 22,410 |   | 22,277 |   |
| **Total debt** |       |                                                                                  |       | $ | 220,506 |   | $ | 266,113 |   | $ | 16,682 |   | $ | 6,664 |   | $ | 13,974 |   | $ | 523,939 |   | $ | 507,279 |   |

 

In 2009 the ruble depreciated against the U.S. dollarand the euro. We incurred a net foreign exchange loss of $11.6 million, whichwas comprised of gains and losses from euro- and U.S. dollar denominatedobligations, respectively, as well as a foreign exchange loss from our U.S.dollar-denominated syndicated facility. In order to measure the foreigncurrency exchange rate effect of our U.S. dollar-denominated syndicated loanfacility, we used the ruble exchange rate as of December 31, 2009, whichdepreciated by 2.9% against the U.S. dollar as of December 31, 2009. The averageruble exchange rate depreciated against the U.S. dollar by 27.8%, whichadversely affected our operating results.

 
| ** **     | ** ** | **Expected Maturity Date as of December 31, 2008** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Currency**                                                                          | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013 and********thereafter** | ** ** | **Total** | ** ** | **Fair********value** | ** ** |
| ** **     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Debt**       |       | Rubles                                                                                |       | $ | 232,036 |   | $ | 136,640 |   | $ | 7,129 |   | $ | 6,172 |   | $ | 13,030 |   | $ | 395,007 |   | $ | 358,848 |   |
|           |       | U.S. dollars                                                                          |       | 5,547 |   | 384 |   | 250,153 |   | — |   | — |   | 256,084 |   | 255,885 |   |
|           |       | Euro                                                                                  |       | 11,073 |   | 6,496 |   | 3,775 |   | 480 |   | 275 |   | 22,099 |   | 21,939 |   |
| **Total debt** |       |                                                                                  |       | $ | 248,656 |   | $ | 143,520 |   | $ | 261,057 |   | $ | 6,652 |   | $ | 13,305 |   | $ | 673,190 |   | $ | 636,672 |   |

 

In2008 the ruble depreciated against the U.S. dollar and the euro. We incurred anet foreign exchange loss of $61.4 million, which was comprised of gains andlosses from euro- and U.S. dollar-denominated obligations, respectively, aswell as foreign exchange loss from our U.S. dollar-denominated syndicated loan.In order to measure the foreign exchange rate effect of our U.S. dollardenominated syndicated loan facility, we used the ruble exchange rate as of December 31,2008, which depreciated by 19.7% against the U.S. dollar as of December 31,2007.

 

Webelieve that the carrying amounts of cash and cash equivalents, accountsreceivable, accounts payable, financial liabilities and short-term loansreported in the consolidated balance sheet approximate their fair values due tothe short maturity of those instruments.

 

Seealso “Item 3. Key Information—A. Selected Financial Data—Exchange Rates andInflation.”

 

## ***Item12. Description of Securities Otherthan Equity Securities***

 

Notapplicable.

 

154

----

Table of Contents

 

**PART II**

** **

## ***Item13. Defaults, Dividend Arrearages and Delinquencies***

## *** ***

None.

 

## ***Item14. Material Modifications to theRights of Security Holders and Use of Proceeds***

## *** ***

None.

 

## ***Item15. Controls and Procedures***

## *** ***

**(a) Disclosure Controls and Procedures**

** **

As required by Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, management has evaluated, with theparticipation of our chief executive officer and chief financial officer, theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Disclosure controls and procedures refer tocontrols and other procedures designed to ensure that information required tobe disclosed in the reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the rules and forms of the Securities and Exchange Commission.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin our reports that we file or submit under the Exchange Act is accumulated andcommunicated to management, including our chief executive officer and chieffinancial officer, as appropriate to allow timely decisions regarding itsrequired disclosure. In designing and evaluating our disclosure controls andprocedures, management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management was required to applyits judgment in evaluating and implementing possible controls and procedures.

 

As described below, a material weakness was identifiedin our internal control over financial reporting. The SEC’s “GuidanceRegarding Management’s Report on Internal Control Over Financial Reporting” asit applies to foreign private issuers definesa material weakness as a deficiency, or combination of deficiencies, ininternal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the Company’s annual financialstatements will not be prevented or detected on a timely basis. As a result ofthe material weakness, our chief executive officer and chief financial officerhave concluded that, as of December 31, 2009, the end of the period coveredby this report, our disclosure controls and procedures were not effective at areasonable assurance level.

 

**(b) Management’s Annual Report on Internal Control over FinancialReporting**

** **

Management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) underthe Securities Exchange Act.

 

Internal control over financial reporting is a processdesigned by, or under the supervision of, our chief executive officer and chieffinancial officer and effected by our board of directors, management and otherpersonnel, to provide reasonable assurance to our management and the Board ofDirectors regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles and includes those policies and procedures that:

 

·                  pertain to the maintenance of records that in reasonable detailaccurately and fairly reflect the transactions and dispositions of our assets;

 

·                  provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with generallyaccepted accounting

 

155

----

Table of Contents

 

principles, and that our receipts andexpenditures are being made only in accordance with authorizations of ourmanagement and members of our board of directors; and

 

·                  provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of our assets that could have amaterial effect on our financial statements.

 

Internal control over financial reporting cannotprovide absolute assurance of achieving financial reporting objectives becauseof its inherent limitations. Internal control over financial reporting is aprocess that involves human diligence and compliance and is subject to lapsesin judgment and breakdowns resulting from human failures. Internal control overfinancial reporting also can be circumvented by collusion or improper override.Because of such limitations, there is a risk that material misstatements maynot be prevented or detected on a timely basis by internal control overfinancial reporting. However, these inherent limitations are known features ofthe financial reporting process, and it is possible to design into the processsafeguards to reduce, though not eliminate, this risk.

 

Management assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2009 in accordancewith the framework set forth in the report of the Treadway Commission’sCommittee of Sponsoring Organizations (COSO), “Internal Control—IntegratedFramework.”

 

As a result of management’s assessment of our internalcontrol over financial reporting as of December 31, 2009, managementconcluded that the following material weakness in our internal control overfinancial reporting existed:

 

*Our financial statement closing process, including transformation ofour statutory financial statements into U.S. GAAP consolidated financialstatements, contains design and operating deficiencies severe enough thatmaterial errors in one or more of the line items in our financial statementsmay occur and may not be detected on a timely basis by management in the normalcourse of business.*

 

We have not retained sufficient accounting personnelwith the appropriate level of U.S. GAAP knowledge to perform timely proceduresto ensure the accuracy of both the interim and annual financial statementclosing processes. As a result of the material weakness in our system ofinternal control over financial reporting, a number of errors in our financialstatements were not detected on a timely basis by management in the normalcourse of the business.

 

Because of the existence of this material weakness,management has concluded that our internal control over financial reporting wasineffective as of December 31, 2009.

 

The effectiveness of the Company’s internal controlover financial reporting has been audited by Ernst & Young LLC, anindependent registered public accounting firm, as stated in their reportappearing below, which expresses an adverse opinion on the effectiveness of theCompany’s internal control over financial reporting as of December 31,2009.

 

**(c) Discussionof Remediation Activities**

** **

We have implemented and continue to implement measuresdesigned to remediate the material weakness and, in the short term, to mitigatethe potential adverse effects of this material weakness.

 

We are committed to continuing to improve our internalcontrol processes and will continue to diligently review our financialreporting controls and procedures in order to ensure our compliance with therequirements of the Sarbanes-Oxley Act and the related rules promulgatedby the SEC.

 

156

----

Table of Contents

 

Actions taken and planned to be taken by managementto improve the internal control over financial reporting include reconsideringexisting controls in financial statement closing process to increase theireffectiveness in preventing and detecting errors, further enhancement of timelyinternal reviews of the statutory and U.S. GAAP financial statements, providingadditional US GAAP staff training, and other procedures, to improve the interimand annual financial statement closing process.

 

In previous years we had no comprehensive accountingsystem in place to support the consolidation of our financial statements andthe transformation of the statutory financial statements of our subsidiariesinto U.S. GAAP. Starting fourth quarter 2009 we implemented financialconsolidation software to automate the process of transforming statutoryaccounting records into U.S. GAAP records and preparation of the U.S. GAAPconsolidated financial statements. Though using consolidation software hassignificantly improved reliability and transparency of financial statementclosing process, the short period of its production use as of December 31,2009 and lack of qualified US GAAP personnel did not allow us to reach apositive conclusion on controls effectiveness

 

**(d)  Changes in Internal Control overFinancial Reporting**

** **

Except for the mattersdescribed above, there have not been any changes in our internal control overfinancial reporting identified in the evaluation required by Rule 13a-15or Rule 15d-15 of the Exchange Act that occurred during the period coveredby this annual report that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.  Asfurther described in paragraph (c) above, management has and will continueto take steps to address the material weakness in its internal controls overfinancial reporting.

 

**(e)   Report of Independent Registered PublicAccounting Firm**

** **

The Board of Directors andShareholders of

Wimm-Bill-DannFoods OJSC

 

We have auditedWimm-Bill-Dann Foods OJSC’s (the Company) internal control over financialreporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). Wimm-Bill-Dann Foods OJSC’s management is responsible formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying Management’s Annual Report on Internal Controlover Financial Reporting.  Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessedrisk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions

 

157

----

Table of Contents

 

and dispositions of theassets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is adeficiency, or combination of deficiencies, in internal control over financialreporting, such that there is a reasonable possibility that a materialmisstatement of the company’s annual or interim financial statements will notbe prevented or detected on a timely basis. The following material weaknesseshas been identified and included in management’s assessment.

 

*U.S. GAAP**FinancialStatement Close Process*

* *

The Company has identified both design and operatingdeficiencies in its U.S. GAAP financial statement close process.  The following deficiency comprises a materialweakness in the Company’s internal controls over its U.S. GAAP financialreporting:

 

The Company did not have sufficient and skilledaccounting and finance personnel necessary to perform appropriate processes andcontrols; timely, consistently and appropriately identify, capture and analyzefinancially significant information; and to properly transform accountingrecords maintained on a statutory basis of accounting into U.S. GAAPaccounting records.  As a result, auditadjustments were proposed and recorded by the Company in order to properlyreflect certain, primarily non-routine transactions in the Company’s U.S. GAAPfinancial statements, including adjustments related to stock appreciationrights liability, vendor and customer incentives, trademarks, property andequipment and interest capitalization.

 

While this material weakness did not result inindividually material adjustments to the Company’s consolidated financialstatements, given the number of adjustments that were recorded and thedeficiencies identified in the financial statement close and U.S. GAAPtransformation and reporting processes, there is a reasonable possibility thata material misstatement in**one or more ofthe line items of the Company’s consolidated financial statements will not beprevented or detected on a timely basis. This material weakness was considered in determining the nature, timing,and extent of audit tests applied in our audit of the 2009 financialstatements, and this report does not affect our report dated April 23, 2010 onthose financial statements.

 

In our opinion, because ofthe effect of the material weakness described above on the achievement of theobjectives of the control criteria, Wimm-Bill-Dann Foods OJSC has notmaintained effective internal control over financial reporting as of December 31,2009, based on the COSO criteria.

 

 

/s/ ERNST & YOUNGLLC

 

Moscow, Russia

 

April 23, 2010

 

158

----

Table of Contents

 

## ***Item 16A. AuditCommittee Financial Expert***

 

OurBoard of Directors has determined that Marcus J. Rhodes is an “audit committeefinancial expert” as defined in Item 16A of Form 20-F. Mr. Rhodes isindependent in accordance with SEC Rule 10A-3.

 

## ***Item 16B. Code ofEthics***

 

InJuly 2005, our Board of Directors approved a Code of Ethics that appliesto our employees, including our principal executive officer, principalfinancial officer and principal accounting officer or controller, or personsperforming similar functions, which is posted on our website athttp://www.wbd.com/profile/governance/. No waivers of the Code of Ethics havebeen granted.

 

## ***Item 16C.Principal Accountant Fees andServices***

 

Ernst &Young LLC has served as our independent public accountants for the fiscal yearsended December 31, 2009 and 2008, respectively, for which auditedfinancial statements appear in this annual report on Form 20-F. Thefollowing table presents the aggregate fees for professional services and otherservices rendered by Ernst & Young in 2009 and 2008, respectively.

 
| ** **         | ** ** | **Year ended December 31,**             | ** ** |
|--------------------|------------|--------------------------------------------------------|------------|
| ** **         | ** ** | **2009**                                               | ** ** | **2008** | ** ** |
| ** **         | ** ** | **(in thousands of U.S. dollars)** | ** ** |
| Audit Fees         |       | $                                                      | 1,154      |   | $ | 1,385 |   |
| Audit-related fees |       | 40                                                     |       | — |   |
| Other Services     |       | 41                                                     |       | — |   |
| Total              |       | $                                                      | 1,235      |   | $ | 1,385 |   |

 

Notax services were provided to us by Ernst & Young during the yearsended December 31, 2009 and 2008.

 

**AuditFees**

 

Auditservices consisted of the audit of the consolidated financial statements,prepared under the U.S. GAAP as of and for the years ended December 31,2009 and 2008, the Russian statutory audit of stand-alone financial statementsof certain of our subsidiaries prepared in accordance with Russian AccountingStandards as of and for the years ended December 31, 2008, reviews of theconsolidated condensed financial statements, prepared under the U.S. GAAP forthe three months ended March 31, 2008, the six months ended June 30,2009 and 2008 and the nine months ended September 30, 2008 and servicesperformed in 2009 in connection with review of the prospectus for our rublebonds.

 

**Audit-relatedFees**

** **

In2009 Ernst & Young provided audit-related transaction support service. Nosuch services were provided to us in 2008.

 

**OtherServices**

** **

In2009 Ernst & Young delivered certain trainings and consulting servicesrelated to our internal audit department.  No such services were providedto us in 2008.

 

**AuditCommittee Pre-Approval Policies and Procedures**

** **

TheSarbanes-Oxley Act of 2002 required that we implement a pre-approval processfor all engagements with our Independent Registered Public Accounting Firm. Incompliance with these requirements, our Audit Committee pre-approves theengagement terms and fees of Ernst & Young for all audit and non-auditservices. The Audit Committee pre-approved the engagement terms and fees ofErnst & Young for all audit and non-audit services for the fiscalyears ended December 31, 2009 and 2008.

 

159

----

Table of Contents

 

## ***Item 16D.Exemption from the Listing Standardsfor Audit Committees***

 

Notapplicable.

 

## ***Item 16E.Purchases of Equity Securities by the Issuer andAffiliated Purchasers***

 

In 2008, Wimm-Bill-DannFinance, our wholly owned subsidiary, repurchased a total of 274,465 of ourordinary shares on the open market in Russia. These ordinary shares were repurchased in December 2008, and theaverage price paid per ordinary share was $10.98. The repurchase was not madepursuant to a repurchase plan or program, and we did not have any repurchaseplan or program in effect in 2008. No purchases of our ADSs were made byWimm-Bill-Dann Foods OJSC in 2008.

 

The following table sets forth, for each monthin 2008 and for the year as a whole, the total number of our ordinary sharesrepurchased by Wimm-Bill-Dann Finance and the average price paid per ordinaryshare.

 
| **Period**          | ** ** | **Total Number of********Shares(or Units)********Puchased** | ** ** | **Average Price********Paid per Share********(or Units)** | ** ** | **Total Number of********Shares (or Units)********Purchased as Part********of Publicly********Announced Plans********or Programs (1)** | ** ** | **Maximum Number (or********Approximate Dollar********Value) of Shares (or********Units) that May Yet********Be Purchased Under********the Plans or Programs********(1)** | ** ** |
|---------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **2008**            | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** **                                                                                                                             | ** ** | ** **                                                                                                                                                                     | ** ** |
| January 1-31   |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| February 1-28  |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| March 1-31     |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| April 1-30     |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| May 1-31       |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| June 1-30      |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| July 1-31      |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| August 1-31    |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| September 1-30 |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| October 1-31   |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| November 1-30  |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| December 1-31  |       | 274,465                                                     |       | $                                                         | 10.98      |                                                                                                                                   | —     |                                                                                                                                                                           | —     |   |
| **Total**           | ** ** | **274,465**                                                 |       | $                                                         | 10.98      | ** **                                                                                                                             | **—** | ** **                                                                                                                                                                     | **—** | ** ** |

 

----

(1) We did not have any a repurchase plan or program in effect in 2008.  All purchases of ordinary shares were made onthe open market in Russia. No purchases of our ADSs were made by Wimm-Bill-DannFoods in 2008.

 

In January 2009,Wimm-Bill-Dann Finance repurchased 66,687 of our ordinary shares on the openmarket in Russia for an average price of $11.79 per ordinary share.  In February 2009, Wimm-Bill-Dann Financerepurchased an additional 257,971 of our ordinary shares on the open market inRussia for an average price of $12.89 per ordinary share.  In March and April, Wimm-Bill-DannFinance repurchased on the open market in Russia additional 155,000 and 79,650of our own shares for $13.94 and $19.9, respectively. In May and June2009,Wimm-Bill-Dann Finance repurchased on the open market in Russia additional625,700 and 102,000 of our own shares for an average price of $26.17 and$32.91, respectively. In August 2009 Wimm-Bill-Dann Finance purchased100,000 ordinary shares of WBD Foods for $32.47 per ordinary share. In December 2009Wimm-Bill Dann Finance purchased on the open market 492,505 ordinary shares ofWBD Foods for $42.50 per ordinary share. On December 29, 2009 4,000ordinary shares of WBD Foods were sold by Wimm-Bill-Dann Finance to our 100%owned subsidiary Wimm-Bill-Dann Beverages OJSC for $48.99 per share. Theserepurchases were not made pursuant to a repurchase plan or program, and we donot as of the date of this annual report have any repurchase plan or program ineffect.

 

The following table sets forth, for each month in 2009and for the year as a whole, the total 

 

160

----

Table of Contents

 

numberof our ordinary shares repurchased by Wimm-Bill-Dann Finance and the averageprice paid per ordinary share.

 
| **Period**     | ** ** | **Total Number of********Shares(or  Units)********Puchased** | ** ** | **Average Price********Paid per Share********(or Units)** | ** ** | **Total Number of********Shares (or  Units)********Purchased as  Part********of********Publicly********Announced Plans********or Programs (1)** | ** ** | **Maximum Number (or********Approximate  Dollar********Value) of  Shares (or********Units) that May  Yet********Be Purchased  Under********the Plans or  Programs********(1)** | ** ** |
|----------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **2009**       | ** ** | ** **                                                   | ** ** | ** **                                                | ** ** | ** **                                                                                                                                      | ** ** | ** **                                                                                                                                                                     | ** ** |
| January 1-31   |       | 66,687                                                       |       | $                                                         | 11.79      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| February 1-28  |       | 257,971                                                      |       | $                                                         | 12.88      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| March 1-31     |       | 155,000                                                      |       | $                                                         | 13.94      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| April 1-30     |       | 79,650                                                       |       | $                                                         | 19.90      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| May 1-31       |       | 625,700                                                      |       | $                                                         | 26.17      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| June 1-30      |       | 102,000                                                      |       | $                                                         | 32.91      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| July 1-31      |       | —                                                       |       | —                                                    |       | —                                                                                                                                          |       | —                                                                                                                                                                         |       |
| August 1-31    |       | 100,000                                                      |       | $                                                         | 32.47      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| September 1-30 |       | —                                                       |       | —                                                    |       | —                                                                                                                                          |       | —                                                                                                                                                                         |       |
| October 1-31   |       | —                                                       |       | —                                                    |       | —                                                                                                                                          |       | —                                                                                                                                                                         |       |
| November 1-30  |       | —                                                       |       | —                                                    |       | —                                                                                                                                          |       | —                                                                                                                                                                         |       |
| December 1-31  |       | 492,505                                                      |       | $                                                         | 42.50      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| December 29*   |       | (4,000                                                       | )          | $                                                         | 48.99      |                                                                                                                                            | —     |                                                                                                                                                                           | —     |   |
| **Total**      | ** ** | **1,875,513**                                                | ** ** | **$**                                                     | **27.50**  | ** **                                                                                                                                      | **—** | ** **                                                                                                                                                                     | **—** | ** ** |

 

----

* On December 29, 2009 Wimm-Bill-Dann Financetransferred 4,000 ordinary shares of WBD Foods to our 100% owned subsidiaryWimm-Bill-Dann Beverages OJSC incorporated under the Russian legislation for$49.0 per ordinary share.

 

On February 24, 2010Wimm-Bill-Dann Finance repurchased 485,500 of our ordinary shares on the openmarket in Russia for an average price of $46.98 per ordinary share. Thefollowing table sets forth, for each month in 2010 the total number of ourordinary shares repurchased by Wimm-Bill-Dann Finance at the average price paidper ordinary share.

 
| **Period**          | ** ** | **Total Number of********Shares(or Units)********Puchased** | ** ** | **Average Price********Paid per Share********(or Units)** | ** ** | **Total Number of********Shares (or Units)********Purchased as Part********of Publicly********Announced Plans********or Programs (1)** | ** ** | **Maximum Number (or********Approximate Dollar********Value) of Shares (or********Units) that May Yet********Be Purchased Under********the Plans or Programs********(1)** | ** ** |
|---------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **2010**            | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** **                                                                                                                             | ** ** | ** **                                                                                                                                                                     | ** ** |
| January 1-31   |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| February 1-28  |       | 485,500                                                     |       | $                                                         | 46.98      |                                                                                                                                   | —     |                                                                                                                                                                           | —     |   |
| February 3**   |       | (96,000                                                     | )          | $                                                         | 43.00      |                                                                                                                                   | —     |                                                                                                                                                                           | —     |   |
| March 1-31     |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| April 1-30     |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| May 1-31       |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| June 1-30      |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| July 1-31      |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| August 1-31    |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| September 1-30 |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| October 1-31   |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| November 1-30  |       | —                                                      |       | —                                                    |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| December 1-31  |       |                                                        |       |                                                      |       | —                                                                                                                                 |       | —                                                                                                                                                                         |       |
| **Total**           | ** ** | **389,500**                                                 | ** ** | **$**                                                     | **47.96**  | ** **                                                                                                                             | **—** | ** **                                                                                                                                                                     | **—** | ** ** |

 

----

** On February 3, 2010 Wimm-Bill-Dann Financetransferred 96,000 ordinary shares of WBD Foods to our 100% owned subsidiaryWimm-Bill-Dann Beverages OJSC incorporated under the Russian legislation for$43.0 per ordinary share.

 

On December 29, 2009our 100% owned subsidiary Wimm-Bill-Dann Beverages OJSC 

 

161

----

Table of Contents

 

incorporated under the Russian legislationpurchased from Wimm-Bill-Dann Finance common shares of WBD Foods in aggregatequantity of 4,000 for the total amount of $196.0 million:

 
| **Period**     | ** ** | **Total Number of********Shares(or  Units)********Puchased** | ** ** | **Average Price********Paid per Share********(or Units)** | ** ** | **Total Number of********Shares (or  Units)********Purchased as  Part********of Publicly********Announced Plans********or Programs (1)** | ** ** | **Maximum Number (or********Approximate  Dollar********Value) of  Shares (or********Units) that May  Yet********Be Purchased  Under********the Plans or  Programs********(1)** | ** ** |
|----------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **2009**       | ** ** | ** **                                                   | ** ** | ** **                                                | ** ** | ** **                                                                                                                               | ** ** | ** **                                                                                                                                                                     | ** ** |
| January 1-31   |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| February 1-28  |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| March 1-31     |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| April 1-30     |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| May 1-31       |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| June 1-30      |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| July 1-31      |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| August 1-31    |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| September 1-30 |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| October 1-31   |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| November 1-30  |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| December 1-31  |       | 4,000                                                        |       | $                                                         | 48.99      |                                                                                                                                     | —     |                                                                                                                                                                           | —     |   |
| **Total**      | ** ** | **4,000**                                                    |       | $                                                         | 48.99      | ** **                                                                                                                               | **—** | ** **                                                                                                                                                                     | **—** | ** ** |

 

On February 3, 2010OJSC Wimm-Bill-Dann Beverages purchased 96,000 ordinary shares at $43.0 perordinary share from our 100% owned subsidiary Wimm-Bill-Dann Finance:

 
| **Period**     | ** ** | **Total Number of********Shares(or  Units)********Puchased** | ** ** | **Average Price********Paid per Share********(or Units)** | ** ** | **Total Number of********Shares (or  Units)********Purchased as  Part********of Publicly********Announced Plans********or Programs (1)** | ** ** | **Maximum Number (or********Approximate  Dollar********Value) of  Shares (or********Units) that May  Yet********Be Purchased  Under********the Plans or  Programs********(1)** | ** ** |
|----------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **2010**       | ** ** | ** **                                                   | ** ** | ** **                                                | ** ** | ** **                                                                                                                               | ** ** | ** **                                                                                                                                                                     | ** ** |
| January 1-31   |       |                                                         |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| February 1-28  |       | 96,000                                                       |       | $                                                         | 43.00      |                                                                                                                                     | —     |                                                                                                                                                                           | —     |   |
| March 1-31     |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| April 1-30     |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| May 1-31       |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| June 1-30      |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| July 1-31      |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| August 1-31    |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| September 1-30 |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| October 1-31   |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| November 1-30  |       | —                                                       |       | —                                                    |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| December 1-31  |       |                                                         |       |                                                      |       | —                                                                                                                                   |       | —                                                                                                                                                                         |       |
| **Total**      | ** ** | **96,000**                                                   | ** ** | **$**                                                     | **43.00**  | ** **                                                                                                                               | **—** | ** **                                                                                                                                                                     | **—** | ** ** |

 

Through the precedingtransactions, we have repurchased a total of 6.0% of our share capital fortotal consideration of $77.6 million.

 

## ***Item 16F. Changein Registrant’s CertifyingAccountant***

 

Notapplicable.

 

## ***Item 16G.Corporate Governance***

 

We are a company organized under the laws of theRussian Federation and qualify as a foreign private issuer as such term isdefined in Rule 3b-4 of the Exchange Act. In accordance with the NYSEcorporate governance rules, listed companies that are foreign private issuersare permitted in 

 

162

----

Table of Contents

 

some circumstances to follow home country practice inlieu of the provisions of the corporate governance rules contained in Section 303Aof the NYSE Listed Company Manual that are applicable to U.S. companies.  In addition, foreign private issuers listedon the NYSE must disclose any significant ways in which their corporategovernance practices differ from those followed by U.S. companies listed on theNYSE.  With regard to our corporategovernance practices, these differences can be summarized as follows:

 

**Comparisonof the rules of corporate governance developed by the New York Stock Exchangeand Wimm-Bill-Dann’s corporate governance practices.**

 
| **NYSE Corporate Governance Rules for U.S.  companies**                                                                                                                                                                                                                                                     | ** ** | **WBD’s Corporate Governance Practices**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Majority  of independent directors. (Section 303A.01 and 02)                                                                                                                                                                                                                                                                    |       | Our  Board of Directors is comprised of the majority of independent directors  meeting NYSE’s definition of independence (Section 303A.01 and 02)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Non-management  directors must meet at regular scheduled executive sessions without management.  (Section 303A.03)                                                                                                                                                                                                              |       | Our  non-management board members are free to meet without management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Listed  companies must have a nominating/ corporate governance and a compensation  committee, each composed entirely of independent directors and having a  written charter specifying the committee’s purpose and responsibilities, as  well as annual performance evaluation of the committee. (Section 303A.04  and 05) |       | In  June 2007, our Board of Directors formed a Corporate Governance  Committee. This committee functions pursuant to bylaws approved by the Board  of Directors specifying the committee’s purpose, duties and responsibilities.  It is composed of two independent directors and one non-independent  director.  According to the bylaws, the  Corporate Governance Committee was established to assist the Board of  Directors in performing its functions in the following areas: compliance with  the principles of corporate governance; development of the principles of  corporate governance; evaluation of the independence of the members of the  Board of Directors; determination of the best ways of interaction of the  Board of Directors and /or its members with officers and employees. According  to the bylaws, the Corporate Governance Committee shall meet not less than  once during each fiscal quarter. See also “Item 6. Directors and Senior  Management—C. Board Practices—Board of Directors Committees—Corporate  Governance Committee.”

 

We  also have a Personnel and Compensation Committee comprised of one independent  director, who is the head of the committee, and two non-independent  directors. This committee functions pursuant to bylaws approved by the Board  of Directors specifying the committee’s purpose, duties and responsibilities.  According to the bylaws, the Personnel and Compensation Committee is tasked  with assisting in the selection of |

 

163

----

Table of Contents

 
|                                                                                                                                                                                                                                     |   | Board  of Directors candidates. Its members also assist the Management Board in  formulating and implementing: a uniform personnel policy for all of our  subsidiaries; a personnel appraisal, rotation, dismissal, education and  training policy and administrative accounting standards; a remuneration and  compensation policy, as well as other incentive programs (stock option and  pension plans, social programs); and a corporate ethics and communications  policy. See also “Item 6. Directors and Senior Management—C. Board  Practices—Board of Directors Committees—Personnel and Compensation  Committee.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Listed  companies must have an audit committee that satisfies the requirements of Rule 10A-3  under the Exchange Act. (Section 303A.06)                                                                                        |   | Our  Audit Committee satisfies the requirements of Rule 10A-3 under the  Exchange Act. Our shareholders appoint our independent auditors for purposes  of verifying our financial and business activities in accordance with Russian  legal acts at our Annual General Meeting as required by Russian law. This  practice is not in violation of Rule 10A-3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Audit  committee must have a minimum of three members and have a written charter  specifying the committee’s purpose, an annual performance evaluation and its  duties and responsibilities. (Section 303A.07(a) and (c)) |   | Our  Audit Committee consists of three members and functions pursuant to written  bylaws, approved by the Board of Directors, specifying the committee’s  purpose, an annual performance evaluation, its duties and responsibilities.  All committee members are independent directors according to Rule 10A-3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Listed  companies must have an internal audit function. (Section 303A.07(d))                                                                                                                                                        |   | As  required by Russian law, we have a Revision Commission that verifies the  accuracy of our financial reporting under Russian law and generally  supervises our financial activity. The members of our Revision Commission are  nominated by our Shareholders and/or the Board of Directors and elected by  our Shareholders for a term of one year. A director may not simultaneously be  a member of the Revision Commission. We also have an Internal Audit and  Control Service which reports to the chief financial officer and performs its  functions in accordance with formally approved bylaws. The bylaws set forth  the indirect subordination of the Internal Audit and Control Service to the  Audit committee. The Internal Audit and Control Service is responsible for:

· Carrying out audits of the divisions of the Company;

· Creating and implementing a single corporate procedure for assessing  the internal control system and components thereof;

· Optimizing the internal control system and components thereof; and

· Creating and implementing our system of |

 

164

----

Table of Contents

 
|                                                                                                                                                                                                                               |   | internal  controls over financial reporting in an effort to comply with Section 404  of the Sarbanes-Oxley Act of 2002

The  Internal Audit and Control Service meets with the Audit Committee to discuss  issues related to the functioning of the internal controls system,  development of rules and procedures for business risks assessment and  coordination**.** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                              |
| Shareholders  must be given the opportunity to vote on all equity remuneration plans and  material revisions. (Section 303A.08)                                                                                               |   | Under  Russian law, such approval from shareholders is not required, and our  compensation plans are currently approved by the Board of Directors.                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                              |
| Listed  companies must adopt and disclose corporate governance guidelines.                                                                                                                                                         |   | Our  corporate governance guidelines are consistent with what is required under  Russian law and are set forth in our Corporate Governance Code, which was  approved by our Board of Directors and is posted on our website.                                                                                                                                                      |
|                                                                                                                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                              |
| Listed  companies must adopt and disclose a code of business conduct and ethics for  directors, officers and employees, and promptly disclose any waivers of the  code for directors or executive officers. (Section 303A.10) |   | We  have adopted and posted on our website a Code of Ethics that applies to our  employees, including our chief executive officer, chief financial officer and  chief accounting officer or controller, or persons performing similar  functions. No waivers of the Code of Ethics have been granted.                                                                             |

 

165

----

Table of Contents

 

**PART III**

 

## ***Item 17.FinancialStatements***

 

Seeinstead “Item 18. Financial Statements.”

 

## ***Item 18.FinancialStatements***

 

Thefollowing financial statements, together with the report of Ernst &Young LLC, are filed as part of this annual report on Form 20-F.

 
| ** **                                                                                                            | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|
| Index to the  Consolidated Financial Statements                                                                       |       | 170      |
| Report of Independent Registered Public Accounting  Firm                                                              |       | F-1      |
| Consolidated Balance Sheets as of December 31,  2009 and 2008                                                    |       | F-2      |
| Consolidated Statements of Income for the years ended  December 31, 2009, 2008 and 2007                          |       | F-4      |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2009, 2008 and 2007                      |       | F-5      |
| Consolidated Statements of Equity and Comprehensive  Income for the years ended December 31, 2009, 2008 and 2007 |       | F-7      |
| Notes to the Consolidated Financial Statements                                                                        |       | F-8      |

 

166

----

Table of Contents

 

## ***Item19. Exhibits***

 
| 1.1    |   | Charter  of Wimm-Bill-Dann Foods OJSC restated version (English Translation), approved  September 9, 2008 is incorporated herein by reference to  Exhibit 1.1 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2008, on Form 20-F.                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1    |   | Deposit  Agreement, dated January 17, 2002, by and among the Company, the  Depositary, and the holders and beneficial owners from time to time of the  ADSs is incorporated by reference to Exhibit 2.1 to the Annual Report  filed pursuant to Section 13 or 15(d) of The Securities Exchange  Act of 1934 for the fiscal year ended December 31, 2001 on  Form 20-F/A.                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1.1  |   | Additional  agreement to the Deposit Agreement, dated January 17, 2002 by and among  the Company, the Depositary, and the holders and beneficial owners of the  ADSs is incorporated herein by reference to Exhibit (a) (2) to  Post-Effective Amendment No. 1 to the Registration Statement on  Form F-6 dated October 19, 2009 (Registration No. 333-14282).                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1    |   | USD  250 mln Syndicated loan facility agreement dated April 25, 2008 for OJSC  WBD Foods arranged by ABN AMRO BANK N.V., CALYON, ING BANK N.V. as  mandated lead arrangers with ING BANK N.V. London branch as Agent is  incorporated herein by reference to Exhibit 4.1 to the Annual Report  filed pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934 for the fiscal year ended December 31, 2007, on  Form 20-F. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1.1  |   | Guarantee  dated April 25, 2008 created by OJSC WBD as Guarantor in favor of ING  BANK N.V.  London branch as Agent is incorporated herein by reference to  Exhibit 4.1.1 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2007, on Form 20-F.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1.2  |   | Guarantee  dated April 25, 2008 created by PJSC WBD Beverages as Guarantor in favor  of ING BANK N.V.  London branch as Agent is incorporated herein by  reference to Exhibit 4.1.2 to the Annual Report filed pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934 for the  fiscal year ended December 31, 2007, on Form 20-F.                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2    |   | Contract  No. P10-1002, dated  December 29, 2009, by and between CJSC Tetra Pak and  OAO Wimm-Bill-Dann.                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3    |   | Contract  No. P10-1003, dated  December 29, 2009, by and between CJSC Tetra Pak and OAO Wimm-Bill-Dann  Beverages.                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4    |   | Exchange  Agreement No. B-01, dated April 4, 2001, by and between Moscow Baby  Food Plant and Mikhail Vishnyakov is incorporated herein by reference to  Exhibit 10.2 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.5    |   | Exchange  Agreement No. B-02, dated April 4, 2001, by and between Lianozovsky  Dairy Plant and Mikhail Vishnyakov is incorporated herein by reference to  Exhibit 10.3 to Amendment No. 2 to the Registration Statement on Form F-1  (Registration No. 333-14278).                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.6    |   | Exchange  Agreement No. B-03, dated April 4, 2001, by and between Lianozovsky  Dairy Plant and Mikhail Dubinin is incorporated herein by reference to  Exhibit 10.4 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.7    |   | Exchange  Agreement No. B-04, dated April 4, 2001, by and between Lianozovsky  Dairy Plant and Alexander Orlov is incorporated herein by reference to  Exhibit 10.5 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.8    |   | Exchange  Agreement No. B-05, dated April 4, 2001, by and between Lianozovsky  Dairy Plant and Sergei Plastinin is incorporated herein by reference to  Exhibit 10.6 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.9    |   | Exchange  Agreement No. B-06, dated April 4, 2001, by and between Lianozovsky  Dairy Plant and Gavril Yushvaev is incorporated herein by reference to  Exhibit 10.7 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.10   |   | Exchange  Agreement No. B-07, dated April 4, 2001, by and between Lianozovsky  Dairy Plant and Evgeny Yaroslavsky is incorporated herein by reference to  Exhibit 10.8 to Amendment No. 2 to the Registration                                                                                                                                                                                                                                           |

 

167

----

Table of Contents

 
|   |   | Statement  on Form F-1 (Registration No. 333-14278).                                                                                                                                                                                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.11   |   | Exchange  Agreement No. TsK-01, dated April 5, 2001, by and between  Lianozovsky Dairy Plant and Mikhail Vishnyakov is incorporated herein by  reference to Exhibit 10.9 to Amendment No. 2 to the Registration  Statement on Form F-1 (Registration No. 333-14278).   |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.12   |   | Exchange  Agreement No. TsK-02, dated April 5, 2001, by and between  Lianozovsky Dairy Plant and Mikhail Dubinin is incorporated herein by  reference to Exhibit 10.10 to Amendment No. 2 to the Registration  Statement on Form F-1 (Registration No. 333-14278).     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.13   |   | Exchange  Agreement No. TsK-03, dated April 5, 2001, by and between  Lianozovsky Dairy Plant and Alexander Orlov is incorporated herein by  reference to Exhibit 10.11 to Amendment No. 2 to the Registration  Statement on Form F-1 (Registration No. 333-14278).     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.14   |   | Exchange  Agreement No. TsK-04, dated April 5, 2001, by and between  Lianozovsky Dairy Plant and Sergei Plastinin is incorporated herein by  reference to Exhibit 10.12 to Amendment No. 2 to the Registration  Statement on Form F-1 (Registration No. 333-14278).    |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.15   |   | Exchange  Agreement No. TsK-05, dated April 5, 2001, by and between  Lianozovsky Dairy Plant and Aleksandrs Timohins is incorporated herein by  reference to Exhibit 10.13 to Amendment No. 2 to the Registration  Statement on Form F-1 (Registration No. 333-14278). |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.16   |   | Exchange  Agreement No. TsK-06, dated April 5, 2001, by and between  Lianozovsky Dairy Plant and Gavril Yushvaev is incorporated herein by  reference to Exhibit 10.14 to Amendment No. 2 to the Registration  Statement on Form F-1 (Registration No. 333-14278).     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.17   |   | Exchange  Agreement No. TsK-07, dated April 5, 2001, by and between  Lianozovsky Dairy Plant and Evgeny Yaroslavsky is incorporated herein by  reference to Exhibit 10.15 to Amendment No. 2 to the Registration  Statement on Form F-1 (Registration No. 333-14278).  |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.18   |   | Amended  and Restated Partnership and Cooperation Agreement is incorporated herein by  reference to Exhibit 99.1 to Amendment No. 2 to the Registration  Statement on Form F-1 (Registration No. 333-14278).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 8.1    |   | List  of Subsidiaries of Wimm-Bill-Dann Foods OJSC.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 12.1   |   | Certification  by the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 12.2   |   | Certification  by the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 13.1   |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 13.2   |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                   |

 

168

----

Table of Contents

 

**SIGNATURES**

 

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned tosign this annual report on its behalf.

 
|                      | WIMM-BILL-DANN FOODS OJSC |
|---------------------------|---------------------------|
|                      |                      |
|                      |                      |
| Date: April 23, 2010 | By:                       | /s/ Tony D. Maher |
|                      | Name:                     | Tony D. Maher |
|                      | Title:                    | Chief Executive Officer |

 

169

----

Table of Contents

 

**Contents**

 
| Report  of Independent Registered Public Accounting Firm    | F-1    |
|-------------------------------------------------------------|--------|
|                                                        |   |
| Consolidated Financial Statements                           |   |
| Consolidated  Balance Sheets                                | F-2    |
| Consolidated  Statements of Income                          | F-4    |
| Consolidated  Statements of Cash Flows                      | F-5    |
| Consolidated Statements of Equity and Comprehensive  Income | F-7    |
| Notes to Consolidated Financial Statements                  | F-8    |

 

170

----

Table of Contents

 

**Report of Independent Registered PublicAccounting Firm**

 

The Board of Directors and Shareholders

Wimm-Bill-Dann Foods

 

We have audited the accompanying consolidatedbalance sheets of Wimm-Bill-Dann Foods OJSC, a Russian Open Joint StockCompany and subsidiaries (collectively “the Company”) as of December 31,2009 and 2008, and the related consolidated statements of income, equity, andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2009. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluationthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of the Company as of December 31, 2009 and 2008, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2009, in conformity with U.S. generally accepted accountingprinciples.

 

As discussed in Note 2 to the consolidatedfinancial statements, effective January 1, 2009 the Company adopted theFinancial Accounting Standards Board’s Statement No.160, NoncontrollingInterest in Consolidated Financial Statements (primarily codified in ASC810-10, Consolidation-Overall) relating to the presentation and accounting fornoncontrolling interest.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theCompany’s internal control over financial reporting as of December 31,2009, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated April 23, 2010 expressed an adverse opinion thereon.

 

**/s/ Ernst & Young LLC**

**Moscow, Russia**

**April **23, 2010

 

F-1

----

Table of Contents

 

**Wimm-Bill-DannFoods**

** **

**Consolidated Balance Sheets**

** **

*(Amounts in thousands of U.S. dollars, except share data)*

** **
| ** **                                              | ** ** | **December 31,** | ** **                |
|---------------------------------------------------------|------------|-----------------------|---------------------------|
| ** **                                              | ** ** | **2009**              | ** **                | **2008** | ** ** |
| **Assets**                                              | ** ** | ** **            | ** **                |   | ** ** |
| **Current assets:**                                     | ** ** | ** **            |                      |   |   |
| Cash  and cash equivalents                              |       | $                     | 248,521                   |   | $ | 277,252 |   |
| Trade  receivables, net (Note 4)                        |       | 112,083               |                      | 125,453 |   |
| Inventory  (Note 5)                                     |       | 191,334               |                      | 223,768 |   |
| Taxes  receivable                                       |       | 32,304                |                      | 64,916 |   |
| Advances  paid                                          |       | 22,678                |                      | 14,834 |   |
| Deferred  tax asset (Note 15)                           |       | 15,159                |                      | 11,828 |   |
| Other  current assets (Note 6)                          |       | 19,381                |                      | 16,632 |   |
| **Total current assets**                                | ** ** | **641,460**           | ** **                | **73****4****,****683** | ** ** |
| ** **                                              | ** ** | ** **            |                      |   |   |
| **Non-current assets:**                                 | ** ** | ** **            |                      |   |   |
| Property, plant and equipment, net (Note 8)             |       | 699,996               |                      | 693,468 |   |
| Intangible assets, net (Note 7)                         |       | 38,688                |                      | 34,999 |   |
| Goodwill (Note 9)                                       |       | 105,643               |                      | 108,748 |   |
| Deferred tax asset — non-current portion (Note 15) |       | 1,415                 |                      | 1,484 |   |
| Other non-current assets (Note 10)                      |       | 1,602                 |                      | 3,583 |   |
| **Total non-current assets**                            | ** ** | **847****,****344**   | ** **                | **84****2****,****2****82** | ** ** |
| **Total assets**                                        | ** ** | **$**                 | **1,****488****,****804** | ** ** | **$** | **1,****576****,****965** | ** ** |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

F-2

----

Table of Contents

 

**Wimm-Bill-DannFoods**

** **

**ConsolidatedBalance Sheets (continued)**

** **

*(Amounts in thousands of U.S. dollars, except share data)*

* *
| ** **                                                                                                                                                                                                                | ** ** | **December 31,**   | ** **            |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-----------------------|
| ** **                                                                                                                                                                                                                | ** ** | **2009**                | ** **            | **2008** | ** ** |
| **Liabilities and equity**                                                                                                                                                                                                | ** ** | ** **              | ** **            | ** ** | ** ** |
| **Current liabilities:**                                                                                                                                                                                                  |       |                    |                  |   |   |
| Trade  accounts payable                                                                                                                                                                                                   |       | $                       | 135,825               |   | $ | 133,886 |   |
| Advances  received                                                                                                                                                                                                        |       | 10,762                  |                  | 8,342 |   |
| Short-term loans (Note 12)                                                                                                                                                                                                |       | 4,521                   |                  | 66,278 |   |
| Long-term loans, current portion (Note 12)                                                                                                                                                                                |       | 22,308                  |                  | 8,632 |   |
| Long-term  notes  payable, current portion (Note 13)                                                                                                                                                                      |       | 185,835                 |                  | 159,153 |   |
| Taxes  payable                                                                                                                                                                                                            |       | 13,667                  |                  | 18,984 |   |
| Accrued  liabilities (Note 11)                                                                                                                                                                                            |       | 54,969                  |                  | 33,864 |   |
| Other  payables                                                                                                                                                                                                           |       | 28,249                  |                  | 43,073 |   |
| **Total current liabilities**                                                                                                                                                                                             | ** ** | **456,136**             | ** **            | **472,212** | ** ** |
| ** **                                                                                                                                                                                                                |       |                    |                  |   |   |
| **Long-term liabilities:**                                                                                                                                                                                                |       |                    |                  |   |   |
| Long-term loans (Note 12)                                                                                                                                                                                                 |       | 285,998                 |                  | 327,157 |   |
| Long-term notes payable (Note 13)                                                                                                                                                                                         |       | —                  |                  | 88,494 |   |
| Other long-term payables                                                                                                                                                                                                  |       | 21,215                  |                  | 10,048 |   |
| Deferred  taxes — long-term portion (Note 15)                                                                                                                                                                        |       | 22,179                  |                  | 22,754 |   |
| **Total long-term liabilities**                                                                                                                                                                                           | ** ** | **329,392**             | ** **            | **448,453** | ** ** |
| **Total liabilities**                                                                                                                                                                                                     | ** ** | **785,528**             | ** **            | **920,665** | ** ** |
|                                                                                                                                                                                                                      |       |                    |                  |   |   |
| **Equity**                                                                                                                                                                                                                | ** ** | ** **              | ** **            | ** ** | ** ** |
|                                                                                                                                                                                                                      |       |                    |                  |   |   |
| **Shareholders’ equity**:                                                                                                                                                                                            |       |                    |                  |   |   |
| Common  stock: 44,000,000 shares authorized and issued with a par value of 20 Russian  rubles; 41,846,022 shares outstanding as of December 31, 2009 and  43,725,535 shares outstanding as of December 31, 2008 |       | 29,908                  |                  | 29,908 |   |
| Share  premium account                                                                                                                                                                                                    |       | 163,781                 |                  | 164,132 |   |
| Treasury  stock, at cost                                                                                                                                                                                                  |       | (54,802                 | )                     | (3,014 | ) |
| Accumulated  other comprehensive loss:                                                                                                                                                                                    |       |                    |                  |   |   |
| Currency  translation adjustment                                                                                                                                                                                          |       | (32,167                 | )                     | (17,214 | ) |
| Retained  earnings                                                                                                                                                                                                        |       | 587,160                 |                  | 470,625 |   |
| **Equity attributable to shareholders**                                                                                                                                                                                   | ** ** | **693,880**             | ** **            | **644,437** | ** ** |
| ** **                                                                                                                                                                                                                |       |                    |                  |   |   |
| Equity  attributable to noncontrolling interests                                                                                                                                                                          |       | 9,396                   |                  | 11,863 |   |
| ** **                                                                                                                                                                                                                |       |                    |                  |   |   |
| **Total equity**                                                                                                                                                                                                          | ** ** | **7****03****,****276** | ** **            | **656,300** | ** ** |
| ** **                                                                                                                                                                                                                | ** ** | ** **              | ** **            | ** ** | ** ** |
| **Total liabilities and equity**                                                                                                                                                                                          | ** ** | **$**                   | **1,****4****88,804** | ** ** | **$** | **1,576,965** | ** ** |

* *

*The accompanying notes arean integral part of these consolidated financial statements.*

 

F-3

----

Table of Contents

 

**Wimm-Bill-DannFoods**

** **

## ***Consolidated Statements of Income***

## *** ***

*(Amounts in thousands of U.S. dollars, except share data)*

* *
| ** **                                                                                  | ** ** | **Year ended December 31,** | ** **                        |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|-----------------------------------|
| ** **                                                                                  | ** ** | **2009**                         | ** **                        | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                  | ** ** | ** **                       | ** **                        | ** ** | ** ** | ** ** | ** ** |
| **Sales**                                                                                   | ** ** | **$**                            | **2,****1****8****1****,****062** | ** ** | **$** | **2,823,564** | ** ** | **$** | **2,438,328** | ** ** |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** | ** ** | ** ** | ** ** |
| **Cost of  sales**                                                                          | ** ** | **(1,****4****52,737**           | **)**                             | **(1,910,528** | **)** | **(1,654,879** | **)** |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** | ** ** | ** ** | ** ** |
| **Gross  profit**                                                                           | ** ** | **7****28,325**                  | ** **                        | **913,036** | ** ** | **783,449** | ** ** |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** |   |   |   |
| Selling and distribution expenses                                                           |       | (379,659                         | )                                 | (488,110 | ) | (387,853 | ) |
| General and administrative expenses                                                         |       | (137,440                         | )                                 | (171,400 | ) | (180,922 | ) |
| Other operating expenses, net                                                               |       | (9,552                           | )                                 | (8,383 | ) | (704 | ) |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** |   |   |   |
| **Operating  income**                                                                       | ** ** | **20****1****,****674**          | ** **                        | **245,143** | ** ** | **213,970** | ** ** |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** |   |   |   |
| Financial income and expenses, net (Note 17)                                                |       | (43,224                          | )                                 | (101,504 | ) | (16,851 | ) |
| **Income before provision for income taxes**                                                | ** ** | **1****58****,****450**          | ** **                        | **143,639** | ** ** | **197,119** | ** ** |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** |   |   |   |
| Provision  for income taxes (Note 15)                                                       |       | (40,678                          | )                                 | (39,898 | ) | (54,302 | ) |
|                                                                                        |       |                             |                              |   |   |   |   |
| **Consolidated********net income**                                                          | ** ** | **$**                            | **117,772**                       | ** ** | **$** | **103,741** | ** ** | **$** | **1****42****,****817** | ** ** |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** | ** ** | ** ** | ** ** |
| Net  income attributable to noncontrolling interest                                         | ** ** | (1,237                           | )                                 | (2,029 | ) | (2,769 | ) |
| ** **                                                                                  | ** ** | ** **                       | ** **                        | ** ** | ** ** | ** ** | ** ** |
| **Net income attributable to WBD Foods shareholders**                                       | ** ** | **$**                            | **116,535**                       | ** ** | **$** | **101,712** | ** ** | **$** | **140****,****048** | ** ** |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** |   |   |   |
| **Net income per common share attributable to WBD Foods  shareholders - basic and diluted** | ** ** | **$**                            | **2****.****73**                  | ** ** | **$** | **2****.****31** | ** ** | **$** | **3.18** | ** ** |
|                                                                                        | ** ** | ** **                       | ** **                        | ** ** |   |   |   |
| **Weighted average number of shares outstanding, basic and  diluted**                       |       | 42,763,668                       |                              | 43,993,827 |   | 44,000,000 |   |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

F-4

----

Table of Contents

 

**Wimm-Bill-DannFoods**

** **

## ***Consolidated Statements of Cash Flows***

## *** ***

*(Amounts in thousands of U.S. dollars, except share data)*

* *
| ** **                                                                         | ** ** | **Year ended December 31,** | ** **          |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|---------------------|
| ** **                                                                         | ** ** | **200****9**                               | ** **          | **200****8** | ** ** | **200****7** | ** ** |
| **Cash flows from  operating activities:**                                         | ** ** | ** **                                 | ** **          | ** ** | ** ** | ** ** | ** ** |
|                                                                               | ** ** |                                       | ** **          |   | ** ** |   | ** ** |
| **Consolidated****net income**                                                     | ** ** | **$**                                      | **117,****772**     | ** ** | **$** | **10****3****,****741** | ** ** | **$** | **142,817** | ** ** |
|                                                                               |       |                                       |                |   |   |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                       |                |   |   |   |   |
| Depreciation and  amortization                                                     |       | 104,883                                    |                | 115,823 |   | 86,574 |   |
| Foreign currency  loss (gain)                                                      |       | 6,736                                      |                | 54,203 |   | (20,191 | ) |
| Provision for  doubtful accounts                                                   |       | 4,511                                      |                | 8,155 |   | 1,649 |   |
| Loss (gain) on  disposal of property, plant and equipment                          |       | (79                                        | )                   | 4,038 |   | (4,633 | ) |
| Gain on sale of  subsidiary                                                        |       | —                                     |                | (2,574 | ) | (978 | ) |
| Deferred tax charge  (benefit)                                                     |       | (3,380                                     | )                   | 54 |   | 4,893 |   |
| Amortization of  deferred finance costs                                            |       | 2,225                                      |                | 1,716 |   | 2,617 |   |
| Other non-cash  charges and credits, net                                           |       | 3,060                                      |                | (2,205 | ) | 1,789 |   |
| ** **                                                                         |       |                                       |                |   |   |   |   |
| **Changes  in operating assets and liabilities:**                                  |       |                                       |                |   |   |   |   |
| Inventory                                                                          |       | 21,681                                     |                | (6,331 | ) | (66,951 | ) |
| Trade receivables                                                                  |       | 5,513                                      |                | (2,274 | ) | (61,638 | ) |
| Advances paid                                                                      |       | 20                                         |                | 29,931 |   | (10,449 | ) |
| Taxes receivable                                                                   |       | 29,118                                     |                | (11,033 | ) | (11,291 | ) |
| Other current  assets                                                              |       | (2,851                                     | )                   | (3,300 | ) | 2,721 |   |
|                                                                               |       |                                       |                |   |   |   |   |
| Other non-current  assets                                                          |       | (1,621                                     | )                   | — |   | (26 | ) |
| Trade accounts  payable                                                            |       | 6,587                                      |                | 32,137 |   | 17,001 |   |
| Advances received                                                                  |       | 2,546                                      |                | (1,277 | ) | (766 | ) |
| Taxes payable                                                                      |       | (4,501                                     | )                   | 8,467 |   | 4,356 |   |
| Accrued liabilities                                                                |       | 20,815                                     |                | (10,603 | ) | 10,694 |   |
| Other  current payables                                                            |       | (5,774                                     | )                   | 2,522 |   | (1,364 | ) |
| Other long-term payables                                                           |       | 5,035                                      |                | — |   | (20 | ) |
|                                                                               | ** ** |                                       | ** **          |   | ** ** |   | ** ** |
| **Total  cash provided by operating activities**                                   | ** ** | **$**                                      | **312****,****296** | ** ** | **$** | **321****,****190** | ** ** | **$** | **96,804** | ** ** |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

F-5

----

Table of Contents

 

**Wimm-Bill-DannFoods**

** **

## ***Consolidated Statements of Cash Flows (continued)***

 

*(Amounts in thousands of U.S. dollars, except share data)*

 
| ** **                                                                                 | ** ** | **Year ended  December 31,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                                                 | ** ** | **200****9**                      | ** **  | **2008** | ** ** | **2007** | ** ** |
| **Cash flows from  investing activities:**                                                 | ** ** | ** **                        | ** **  | ** ** |   |   |   |
| Cash paid for  property, plant and equipment                                               |       | (128,846                          | )           | (189,003 | ) | (189,049 | ) |
| Proceeds from  disposal of property, plant and equipment                                   |       | 2,683                             |        | 6,454 |   | 3,668 |   |
| Cash returned from  short-term bank deposits and other current  assets                     |       | —                            |        | — |   | 6,800 |   |
| Cash paid for  acquisition of subsidiaries, net of cash acquired                           |       | —                            |        | (327 | ) | (5,290 | ) |
| Other investing  activities                                                                |       | 901                               |        | 1,195 |   | 390 |   |
| **Net  cash used in investing activities**                                                 | ** ** | **(****125****,****262**          | **)**       | **(****181****,****681** | **)** | **(183,481** | **)** |
|                                                                                       |       |                              |        |   |   |   |   |
| **Cash flows from  financing activities:**                                                 |       |                              |        |   |   |   |   |
| Proceeds from long-term  notes payable, net of debt issuance costs                         |       | 95,814                            |        | 207,473 |   | 147,909 |   |
| Short-term loans and  notes, net                                                           |       | (56,312                           | )           | (30,454 | ) | (33,946 | ) |
| Repayment of long-term  loans and notes                                                    |       | (160,724                          | )           | (308,917 | ) | (5,081 | ) |
| Proceeds from long-term  loans                                                             |       | 7,233                             |        | 315,579 |   | 6,778 |   |
| Repayment of long-term  payables                                                           |       | (11,891                           | )           | (14,445 | ) | (18,811 | ) |
| Cash paid for treasury  stock acquisition and advances made for purchase of treasury stock |       | (58,632                           | )           | (3,014 | ) | — |   |
| Dividends paid to  noncontrolling interests                                                |       | (544                              | )           | — |   | (5,420 | ) |
| Cash paid for  acquisition of noncontrolling interests                                     |       | (2,280                            | )           | (3,723 | ) | (19,560 | ) |
| **Total cash provided by (used in) financing activities**                                  | ** ** | **(1****87****,****336**          | **)**       | **1****62****,499** | ** ** | **71,869** | ** ** |
|                                                                                       |       |                              |        |   |   |   |   |
| Impact of exchange rate  differences on cash and cash equivalents                          |       | (28,429                           | )           | (58,208 | ) | 7,950 |   |
| ** **                                                                                 | ** ** | ** **                        | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Net  increase********(decrease) in cash and cash  equivalents**                          | ** ** | **(28,731**                       | **)**       | **243,800** | ** ** | **(6,858** | **)** |
| **Cash  and cash equivalents**, **at beginning  of the year**                              | ** ** | **277****,****2****52**           | ** **  | **33****,****452** | ** ** | **40,310** | ** ** |
| **Cash  and cash equivalents, at the end of the year**                                     | ** ** | **$**                             | **248,521** | ** ** | **$** | **277,252** | ** ** | **$** | **33,452** | ** ** |
|                                                                                            |            |                                   |             |  |  |  |  |  |  |  |

* *
| ** **                                                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Supplemental  information:**                                 |       |     |       |     |       |     |       |
| Income taxes paid                                              |       | $        | 28,988     |     | $          | 60,343   |       | $ | 58,700 |   |
| Interest paid                                                  |       | 38,508   |       | 44,293   |       | 38,285   |       |
| Vendor financed  acquisitions of property, plant and equipment |       | 15,533   |       | 6,967    |       | 6,860    |       |
|                                                                |            |          |            |          |            |          |            |  |  |  |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

F-6

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

ConsolidatedStatements of Equity and Comprehensive Income

For The Years Ended December 31, 2009,2008 and 2007

 

*(Amountsin thousands of U.S. dollars, except share data)*

 
| ** **                                  | ** ** | **Common Stock** | ** ** | **Treasury shares** | ** ** | **Share  premium** | ** **                 | **Accumulated  other  comprehensive** | ** ** | **Retained**    | ** ** | **Total equity  attributable to** | ** **              | **Noncontrolling**  | ** ** | ** **                | ** ** |
|---------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------|----------------------------|---------------------------------------|------------|-----------------|------------|---------------------------------------------|-------------------------|---------------------|------------|---------------------------|------------|
| ** **                                  | ** ** | **Shares**            | ** ** | **Amount**               | ** ** | **Shares**         | ** **                 | **Amount**                            | ** ** | **account**     | ** ** | **income (loss)**                      | ** **              | **earnings**        | ** ** | **WBD shareholders** | ** ** | **Interest** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | ** **            | ** ** | ** **               | ** ** | ** **         | ** **                 | ** **                            | ** ** | ** **      | ** ** | ** **                                  | ** **              | ** **          | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balances  at December 31, 2006**     | ** ** | **44,000,000**        | ** ** | **$**                    | **29,908** | ** **         | **—**                 | ** **                            | **$**      | **—**      | ** ** | **$**                                       | **164,132**             | ** **          | **$**      | **69,169**                | ** ** | **$** | **234,285** | ** ** | **$** | **497,494** | ** ** | **$** | **18,977** | ** ** | **$** | **516,471** | ** ** |
| Consolidated net income                     |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | —                                      |                    | 140,048             |       | 140,048                   |       | 2,769 |   | 142,817 |   |
| Currency translation  adjustment            |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | 41,002                                      |                    | —              |       | 41,002                    |       | 1,212 |   | 42,214 |   |
| Total comprehensive  income                 |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | 41,002                                      |                    | 140,048             |       | 181,050                   |       | 3,981 |   | 185,031 |   |
| Dividends paid to  shareholders             |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | —                                      |                    | (5,420              | )          | (5,420                    | )          | — |   | (5,420 | ) |
| Acquisition of noncontrolling  interest     |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | —                                      |                    | —              |       | —                    |       | (9,096 | ) | (9,096 | ) |
| **Balances  at December 31, 2007**     | ** ** | **44,000,000**        | ** ** | **29,908**               | ** ** | **—**         | ** **                 | **—**                            | ** ** | **164,132**     | ** ** | **110,171**                                 | ** **              | **368,913**         | ** ** | **673,124**               | ** ** | **13,862** | ** ** | **686,986** | ** ** |
| Consolidated net income                     |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | —                                      |                    | 101,712             |       | 101,712                   |       | 2,029 |   | 103,741 |   |
| Currency translation  adjustment            |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | (127,385                                    | )                       | —              |       | (127,385                  | )          | (2,301 | ) | (129,686 | ) |
| Total comprehensive  income (loss)          |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | (127,385                                    | )                       | 101,712             |       | (25,673                   | )          | (272 | ) | (25,945 | ) |
| Acquisition of  noncontrolling interest     |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | —                                      |                    | —              |       | —                    |       | (1,727 | ) | (1,727 | ) |
| Treasury stock acquisition                  |       |                  |       |                     |       | (274,465           | )                          | (3,014                                | )          | —          |       | —                                      |                    | —              |       | (3,014                    | )          | — |   | (3,014 | ) |
| **Balances  at December 31, 2008**     | ** ** | **44,000,000**        | ** ** | **29,908**               | ** ** | **(274,465**       | **)**                      | **(****3,014**                        | **)**      | **164,132**     | ** ** | **(17,214**                                 | **)**                   | **470****,****625** | ** ** | **644,437**               | ** ** | **11****,****863** | ** ** | **6****56****,****300** | ** ** |
| Consolidated net income                     |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | —                                      |                    | 116,535             |       | 116,535                   |       | 1,237 |   | 117,772 |   |
| Currency translation  adjustment            |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | (14,953                                     | )                       | —              |       | (14,953                   | )          | (529 | ) | (15,482 | ) |
| Total comprehensive  income (loss)          |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | (14,953                                     | )                       | 116,535             |       | 101,582                   |       | 708 |   | 102,290 |   |
| Dividends paid to noncontrolling  interests |       | —                |       | —                   |       | —             |                       | —                                |       | —          |       | —                                      |                    | —              |       | —                    |       | (544 | ) | (544 | ) |
| Acquisition of  noncontrolling interest     |       | —                |       | —                   |       | —             |                       | —                                |       | (351            | )          | —                                      |                    | —              |       | (351                      | )          | (2,631 | ) | (2,982 | ) |
| Treasury stock acquisition                  |       | —                |       | —                   |       | (1,879,513         | )                          | (51,788                               | )          | —          |       | —                                      |                    | —              |       | (51,788                   | )          | — |   | (51,788 | ) |
| ** **                                  | ** ** | ** **            | ** ** | ** **               | ** ** | ** **         | ** **                 | ** **                            | ** ** | ** **      | ** ** | ** **                                  | ** **              | ** **          | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balances  at December 31, 2009**     | ** ** | **44,000,000**        | ** ** | **$**                    | **29,908** | ** **         | **(2****,153****,****978** | **)**                                 | **$**      | **(****54,802** | **)**      | **$**                                       | **16****3****,****781** | ** **          | **$**      | **(32,167**               | **)**      | **$** | **587,160** | ** ** | **$** | **693,880** | ** ** | **$** | **9,396** | ** ** | **$** | **703,276** | ** ** |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

F-7

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

* *

**1.**                            The Company

 

**Wimm-Bill-DannFoods (“WBD Foods” or “the Company”) is an openjoint stock company registered in Russia. It is a holding company which, as of December 31,2009, owned controlling interests in 37 manufacturing facilities in Russia andelsewhere in the Commonwealth of Independent States (“CIS”), as well asdistribution branches in 30 cities in Russia and elsewhere in the CIS. WBD Foods hasa strong and diversified brand portfolio with over 1,000 types of dairyproducts, and over 150 types of juice, nectars and mineral water.**

** **

**2.**                            Summaryof Significant Accounting Policies

** **

**Accounting Principles**

** **

The Company and itssubsidiaries maintain their accounting books and records in domestic currencybased on domestic accounting regulations. The consolidated financial statementshave been prepared in order to present WBD Foods’ consolidated financialposition, results of operations, and cash flows in accordance with accountingprinciples generally accepted in the United States of America (“U.S. GAAP”) andexpressed in terms of U.S. dollars (see paragraph “Translation Methodology”below).

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued the Accounting StandardsUpdate (“ASU”) 2009-01 (“ASU 2009-01”). ASU 2009-01 also issued as FASBStatement of Financial Accounting Standards (“SFAS”) 168, *The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles*, is effective for financial statements issuedafter September 15, 2009. ASU 2009-01 requires that the FASB’s AccountingStandards Codification (“ASC”) become the single source of authoritative USGAAP principles recognized by the FASB. The Company adopted ASU 2009-01effective July 1, 2009 and changed references to US GAAP in itsconsolidated financial statements issued for the year 2009. The adoption of ASU2009-01 did not impact the Company’s consolidated financial position or resultsof operations.

 

F-8

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.**                            Summaryof Significant Accounting Policies (continued)

** **

Principlesof Consolidation

 

The consolidated financialstatements of the Company include the accounts of WBD Foods and itssubsidiaries where the Company has operating and financial control. Results ofsubsidiaries acquired or disposed of during the year and accounted for by thepurchase method have been included in operations from the relevant date ofacquisition to the relevant date of disposal. Proforma results of operations reflecting these acquisitions have not beenpresented because the results of operations of the acquired companies, eitherindividually or collectively, are not material to consolidated results ofoperations. All inter-company accounts andtransactions are eliminated upon consolidation. Noncontrolling interests in thenet assets and net results of the Company’s subsidiaries are shown under “Equityattributable to noncontrolling interests” in the accompanying consolidatedbalance sheets and “Net income attributable to noncontrolling interests” in theaccompanying consolidated statements of income.

 

**ComprehensiveIncome**

** **

Comprehensive income isdefined as the change in equity of a company during a period from transactionsand other events and circumstance from non-owner sources. The following tableprovides a summary of total comprehensive income.

 
| ** **                                    | ** ** | **Year ended December 31,** | ** **  |
|-----------------------------------------------|------------|----------------------------------|-------------|
| ** **                                    | ** ** | **2009**                         | ** **  | **2008** | ** ** | **2007** | ** ** |
| **Consolidated net income**                   | ** ** | **$**                            | **117,772** | ** ** | **$** | **103,741** | ** ** | **$** | **142,817** | ** ** |
| Other comprehensive  income:                  | ** ** | ** **                       | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net foreign currency  translation gain (loss) |       | (15,482                          | )           | (129,686 | ) | 42,214 |   |
| **Total  comprehensive income (loss)**        | ** ** | **$**                            | **102,290** | ** ** | **$** | **(25,945** | **)** | **$** | **185,031** | ** ** |

 

The following table summarizes the allocation of totalcomprehensive income between shareholders of WBD Foods and the noncontrollinginterests for the twelve months ended December 31, 2009:

 
| ** **                             | ** ** | **Shareholders of********WBD Foods** | ** **  | **Noncontrolling********Interests** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|--------------------------------------|-------------|-------------------------------------|------------|-----------|------------|
| **Consolidated net income**            | ** ** | **$**                                | **116,535** | ** **                          | **$**      | **1,237** | ** ** | **$** | **117,772** | ** ** |
| Other comprehensive  income:           |       |                                 |        |                                |       |      |       |
| Net foreign currency  translation loss |       | (14,953                              | )           | (529                                | )          | (15,482   | )          |
| **Total  comprehensive inco****me**    | ** ** | **$**                                | **101,582** | ** **                          | **$**      | **708**   | ** ** | **$** | **102,290** | ** ** |

 

F-9

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

* *

**2.        **Summary of SignificantAccounting Policies (continued)

** **

**Translation Methodology**

** **

The financial statements are prepared using the localcurrency, the Russian ruble, as the functional currency for WBD Foods and itsRussian subsidiaries. Subsequent translation to the reporting currency, theU.S. dollar, is made in accordance with FASB ASC 830, *ForeignCurrency Matters*. All assets and liabilities of the Company and itssubsidiaries with functional currencies other than the U.S. dollar aretranslated into U.S. dollar equivalents at exchange rates as follows: (1) assetand liability accounts at the rate of exchange in effect on the balance sheetdate, (2) revenues and costs, income and expenses at the average exchangerates for the year, and (3) shareholders’ equity accounts at historicalexchange rates. Translation gains or losses are recorded as a separatecomponent of equity, and transaction gains and losses are reflected inconsolidated net income.

 

The financial statements of Ukrainian, Kyrgyz, Uzbek,Kazakh and Georgian subsidiaries have been prepared using the Ukrainianhryvnia, Kyrgyz som, Uzbek sum, Kazakh tenge and Georgian lari, respectively,as the functional currency. Translation (remeasurement) of domestic currencydenominated financial statements into U.S. dollars has been performed inaccordance with the provisions of FASB ASC 830, *ForeignCurrency Matters*.

 

**Within the Russian Federation, official exchange rates aredetermined daily by the Central Bank of Russia (“CBR”). Market rates may differfrom the official rates but the differences are, generally, within narrowparameters monitored by the CBR. As of December 31, 2009 and 2008, theofficial rates of exchange were 30.24 rubles = 1 U.S. dollar and 29.38 rubles =1 U.S. dollar, respectively. The translation of local currency denominatedassets and liabilities into U.S. dollars for the purposes of these financial statementsdoes not indicate that the Company could realize or settle, in U.S. dollars,the reported values of these assets and liabilities. Likewise, it does notindicate that the Company could return or distribute the reported U.S. dollarvalue of capital to its shareholders.**

** **

**ManagementEstimates**

** **

The preparation of the consolidated financialstatements in conformity with U.S. GAAP requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period. Examples include estimatesof allowance for doubtful accounts, obsolete inventory, and valuation allowancefor deferred tax assets. Actual results could differ from those estimates.

 

F-10

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.        **Summary of SignificantAccounting Policies (continued)

** **

**Cash and Cash Equivalents**

** **

Cash and cashequivalents represent cash on hand and in the Company’s bank accounts andshort-term deposits and highly liquid investments having original maturities ofthree months or less. Cash equivalents are carried at cost which approximatesfair value.

 

**Trade Receivables andAllowance for Doubtful Accounts**

** **

Trade receivables are stated at their net realizablevalue which approximates their fair value. The Company provides an allowancefor doubtful accounts based on management’s periodic review of accounts,including the delinquency of account balances. Delinquency status is based oncontractual terms. The Company evaluates the collectability of its receivablesat least quarterly, based upon various factors, including the financialcondition and payment history of major customers, an overall review ofcollections experience of other accounts and economic factors or eventsexpected to affect the Company’s future collections.

 

Trade receivables are written-off when evidenceexists that they will not be collectible. The Company generally does notrequire collateral from its credit customers.

 

**Inventory**

** **

Inventories, including work-in-process, are valued atthe lower of cost or market. The cost is the price paid or the considerationgiven to acquire the asset. The cost is determined on the basis of weightedaverage cost. For processed inventories, cost is the sum of the expendituresand charges, direct and indirect, in bringing goods to their existing conditionor location. It includes the applicable allocation of production fixed andvariable overhead costs. The market is the current replacement cost, whether bypurchase or by reproduction, limited to the estimated selling price less anycosts of completion and disposal (net realizable value) at the maximum level,and net realizable value, less an allowance for normal profit at the minimumlevel. Net realizable value is the selling price in the ordinary course ofbusiness, less the costs of completion, marketing, and distribution.Unrealizable inventory is fully provided for in the accompanying consolidated financialstatements.

 

**Value-Added Taxes**

** **

Value-added taxes (“VAT”) related to sales arepayable based upon invoices issued to the customer or collection of respectivereceivables. VAT incurred for purchases may be reclaimed, subject to certainrestrictions, against VAT related to sales.

 

VAT related to purchase transactions that are subjectto offset against VAT payable after the balance sheet dates are recognized inthe balance sheets on a gross basis.

 

Asof December 31, 2009, the VAT rates stated by the Russian Tax Code and TaxCodes of our international subsidiaries were the following: in Russia andGeorgia was 18%, in Kazakhstan and Kyrgyzstan it was 12%, and in Ukraine andUzbekistan it was 20%.

 

F-11

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.        **Summary of SignificantAccounting Policies (continued)

** **

**Property, Plant andEquipment**

** **

Property, plant andequipment are stated at historic acquisition cost, less accumulateddepreciation.

 

The acquisition cost of property, plant and equipment comprisesits purchase price, including import duties and non-refundable purchase taxesand any directly attributable costs of bringing the asset to its workingcondition and location for its intended use. Expenditures incurred after theassets have been put into operation, such as repairs and maintenance costs, arenormally expensed in the period the costs are incurred. In situations where itcan be clearly demonstrated that the expenditures have resulted in an increasein the future economic benefits expected to be obtained from the use of an itemof property, plant and equipmentbeyond its originally assessed standard of performance, the expenditures arecapitalized as an additional cost of property, plant and equipment. When assets are sold or retired, their cost andaccumulated depreciation are eliminated from the accounts and any gain or lossresulting from their disposal is included in other operating expenses of theconsolidated statement of income.

 

The carrying value of property, plant and equipment,as determined above is depreciated on a straight-line basis over the estimateduseful lives of the related assets. The following estimated useful lives havebeen applied:

 
| Buildings                |   | 10-50 years |   |
|--------------------------|--------|-------------|--------|
| Machinery  and equipment |   | 5-25  years |   |
| Computer  hardware       |   | 2-7  years  |   |
| Other                    |   | 2-30  years |   |

 

Certain prior yearamounts have been reclassified to conform to the presentation adopted in thecurrent year.

 

Construction inprogress comprises costs directly related to acquisition or construction ofproperty, plant and equipment. Depreciation commences once construction inprogress is complete and the property, plant and equipment are put intooperation.

 

The Companycapitalizes interest costs with respect to qualified assets.

 

Assets acquired under capital leases are included inproperty, plant, and equipment and relate to machinery and equipment.Depreciation of capital lease assets is included in depreciation expense. Thenet present values of amounts due under capital leases are recorded asliabilities and included in other payables and other long-term payables.

 

F-12

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.        **Summary of SignificantAccounting Policies (continued)

** **

**Capital Leases — Lease Accounting**

** **

The Company presents assetsleased as a receivable equal to the net investment in the lease. Finance incomeis based on a pattern reflecting a constant periodic rate of return on the netinvestment outstanding and included in other operating expenses, net. Initialdirect costs are deferred and expensed over the period in which the relatedincome is recognized.

 

**Intangible Assets**

** **

Intangible assets with determinable useful lives areamortized using the straight-line method over their estimated period ofbenefit, ranging from two to ten years.

 

Intangible assets with determinable useful life aretested and evaluated for impairment when indicators of impairment exist. As perour investigation we learned that all trademarks are currently in use and areprojected being used in foreseeable future and there are no indicators of theirimpairment.

 

Indefinite-lived trademarks are evaluated annually forimpairment or when indicators exist indicating such assets may be impaired. Weconduct annual impairment assessments of trademarks, which are our indefinite-livedintangible assets. For indefinite-lived intangible assets, if the fair value isless than the carrying amount, an impairment charge is recognized in an amountequal to that excess.  In order to determine fair value, we use therelief-from-royalty method within income approach, as we believe this our bestassessment of the fair value determination of a market participant under FASBASC 820, *Fair Value Measurements and Disclosures*. This method involves estimating probable future sales, and then applyingan appropriate royalty rate to arrive at the income attributable to trademarksin future years, which is then discounted to net present value. Key inputsinclude: 5 year-sales projection, royalty rate, weighted average cost ofcapital, terminal growth assumption, which were based on observable inputs(Level 2) derived from independent market projections, industry sources andadjusted by the Company’ specific risks.

 

We have determined that these assets will have afinite life, which we estimate to be four-seven years and we now classify theseas definite lived intangibles with a net value of $13,341 at December 31,2009.

 

As a result we recognized impairment loss in theamount of $2,903, included in amortization expense.

 

F-13

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.        **Summary of SignificantAccounting Policies (continued)

** **

**Goodwill**

** **

Goodwillrepresents the excess of the cost of an acquired entity over the net of theamounts assigned to assets acquired and liabilities assumed. It is assigned toreporting units as of the acquisition date.

 

Goodwill is not amortized, but is tested forimpairment at least on an annual basis and between annual tests if an eventoccurs or circumstances change that would more likely than not reduce the fairvalue of a reporting unit below its carrying amount. The impairment testrequires estimating the fair value of a reporting unit and comparing it withits carrying amount, including goodwill assigned to the reporting unit. If theestimated fair value of the reporting unit is less than its net carryingamount, including goodwill, then the goodwill is written down to its impliedfair value.

 

Weperformed impairment test of goodwill at our reporting unit level, which isoperating segments level. The goodwill impairment test consists of a two-stepprocess. The first step is to compare the fair value of a reporting unit to itscarrying value, including goodwill. We typically use discounted cash flowmodels (“DCF”) to determine the fair value of a reporting unit. The assumptionsused in these models are consistent with those we believe hypotheticalmarketplace participants would use.

 

Thecash flows employed in the DCF analysis are based on the Company’s most recentbudget and, for years beyond the budget, the Company’s estimates, which arebased on assumed growth rates. The discount rates used in the DCF analysis areintended to reflect the risks inherent in the future cash flows. If the fairvalue of the reporting unit is less than its carrying value, the second step ofthe impairment test must be performed in order to determine the amount ofimpairment loss, if any.

 

Thesecond step compares the implied fair value of the reporting unit goodwill withthe carrying amount of that goodwill. If the carrying amount of the reportingunit’s goodwill exceeds its implied fair value, an impairment charge isrecognized in an amount equal to that excess. The loss recognized cannot exceedthe carrying amount of goodwill.

 

Theimpairment test with regards to goodwill was performed as of December 31,2009. Fair values of each reporting unit calculated using discounted cash flowtechniques were determined to exceed the carrying amounts; consequently, noimpairment issues arose.

 

F-14

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.        **Summary of SignificantAccounting Policies (continued)

** **

**Impairment of Long-Lived Assets**

** **

When events andcircumstances occur indicating that the carrying amount of a long-lived assetor group of assets may not be recoverable, the Company estimates the futureundiscounted cash flows expected to derive from the use and eventualdisposition of the asset or group of assets. If the sum of the expected futurecash flows (undiscounted and without interest charges) is less than thecarrying amount of the long-lived asset or group of assets, the Company wouldthen calculate the impairment as the excess of the carrying value of the assetor group of assets over the estimate of its fair value. Any impairment loss isincluded in other operating expenses in the consolidated statement of income.

 

At December 31,2009, the Company reviewed its long-lived assets for indicators of impairmentin accordance FASB ASC 360, *Property, Plant andEquipment.* No impairment losses were recognized.

 

**Revenue Recognition**

** **

Sales are recognized, net of VAT and discounts, whengoods are shipped or delivered to customers, depending on the sales terms. Inaccordance with the Company’s standard sales agreements, at the time ofshipment title is transferred and the customer assumes the risk and rewards ofownership. The Company has a number of contracts where sales are recognizedupon delivery, which is when the ownership title transfers to the customer.

 

The Company offers sales volume discounts based onindividual customer volumes in a given period. An accrual for such discountsand other customer allowances is recognized as a reduction of revenue in theconsolidated statements of income.

 

Shipping and Handling Expenses

 

Shipping and handling expenses incurred by the Companyare reflected in selling and distribution expenses in the accompanyingconsolidated statements of income. Shipping and handling expenses for the yearsended December 31, 2009, 2008 and 2007 were $89,086, $135,598 and$111,228, respectively.

 

**Government Grants**

** **

Government grants are recognized when therelated cash or assets are received. Government grants are deferred andamortized over the period necessary to match them with the related costs thatthey are intended to compensate. Grants received are treated as deferred incomein the accompanying consolidated financial statements. The amortization ofgovernment grants related to acquisition of property, plant and equipment isrecognized as a reduction of depreciation expense of the related long-termassets. Government grants related to subsidies of interest incurred on the bankloans received to construct qualifying agricultural facilities andinfrastructure are recognized as a reduction of interest expense.  Interest expense incurred in government grantloan programs is recognized in financial income and expenses, net.

 

F-15

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.        **Summary of SignificantAccounting Policies (continued)

** **

**Debt Issuance Costs**

** **

Debt issuance costs are capitalized andamortized over the term of the related debt. Amortization charge is calculatedusing the effective interest method.

 

**Income Tax**

** **

Deferred tax assets and liabilities are recognized forthe expected future tax consequences of existing differences between financialreporting and tax reporting bases of assets and liabilities, and loss or taxcredit carry forwards using enacted tax rates expected to be in effect at thetime these differences are realized. A valuation allowance is provided when itis more likely than not that some or all of the deferred tax assets will not berealized in the future. These evaluations are based on expectations of futuretaxable income and reversals of various taxable temporary differences.

 

**Marketing and AdvertisingCosts**

** **

Advertising costs are expensed as incurred, except formass-media advertising which is expensed the first time the advertising isshown. Marketing and advertising costs for the years ended December 31,2009, 2008 and 2007 were $139,532, $142,312 and $137,965, respectively.

 

**ShareBased Compensation**

** **

The Company follows the provisions of FASB ASC 718, *Compensation-Stock compensation*, which requires allcompanies to measure compensation cost for all share-based payments (includingemployee stock options) at fair value. The fair value of share-based paymentawards is estimated on the date of grant using an option-pricing model andaccounted as liability. The Company has chosen to use the Black-Sholes Model asthe option-pricing model and the value of the portion of the award that isultimately expected to vest is being recognized as expense on the straight-linebasis over the requisite service periods.

 

Earnings per Share

 

Earnings per commonshare have been determined based upon the weighted average number of sharesoutstanding during these periods. There are no potentially dilutive securities.

 

Concentration of Credit Risk

 

Financial instrumentswhich potentially expose the Company to concentrations of credit risk consistprimarily of cash in banks, short-term bank deposits and trade receivables. TheCompany deposits available cash with several financial institutions. The creditrisk associated with trade accounts receivable is limited due to the Company’slarge customer base. At December 31, 2009, 2008 and 2007, the Company hadno other significant concentrations of credit risk. The Company does notusually require collateral from its customers.

 

F-16

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.        **Summary of SignificantAccounting Policies (continued)

** **

**Fair Value of FinancialInstruments**

** **

The carrying amountsof cash and cash equivalents, short-term bank deposits, accounts receivable,accounts payable and short-term loans reported in the consolidated balancesheets approximate fair values due to the short maturity of those instruments.The fair value of the Company’s long-term ruble notes payable is estimatedbased on market quotes at $181,381 at December 31, 2009. The fair value ofthe variable-rate loan (syndicated loan) is estimated at $243,985 and the fairvalue of the fixed-rate loans is estimated at $56,636 at December 31,2009.

 

*SegmentReporting*

* *

FASB ASC 280, *Segment reporting*,requires that a business enterprise report financial and descriptiveinformation about its reportable operating segments. WBD Foods currentlymanages its business as three major operating segments — dairy,****beverages and babyfood production anddistribution, and accordingly, reports segment information on this basis.

 

**Comparative Figures**

** **

Where necessary, reclassifications have been made tothe prior period consolidated financial statements to conform to thepresentation of the current period.

 

New and Recently Adopted Accounting Pronouncements

 

In January 2010,the FASB issued ASU 2010-6, *Fair Value Measurementsand Disclosures (Topic 820)*: *Improving Disclosuresabout Fair Value Measurements* (“ASU 2010-6”) that amends Topic 820, *Fair Value Measurements and Disclosures*, of the FASBCodification. ASU 2010-6 requires separate disclosure of significant transfersbetween Level 1 and Level 2 fair value measurement inputs and a description ofthe reasons for the transfers. An entity is also required to present separatelyinformation about purchases, issuance, and settlements in the reconciliationfor fair value measurements using Level 3 inputs. ASU 2010-6 amends existingdisclosure requirements in regards of level of disaggregation and inputs andvaluation techniques. ASU 2010-6 is effective for interim and annual reportingperiods beginning after December 15, 2009, except for the disclosuresabout activity in Level 3 fair value measurements that are effective forinterim and annual periods beginning after December 15, 2010. The Companywill adopt ASU 2010-6 from January 1, 2010. The Company does not expectASU 2010-6 to have a material impact on the Company’s consolidated financialposition and results of operations.

** **

**F-17**

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.         Summary of Significant Accounting Policies (continued)**

** **

New and Recently Adopted Accounting Pronouncements(continued)

 

In January 2010,the FASB issued ASU 2010-2, *Consolidation (Topic 810):Accounting and Reporting for Decreases in Ownership of a Subsidiary—a ScopeClarification* (“ASU 2010-2”) that amends Topic 810, Consolidation,of the FASB Codification. ASU 2010-2 clarifies the list of operations that arewithin the scope of Subtopic 810-10, Consolidation—Overall, and related guidance.ASU 2010-2 also clarifies that if a decrease in ownership occurs in asubsidiary that is not a business or nonprofit activity, an entity first needsto consider whether the substance of transaction is addressed in other topicssuch as transfers of financial assets, revenue recognition, exchange ofnonmonetary assets, sales of real estate, conveyances of oil and gas mineralrights. If no other guidance exists, an entity should apply guidance inSubtopic 810-10, Consolidation — Overall. ASU 2010-2 expands the disclosurerequirements about the deconsolidation of a subsidiary or derecognition of agroup of assets within the scope of Subtopic 810-10, Consolidation — Overall.ASU 2010-2 is effective for interim and annual reporting periods ending on orafter December 15, 2009, and should be applied retrospectively to thefirst period that an entity adopted SFAS 160 Noncontrolling Interests inConsolidated Financial Statements — an amendment of ARB No. 51. TheCompany adopted ASU 2010-2 starting from annual consolidated financialstatements as of and for the year ended December 31, 2009 retrospectivelyto January 1, 2009. Adoption of ASU 2010-2 did not have a material impacton the Company’s consolidated financial position and results of operations.

 

In August 2009,the FASB issued ASU 2009-05, *Fair Value Measurementsand Disclosures (Topic 820): Measuring Liabilities at Fair Value* (“ASU2009-05”) that amends Subtopic 820-10, *Fair value measurementsand disclosures, Overall of Topic 820*, of the FASB Codification. ASU2009-05 provides clarification that in circumstances in which a quoted price inactive market is not available, a reporting entity is required to use one ormore of the following valuation techniques: valuation based on quoted price ofidentical liability when traded as an asset; quoted prices of similarliabilities or similar liabilities when traded as an assets, or any othertechnique consistent with the principles of Topic 820, such as present valuetechnique. ASU 2009-05 also clarifies that a reporting entity is not requiredto include a separate input to existence of restriction that prevents thetransfer of the liability. ASU 2009-05 is effective for the first reportingperiod (including interim periods) beginning after issuance. Early applicationis permitted if financial statements for prior period have not been issued. TheCompany will adopt ASU 2009-05 from January 1, 2010. The Company does notexpect ASU 2009-05 to have a material impact on the Company’s consolidatedfinancial position and results of operations.

 

In May 2009,the FASB issued FASB ASC 855, *Subsequent Events*.FASB ASC 855 establishes the accounting for, and disclosure of, material eventsthat occur after the balance sheet date but before the financial statements areissued or are available to be issued. In general, these events are recognizedif the condition existed at the balance sheet date, and are not recognized ifthe condition did not exist at the balance sheet date. Disclosure is requiredfor unrecognized material events to keep the financial statements from beingmisleading.

 

F-18

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.         Summary of Significant Accounting Policies (continued)**

** **

New and Recently Adopted Accounting Pronouncements(continued)

 

In February 2010FASB issued ASU 2010-09 to amend ASC 855, *Subsequent Events,*that removes the requirement to disclose the date through which subsequentevents were evaluated. The guidance in ASC 855 as revised by the ASU iseffective immediately (i.e., for financial statements available to be issuedafter 24 February 2010.).The Company adopted ASU 2010-09 amended ASC 855starting from annual consolidated financial statements as of and for the yearended December 31, 2009. Adoption of ASU did not have a material impact onthe Company’s consolidated financial position and results of operations.

 

.EffectiveJanuary 1, 2009, the Company adopted FASB ASC 820, *Fair ValueMeasurements and Disclosures*for non-financial assets and liabilities, which defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements. Because there usually is a lack of quoted marketprices for long-lived assets, the Company determines fair value using thepresent value of estimated future net cash flows from using these assets or byusing historical data of market transactions with similar assets wherepossible.

 

Adoptionof FASB ASC 820 for nonfinancial assets and liabilities did not have a materialimpact on the Company’s consolidated financial position and results ofoperations.

 

In December 2007,the FASB issued FASB Statement 141R *Business Combinations*(now ASC 805, *Business Combinations)*, which wassubsequently amended in April 2009. FASB ASC 805 retains the fundamentalrequirements in SFAS 141, *Business Combinations*,that acquisition method of accounting be used for all business combinations andfor an acquirer to be identified for each business combination, but expands thescope of acquisition accounting to all transactions and circumstances underwhich control of business is obtained. FASB ASC 805 requires an acquirer torecognize the assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree at the acquisition date, measured at their fair valuesas of that date. This replaces SFAS 141’s cost-allocation process, whichrequired the cost of an acquisition to be allocated to the individual assetsacquired and liabilities assumed based on their estimated fair values. FASB ASC805 shall be applied prospectively to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. The Company adopted FASBASC 805 (as amended) from January 1, 2009. Adoption of FASB ASC 805 didnot have a material impact on the Company’s consolidated financial position andresults of operations.

 

F-19

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**2.         Summary of Significant Accounting Policies (continued)**

** **

Newand Recently Adopted Accounting Pronouncements (continued)

 

In December 2007,the FASB issued FASB Statement 160 *Noncontrolling Interestsin Consolidated Financial Statements (now* FASB ASC 810 *Consolidation)*. FASB ASC 810 requires noncontrolling interest,previously called minority interest, to be presented as a separate item in theequity section of the consolidated balance sheet. It also requires the amountof consolidated net income attributable to noncontrolling interest to beclearly presented on the face of the consolidated statements of income andcomprehensive income. FASB ASC 810 was effective for fiscal periods beginningon or after December 15, 2008. The Company adopted the provisions of FASBASC 810 from January 1, 2009.  The adoption of FASB ASC 810resulted in the reclassification of noncontrolling interests of $11,863 as of December 31,2008, $13,862 as of December 2007, and $18,977 as of December 31,2006 to equity as part of noncontrolling interests. Cash paid for acquisitionof noncontrolling interests was also reclassified in Consolidated Statements ofCash Flows for years ended 2008 and 2007 from cash flows from investingactivities to cash flows from financing activities in the amount $3,723 and$19,560, respectively.

 

**3.**                            Businessacquired

** **

Acquisition of Noncontrolling Interests

 

The changes in noncontrollinginterest during the years ended December 31, 2009 and 2008 were asfollows:

 
| **Balance at December 31, 2007**                     | ** ** | **$**  | **13,862**    | ** ** |
|-----------------------------------------------------------|------------|--------|---------------|------------|
| Acquisitions of noncontrolling interests in  subsidiaries |       | (1,727 | )             |
| Noncontrolling interest share in net income               |       | 2,029  |          |
| Currency translation adjustment                           |       | (2,301 | )             |
| **Balance at December 31, 200****8**                 | ** ** | **$**  | **11,863**    | ** ** |
| Acquisitions of noncontrolling interests in  subsidiaries |       | (2,631 | )             |
| Noncontrolling interest share in net income               |       | 1,237  |          |
| Dividends paid to noncontrolling interests                |       | (544   | )             |
| Currency translation adjustment                           |       | (529   | )             |
| **Balance at December 31, 200****9**                 | ** ** | **$**  | **9,****396** | ** ** |

 

*2009*

* *

In April and September 2009, WBD Foodsacquired 0.44% of WBD OJSC, a subsidiary, from noncontrolling shareholders ofWBD OJSC for cash consideration of $2,982. The purchase price in excess of fairvalue of net assets acquired of $351 was recorded to share premiumaccount in equity.

 

F-20

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**3.**                            Businessacquired (continued)

** **

*2008*

* *

In July-November 2008, WBD Foods acquired aremaining noncontrolling interest of 2.57% in WBD Beverages for cashconsideration of $3,263. As a result of this transaction, WBD Foods has a 100%interest in WBD Beverages.The purchase price in excess of fair value ofnet assets acquired of $1,536 was recorded as goodwill.

 

*2007*

* *

In March-April 2007, WBD Foods acquiredadditional 4.71% interest in Ochakovo Dairy Plant for cash consideration of$3,312. As a result of this transaction, WBD Foods has a 98.46% interest inOchakovo Dairy Plant. The purchase price in excess of fair value of net assetsacquired of $1,462 was recorded as goodwill.

 

In May 2007, WBD Foods acquired additional 30.12%interest in Obninsk Dairy Plant OJSC for cash consideration of $10,611. InNovember-December WBD Foods acquired another 3.39% interest for cashconsideration of $1,266. After these transactions, WBD Foods has a 99.84%interest in OJSC Obninsk Dairy Plant OJSC. The purchase price in excess of fairvalue of net assets acquired of $6,661 and $754, respectively, was recorded asgoodwill.

 

In November-December 2007, WBD Foods acquired anadditional 13.24% interest in Angarskiy Dairy Plant OJSC for cash considerationof $830. As a result of this transaction, WBD Foods has 96.6% interest in OJSCAngarskiy Dairy Plant OJSC. The purchase price in excess of fair value of netassets acquired of $788 was recorded as goodwill.

 

Business Combinations

 

*2007*

* *

In July 2007, WBD Foods acquired a 94.6% interestin Niva CJSC for cash consideration of $1,185. The acquired farm produces rawmilk in the Krasnodar region. This acquisition allows the Company to reduce rawmaterial expenses and become less dependent on raw milk suppliers, as well asto ensure a steady supply of raw milk to keep pace with growth in productiondriven by an increase in market demand.

 

The fair value of net assets acquired in excessof the purchase price of $778 was recorded as a reduction of the value ofproperty, plant and equipment.

 

In October 2007, WBD Foods acquired a 100%interest in Gruzinskie Producty LLC for cash consideration of $1,100, of which$800 was paid at the acquisition date and $300 in March 2008. The acquiredcompany produces milk products and is the third largest dairy plant in Georgia.The acquisition was in line with Wimm-Bill-Dann’s declared strategy of growingits business by purchasing successful companies with leading market positionsand strong brand portfolios.

 

The cash consideration paid for this acquisition was allocated toproperty, plant and equipment $964, intangible assets of $11, goodwill of$3,246 and current assets of $26, less liabilities of $3,147. In 2008 an adjustment to the preliminarypurchase price allocation for Gruzinskie Producty LLC was made which resulted in decrease ofgoodwill by $1,142.

 

F-21

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**4.**                            TradeReceivables, Net

** **

Trade receivables as of December 31,2009 and 2008 were as follows:

 
| ** **                        | ** ** | **2009** | ** **          | **2008**   | ** ** |
|-----------------------------------|------------|----------|---------------------|------------|------------|
| Trade receivables                 |       | $        | 121,402             |       | $          | 131,248 |   |
| Allowance for doubtful  accounts  |       | (9,319   | )                   | (5,795     | )          |
| **Total  trade receivables, net** | ** ** | **$**    | **1****12****,083** | ** ** | **$**      | **125,453** | ** ** |

 

The changes in the allowance for doubtful accounts for the years ended December 31,2009, 2008 and 2007 were as follows:

 
| ** **                       | ** ** | **2009** | ** **    | **2008**   | ** ** | **2007**  | ** ** |
|----------------------------------|------------|----------|---------------|------------|------------|-----------|------------|
| Balance, beginning of  period    |       | $        | 5,795         |       | $          | 3,726     |       | $ | 7,078 |   |
| Provision for doubtful  accounts |       | 4,511    |          | 8,155      |       | 1,649     |       |
| Write off of trade  receivables  |       | (612     | )             | (4,908     | )          | (6,016    | )          |
| Recovery                         |       | (382     | )             | (229       | )          | —    |       |
| Currency translation  adjustment |       | 7        |          | (949       | )          | 1,015     |       |
| **Balance,  end of period**      | ** ** | **$**    | **9****,319** | ** ** | **$**      | **5,795** | ** ** | **$** | **3,726** | ** ** |

 

**5.**                            Inventory

** **

Inventory as of December 31,2009 and 2008 was as follows:

 
| ** **           | ** ** | **2009** | ** **              | **2008**   | ** ** |
|----------------------|------------|----------|-------------------------|------------|------------|
| Raw materials        |       | $        | 127,919                 |       | $          | 137,849 |   |
| Work in progress     |       | 14,425   |                    | 20,618     |       |
| Finished goods       |       | 48,990   |                    | 65,301     |       |
| **Total  inventory** | ** ** | **$**    | **19****1****,****334** | ** ** | **$**      | **22****3****,****768** | ** ** |

 

**6**.                            Other Current Assets

** **

Other current assets as of December 31,2009 and 2008 were as follows:

 
| ** **                                               | ** ** | **2009** | ** ** | **2008**   | ** ** |
|----------------------------------------------------------|------------|----------|------------|------------|------------|
| Restricted cash                                          |       | $        | 669        |       | $          | 34 |   |
| Other debtors, net                                       |       | 9,918    |       | 7,010      |       |
| Prepaid expenses                                         |       | 1,058    |       | 2,357      |       |
| Prepayment for  participation in tender                  |       | 2,865    |       | 2,487      |       |
| Net investment in direct  finance lease, current portion |       | 1,526    |       | 1,774      |       |
| VAT on advances for  property, plant and equipment       |       | 1,793    |       | 991        |       |
| Bonds issue expenses                                     |       | 833      |       | 933        |       |
| Other                                                    |       | 719      |       | 1,046      |       |
| **Total  other assets**                                  | ** ** | **$**    | **19,381** | ** ** | **$**      | **1****6****,6****32** | ** ** |

 

F-22

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**7.**                            IntangibleAssets, Net

** **

Intangible assets as of December 31, 2009 and2008 were comprised of the following:

 
| ** **                                  | ** ** | **2009**                   | ** ** | **2008**                      | ** ** |
|---------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** |
| Intangible assets with  determinable lives: | ** ** | ** **                 | ** ** | ** **                    |       |   |   |   |   |
| Software                                    |       | $                          | 27,792     |                          | $          | (7,513 | ) | $ | 16,874 |   | $ | (4,898 | ) |
| Trademarks                                  |       | 18,519                     |       | (2,565                        | )          | 4,816 |   | (1,850 | ) |
| Supplier  contracts                         |       | 98                         |       | (95                           | )          | 103 |   | (100 | ) |
| Others                                      |       | 2,137                      |       | (277                          | )          | 2,408 |   | (530 | ) |
| Intangible assets  with indefinite lives:   |       |                       |       |                          |       |   |   |   |   |
| Trademarks                                  |       | 592                        |       | —                        |       | 18,176 |   | — |   |
| **Total****intangible****assets**           | ** ** | **$**                      | **49,138** | ** **                    | **$**      | **(10,450** | **)** | **$** | **42,377** | ** ** | **$** | **(7,378** | **)** |

 

Software and supplier contracts, excluding Oracle ERPsystem, have a weighted average useful life of five years, and trademarks havea weighted average useful of five years.

 

Gross carrying amount of capitalized softwaredevelopment costs related to the implementation of the new Oracle ERP systemamounted to $15,382 as of December 31, 2009.   The costs related to Oracle ERP systemcapitalized in 2009 and 2008 amounted to $ 8,196 and $ 6,767, respectively.Oracle ERP system was launched in year 2009 and has an estimated useful life often years, accumulated amortization related to ERP system capitalized costs asof December 31, 2009 amounted to $850.

 

Amortization expense during the years ended December 31,2009, 2008 and 2007 amounted to $7,416, $3,668 and $2,487, respectively.Amortization expense for year 2009 included impairment charge in the amount of$2,903 related to trademarks that previously were accounted as intangibles withindefinite useful life.

 

Amortization expense relating to the net carryingamount of intangible assets at December 31, 2009 is estimated to be thefollowing:

 
| ** ** | ** ** | **Years ended  December 31,** | ** ** |
|------------|------------|------------------------------------|------------|
| 2010       |       | $                                  | 9,572      |   |
| 2011       |       | 5,789                              |       |
| 2012       |       | 5,486                              |       |
| 2013       |       | 4,547                              |       |
| 2014       |       | 2,704                              |       |
| Thereafter |       | 9,998                              |       |
| **Total**  | ** ** | **$**                              | **38,096** | ** ** |

 

F-23

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**8.**                            Property,Plant and Equipment, Net

** **

The net book value ofproperty, plant and equipment at December 31, 2009 and 2008 was comprisedof the following:

 
| ** **                                               | ** ** | **2009**                  | ** **          | **2008**                | ** ** |
|----------------------------------------------------------|------------|---------------------------|---------------------|-------------------------|------------|
| Buildings                                                |       | $                         | 282,492             |                    | $          | 263,307 |   |
| Machinery  and equipment                                 |       | 667,222                   |                | 620,622                 |       |
| Computer  hardware                                       |       | 20,865                    |                | 20,133                  |       |
| Other                                                    |       | 78,911                    |                | 74,680                  |       |
| **Gross  book value of property, plant and equipment**   | ** ** | **1****,049****,****490** | ** **          | **97****8****,****742** | ** ** |
| Accumulated  depreciation                                |       | (479,628                  | )                   | (401,758                | )          |
| Advances  paid for property, plant and equipment         |       | 16,878                    |                | 17,835                  |       |
| Construction  in progress and equipment for installation |       | 113,256                   |                | 98,649                  |       |
| **Total  property, plant and equipment, net**            | ** ** | **$**                     | **699****,****996** | ** **              | **$**      | **69****3****,****468** | ** ** |

 

The Company capitalized interest costs of $4,734,$6,653, and $6,421 during the years ended December 31, 2009, 2008 and2007, respectively, with respect to qualified assets.

 

Depreciation expense during the years ended December 31,2009, 2008 and 2007 amounted to $97,467, $112,155, and $84,087, respectively.

 

Assets with a gross book value of $15,320 recordedunder capital leases are included to machinery and equipment. The respectiveaccumulated depreciation of those assets is amounted to $11,145. Depreciationcharge for the year ended December 31, 2009 amounted to $3,276. Futureminimum lease payments to be paid on capital lease contracts are presentedfurther in Note 14.

 

**9.**                            Goodwill

** **

The changes in the carrying amount of goodwill for each segment for theyears ended December 31, 2009 and 2008 were as follows:

 
| ** **                                | ** ** | **Dairy** | ** **         | **Beverages** | ** ** | **Total**     | ** ** |
|-------------------------------------------|------------|-----------|--------------------|---------------|------------|---------------|------------|
| Balance at  December 31, 2007        |       | $         | 121,730            |          | $          | 7,661         |       | $ | 129,391 |   |
| Acquisitions                              |       | (1,142    | )                  | 1,536         |       | 394           |       |
| Currency translation adjustment           |       | (19,789   | )                  | (1,248        | )          | (21,037       | )          |
| Balance at December 31, 2008         |       | 100,799   |               | 7,949         |       | 108,748       |       |
| Currency translation adjustment           |       | (2,957    | )                  | (148          | )          | (3,105        | )          |
| **Balance at December 31, 200****9** | ** ** | **$**     | **97****,****842** | ** **    | **$**      | **7,****801** | ** ** | **$** | **105,643** | ** ** |

** **

**The reduction of goodwill of $1,142 in 2008 related to Dairy segmentrepresents an adjustment to the preliminary purchase price allocation for**Gruzinskie Producty LLCacquired in October 2007.

 

F-24

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements

 

Years ended December 31,2009, 2008 and 2007

 

*(Amounts in thousands ofU.S. dollars, except where otherwise stated)*

 

**10.**                     Other Non-Current Assets

** **

Other non-current assets at December 31, 2009and 2008 were comprised as follows:

 
| ** **                                | ** ** | **2009** | ** ** | **2008**   | ** ** |
|-------------------------------------------|------------|----------|------------|------------|------------|
| Debt issuance costs, net  of amortization |       | $        | 1,282      |       | $          | 2,525 |   |
| Other                                     |       | 320      |       | 1,058      |       |
| **Total other assets**                    | ** ** | **$**    | **1,602**  | ** ** | **$**      | **3****,5****83** | ** ** |

 

**11.**                     Accrued Liabilities

** **

Accrued liabilities at December 31, 2009 and 2008were comprised as follows:

 
| ** **                            | ** ** | **2009** | ** ** | **2008**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|
| Payroll related accruals              |       | $        | 14,365     |       | $          | 12,625 |   |
| Stock appreciation rights  obligation |       | 16,064   |       | 847        |       |
| Interest accruals                     |       | 6,171    |       | 7,207      |       |
| Marketing and advertising  accruals   |       | 4,778    |       | 907        |       |
| VAT and income tax  contingencies     |       | 1,706    |       | 1,793      |       |
| Customer allowances                   |       | 5,688    |       | 2,545      |       |
| Other accruals                        |       | 6,197    |       | 7,940      |       |
| **Total  accrued liabilities**        | ** ** | **$**    | **54,969** | ** ** | **$**      | **33,864** | ** ** |

** **

**12.**                     Short-Term and Long-TermLoans

** **

Short-term bank loans at December 31, 2009 and2008 were as follows:

 
| ** **                 | ** ** | **200****9**           | ** ** | **200****8** | ** **        |
|----------------------------|------------|------------------------|------------|--------------|-------------------|
| ** **                 | ** ** | **No. of  loans** | ** ** | **Amount**   | ** **        | **Weighted  average  interest  rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** |
| ** **                 | ** ** | ** **             | ** ** | ** **   | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Euro-denominated           |       |                   |       | $            | —            |   | — |   |   |   | $ | 355 |   | 16.00 | % |
|                       |       |                   |       |         |              |   |   |   |   |   |   |   |   |
| Ruble-denominated          |       | 5                      |       | 4,521        |              | 6.66 | % | 7 |   | 65,923 |   | 14.97 | % |
| ** **                 |       |                   |       |         |              |   |   |   |   |   |   |   |   |
| **Total short-term loans** | ** ** | ** **             | ** ** | **$**        | **4****,****521** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **66,278** | ** ** | ** ** | ** ** |

 

F-25

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**12.**                    Short-Term and Long-TermLoans (continued)

 

Long-term loans at December 31,2009 and 2008 were as follows:

 
| ** **                                | ** ** | **2009**               | ** ** | **2008**                    | ** **          |
|-------------------------------------------|------------|------------------------|------------|-----------------------------|---------------------|
| ** **                                | ** ** | **No. of  loans** | ** ** | **Amount**                  | ** **          | **Weighted  average  interest rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** |
| Euro-denominated (maturity 2011-2020)     |       | 2                      |       | $                           | 3,013               |   | 1.76 | % | 2 |   | $ | 4,730 |   | 1.83 | % |
| Ruble-denominated  (maturity 2010-2012)   |       | 29                     |       | 55,293                      |                | 8.46 | % | 32 |   | 81,059 |   | 9.84 | % |
| U.S. dollar-denominated  (maturity 2011)  |       | 1                      |       | 250,000                     |                | 2.02 | % | 1 |   | 250,000 |   | 4.42 | % |
| **Total  amount of long-term borrowings** | ** ** | ** **             | ** ** | **3****08****,****30****6** | ** **          | ** ** | ** ** | ** ** | ** ** | **335,789** | ** ** | ** ** | ** ** |
| Less current portion of  long-term loans  |       |                   |       | (22,308                     | )                   |   |   |   |   | (8,632 | ) |   |   |
| **Total long-term loans**                 | ** ** | ** **             | ** ** | **$**                       | **285****,****998** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **327,****157** | ** ** | ** ** | ** ** |

##### *** ***

The Companyhas an unsecured $250,000 syndicated loan (the “Loan”) due April 2011. TheLoan bears the interest at an annual rate of LIBOR plus 1.75% (2.02% as of December 31,2009), payable every three months. The loan agreement contains a number ofcovenants including requirements to maintain certain financial ratios which arebeing maintained by the Group. The proceeds of the Loan were used for therefinancing of existing debt and general corporate purposes.

 

On August 28,2009 Company’s subsidiary has borrowed 200 million rubles ($6,614 at theexchange rate as of December 31, 2009) long-term secured loan from AlfaBank with maturity in 2012 at the fixed annual interest rate of 18%.

 

Theremaining amount of long-term ruble-denominated loans as of December 31,2009 mainly comprise of the 411.5 million rubles ($13,608 at the exchange rate asof December 31, 2009) subsidized loan from Moscow Food ResourcesDepartment and a number of subsidized loans borrowed by the Company’sagricultural subsidiaries, including 286.8 million rubles loan fromUnicreditbank, and 283 million rubles loan from Rosselkhozbank ($9,484 and$9,358 at the exchange rate as of December 31, 2009 respectively).

 

From April throughDecember 2009, a number of the Company’s subsidiaries have entered intounsecured short-term ruble-denominated loan agreements with Alfa Bank borrowing136.7 million rubles ($4,521 at the exchange rate as of December 31, 2009)at the average annual interest rate of 6.66%.

 

F-26

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

##### ***12.***                              Short-Termand Long-Term Loans (continued)

 

On June 3,2009, the Company repaid in advance 750 million rubles ($24,801 at the exchangerate as of December 31, 2009 or $24,404 at the date of transaction)secured loan, included in the ruble-denominated long-term borrowings as of December 31,2008 and 500 million rubles ($16,534 at the exchange rate as of December 31,2009 or $16,270 at the date of transaction) secured loan included inruble-denominated short-term loans as of December 31, 2008. Both loanswere borrowed from Sberbank.

 

##### ***In April and May 2009 the Company repaid 1,300 million rubles($42,989 at the exchange rate as of December 31, 2009 or $39,997 at theexchange rate as of the dates of repayment) short-term unsecured loan from AlfaBank.***

##### *** ***

##### ***Guarantees***

##### *** ***

At December 31, 2009 and 2008, WBD Foods andcertain other major subsidiaries guaranteed certain short-term and long-termbank loans received by other subsidiaries of WBD Foods. The aggregate amount ofsuch guarantees equaled the carrying amount of the respective short-term andlong-term loans.

 

**At December 31, 2009 and 2008,WBD Foods and certain other major subsidiaries guaranteed certain short-termand long-term bank loans received by third parties in amount of $207 and $251respectively.**

** **

##### ***Collateral***

##### *** ***

Certain of the Company’sproperty, plant and equipment served as collateral for the short-term andlong-term loans from Rosselkhozbank, Sberbank,Unicreditbank and Alfa Bank.

 

At December 31, 2009 and2008 the assets that served as collateral consisted of the property, plant andequipment with a net book value of $21,571 and $75,513, respectively.

 

None of the othershort-term and long-term loans and long-term notes payable are secured.

 

**13.**                     Long-Term Notes Payable

** **

Notes payable issued by WBD Foods at December 31,2009 and 2008 were as follows:

 
| **Issuer**                         | ** ** | **Currency** | ** ** | **2009**            | ** ** | **2008**    | ** ** |
|------------------------------------|------------|--------------|------------|---------------------|------------|-------------|------------|
| WBD Foods                          |       | Ruble        |       | 185,835             |       | 247,647     |       |
| **Total**                          | ** ** | ** **   | ** ** | **185****,****835** | ** ** | **247,647** | ** ** |
| less current portion               |       |         |       | 185,835             |       | 159,153     |       |
|                               |       |         |       |                |       |        |       |
| **Total  long-term notes payable** | ** ** | ** **   | ** ** | **$**               | **—** | ** **  | **$**      | **88,494** | ** ** |
|                                    |            |              |            |                     |            |             |            |  |  |

 

F-27

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**13.**                     Long-Term Notes Payable(continued)

** **

*WBD Foods Ruble Notes*

* *

**On December 21, 2005, WBD Foods issued 3,000,000non-convertible ruble-denominated notes at a face value of 1,000 rubles each.The offering raised a total of 3 billion rubles ($99,193 at the exchange rateas of December 31, 2009, of which $13,226 have been repaid as of December 31,2009). The notes are redeemable by WBD Foods on December 15, 2010. Theinterest rate of the coupon is 9%. The interest is payable semi-annually inarrears, commencing on June 21, 2006.**

 

On March 6, 2009, theCompany carried out the repayment of its ruble bonds, which were issued inMarch 2008 and which had a put option exercisable on March 6, 2009, from itsown cash sources in the amount of 4,660.3 million rubles, which is theequivalent of $128,636 at the exchange rates at March 6, 2009.

 

**In May and June 2009, the Company issued bonds onMICEX raising cash of 3 billion rubles, ($96,945 at the exchange rates at thedates of transactions or $99,498 as of December 31, 2009). The bonds aredue in February 2013, and bondholders have a put option exercisable inSeptember, 2010, at 100% of nominal value plus accrued interest. **As aresult the bonds are classified as current debt as of December 31, 2009. The annual interest rate of the coupon is 15% for thenext one and half years. The interest is payable semi-annually commencing in September 2009.

** **

##### ***Maturity of Long-Term Loans andLong-Term Notes Payable***

##### *** ***

The combined aggregatematurities of long-term loans (Note 12) and long-term notes payable outstandingat December 31, 2009 were as follows:

 
| ** **                                            | ** ** | **Years ended  December 31,** | ** **          |
|-------------------------------------------------------|------------|------------------------------------|---------------------|
|                                                  |       |                               |                |
| 2010                                                  |       | $                                  | 208,143             |   |
| 2011                                                  |       | 257,467                            |                |
| 2012                                                  |       | 12,016                             |                |
| 2013                                                  |       | 4,748                              |                |
| 2014                                                  |       | 4,716                              |                |
| Thereafter                                            |       | 7,050                              |                |
| **Total long-term loans and long-term notes payable** | ** ** | **$**                              | **494****,****140** | ** ** |

 

F-28

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**14.**                     Vendor Financing

** **

The Company has certain vendorfinancing obligations included in other payables and other long-term payableswhich primarily represent payables for property, plant and equipment and werecomprised of the following as of December 31,2009 and 2008:

 
| ** **                                      | ** ** | **2009** | ** **                 | **2008**   | ** ** |
|-------------------------------------------------|------------|----------|----------------------------|------------|------------|
| Vendors’ financing  obligations, including |       |     |                       |       |       |
| Current portion                                 |       | $        | 9,316                      |       | $          | 14,593 |   |
| Long-term portion                               |       | 15,962   |                       | 8,883      |       |
| **Total vendor financing  obligations**         | ** ** | **$**    | **2****5****,****2****78** | ** ** | **$**      | **23,476** | ** ** |

 

The Company has agreements withsuppliers of equipment, which provide financing for the periods ranging from 1to 9 years. As of December 31, 2009 and 2008, vendor financing obligationswere $1,008 and $6,084, respectively, 13,520thousand euros and 12,063 thousand euros,respectively (equivalent to $19,398 and $17,015 as of December 31, 2009and 2008, respectively) and 147,329 thousand rubles and 11,076 thousand rubles,respectively (equivalent to $4,872 and $377 as of December 31, 2009 and2008, respectively). This financing is provided at average interest rate of6.89%.

 

The maturity of vendors financing obligationsoutstanding at December 31, 2009 was as follows:

 
| ** **                                      | ** ** | **Years ended  December 31,** | ** **         |
|-------------------------------------------------|------------|------------------------------------|--------------------|
|                                            |       |                               |               |
| 2010                                            |       | $                                  | 10,422             |   |
| 2011                                            |       | 8,645                              |               |
| 2012                                            |       | 4,666                              |               |
| 2013                                            |       | 1,916                              |               |
| 2014                                            |       | 1,922                              |               |
| Thereafter                                      |       | 286                                |               |
| Total maturity of vendor  financing obligations |       | 27,857                             |               |
| Less: amount representing  interest             |       | (2,579                             | )                  |
| **Total  vendor financing obligations**         | ** ** | **$**                              | **25****,****278** | ** ** |

 

F-29

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**15.**                     Income Tax

 

WBD Foods’ provision forincome taxes for the years ended December 31, 2009, 2008 and 2007 was asfollows:

 
| ** **                            | ** ** | **2009** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Current income tax  provision         |       | $        | 44,058     |       | $          | 39,844     |       | $ | 49,409 |   |
| Deferred income tax  charge/(benefit) |       | (3,380   | )          | 54         |       | 4,893      |       |
| **Total  provision for income taxes** | ** ** | **$**    | **40,678** | ** ** | **$**      | **39,898** | ** ** | **$** | **54,302** | ** ** |

** **

In November 2008, a new Federal Law was enactedwhich introduces a number of amendments to the Tax Code which are aimed atimproving the regulatory framework for certain tax administration issues andcertain rights and obligations of taxpayers with respect to the calculation andpayment of taxes. Significant changes introduced by the law include thereduction of the income tax rate from 24% to 20% effective January 1,2009. The effect of this rate change on the Company’s deferred tax assets andliabilities as of December 31, 2008 was $3,446.

 

Foreigncurrent income tax provisions for the years ended December 31, 2009, 2008and 2007 were $416, $2,511 and $2,068, respectively.  Foreign deferred income tax (benefit) charge for the years ended December 31,2009, 2008 and 2007 were $389, $(1,611) and $69 respectively.

 

The reconciliation of theincome tax provision using Russian statutory income tax rate of 24% to theCompany’s provision for income taxes is as follows:

 
| ** **                                                                      | ** ** | **2009** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
|                                                                            |       |     |       |       |       |       |       |
| Income before provision  for income taxes                                       |       | $        | 158,450    |       | $          | 143,639    |       | $ | 197,119 |   |
| Russian statutory tax rate                                                      |       | 20       | %          | 24         | %          | 24         | %          |
| Income tax provision at Russian  statutory rate                                 |       | 31,690   |       | 34,473     |       | 47,309     |       |
| Tax effect of expenses not  deductible for national statutory taxation purposes |       | 10,695   |       | 13,238     |       | 12,758     |       |
| Tax effect of income not  taxable for national statutory taxation purposes      |       | (688     | )          | (3,193     | )          | (2,396     | )          |
| Tax effect of income tax  at different rates                                    |       | 1,517    |       | (1,290     | )          | (947       | )          |
| Increase (decrease) in  valuation allowance                                     |       | 464      |       | (1,594     | )          | (2,741     | )          |
| Tax effect of income tax  rate change                                           |       | —   |       | (3,446     | )          | —     |       |
| Tax effect of other  permanent differences                                      |       | (3,020   | )          | 1,710      |       | 319        |       |
| **Provision  for income taxes**                                                 | ** ** | **$**    | **40,678** | ** ** | **$**      | **39,898** | ** ** | **$** | **54,302** | ** ** |

 

F-30

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**15.**                     Income Tax (continued)

 

Temporarydifferences between the tax bases of assets and liabilities and the respectivecarrying amounts in these consolidated financial statements give rise to thefollowing deferred tax assets and liabilities at December 31, 2009 and2008:

 
| ** **                                                              | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax  assets/(liabilities) arising from tax effect of:          |       |       |       |       |       |
| Losses carried forward                                                  |       | $          | 7,071      |       | $          | 4,100 |   |
| Intangible assets                                                       |       | 77         |       | 1,506      |       |
| Property, plant and  equipment                                          |       | 4          |       | 1,988      |       |
| Trade and other  receivables, including allowance for doubtful accounts |       | 4,487      |       | 6,007      |       |
| Obsolescence and net  realizable value inventory write off              |       | 2,003      |       | 688        |       |
| Payroll related accruals                                                |       | 4,645      |       | 1,408      |       |
| Accrued liabilities                                                     |       | 2,254      |       | 2,073      |       |
| Other                                                                   |       | 2,109      |       | 677        |       |
| Gross deferred tax asset                                                |       | 22,650     |       | 18,447     |       |
| Less valuation allowance  for deferred tax assets                       |       | (3,225     | )          | (2,762     | )          |
| **Deferred  tax assets net of valuation allowance**                     | ** ** | **19,425** | ** ** | **15,685** | ** ** |
| Intangible assets                                                       |       | (3,609     | )          | (4,253     | )          |
| Property, plant and  equipment                                          |       | (18,066    | )          | (16,606    | )          |
| WIP and finished goods                                                  |       | (2,370     | )          | (1,776     | )          |
| Investments in direct  finance leases                                   |       | (358       | )          | (549       | )          |
| Debt issuance costs                                                     |       | (423       | )          | (691       | )          |
| Other                                                                   |       | (204       | )          | (1,252     | )          |
| Gross deferred tax  liability                                           |       | (25,030    | )          | (25,127    | )          |
| **Net  deferred tax liability**                                         | ** ** | **$**      | **(5,605** | **)**      | **$**      | **(9,442** | **)** |
| Balance sheet  classification is as follows:                            |       |       |       |       |       |
| Current deferred tax asset                                              |       | 15,159     |       | 11,828     |       |
| Long-term deferred tax  asset                                           |       | 1,415      |       | 1,484      |       |
| Long-term deferred tax  liability                                       |       | (22,179    | )          | (22,754    | )          |

 

Inthe context of the Company’s current structure, tax losses and current taxassets of the different subsidiaries may not be set off against current taxliabilities and taxable profits of other subsidiaries and, accordingly, taxesmay accrue even where there is a net consolidated tax loss. As of December 31,2009 and 2008, a valuation allowance has been recorded for deferred tax assetsin the amounts of $3,225 and $2,762, respectively, as it is not more likely thannot that sufficient taxable profit will be available to offset the deductibletemporary differences to which these assets relate.

 

F-31

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**15.**                     Income Tax (continued)

 

For statutory income tax purposes, WBD Foods and itssubsidiaries had accumulated tax losses of $47,032 which may be carried forwardfor use against future taxable income, which, expire in the following periods:

 
| ** **                                    | ** ** | **Years ended********December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| 2010                                          |       | 20,712                                   |       |
| 2011                                          |       | 1,696                                    |       |
| 2012                                          |       | 2,256                                    |       |
| 2013                                          |       | 1,710                                    |       |
| 2014andthereafter                             |       | 20,659                                   |       |
| **Total********losses********carriedforward** | ** ** | **47,032**                               | ** ** |

 

Starting from January 1, 2007, the Companyadopted the provisions of FIN 48 (Note 2). The Company recognizes interestaccrued related to unrecognized tax benefits and penalties, if any, as a partof income tax expense. Currently, the tax years ended December 31, 2009,2008 and 2007 remained subject to examination by Russian, Ukraine, Kazakh,Uzbek and Georgian tax authorities, and the years ended December 31, 2009and 2008 remained subject to examination by Kyrgyz tax authorities. Thereconciliation of the total amounts of unrecognized tax benefit is follows:

 

F-32

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**15.**                     Income Tax (continued)

 
| ** **                                                                                                                                                                         | ** ** | **Year ended  December 31,****200****9** | ** ** | **Year ended  December  31,****200****8** | ** ** | **Year ended  December  31,****200****7** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| **Unrecognized  tax benefits as of the beginning of the year**                                                                                                                     | ** ** | **$**                                         | **517**    | ** **                                | **$**      | **579**                                   | ** ** | **$** | **894** | ** ** |
| The gross amounts of the  increase (decreases) in unrecognized tax benefits, included in income tax  expense in the accompanying consolidated statement of income, as a result of: |       |                                          |       |                                      |       |                                      |       |
| Increase of tax positions  taken during the current period                                                                                                                         |       | 8                                             |       | 306                                       |       | 642                                       |       |
| Decrease of tax positions  taken during the current period                                                                                                                         |       | (8                                            | )          | —                                    |       | (127                                      | )          |
| Increase of tax positions  taken during a prior period                                                                                                                             |       | —                                        |       | 10                                        |       | 349                                       |       |
| Decrease of tax positions  taken during a prior period                                                                                                                             |       | (171                                          | )          | (223                                      | )          | (873                                      | )          |
| Amount of increase  (decrease) of tax fines and penalties                                                                                                                          |       | —                                        |       | (55                                       | )          | —                                    |       |
| Amount of decreases in the  unrecognized tax benefits as a result of resolution through litigation —  prior periods                                                           |       | —                                        |       | (173                                      | )          | (354                                      | )          |
| Foreign currency translation adjustment                                                                                                                                            |       | (28                                           | )          | 73                                        |       | 48                                        |       |
| **Unrecognized  tax benefits as of the end of the year, including**                                                                                                                | ** ** | **$**                                         | **318**    | ** **                                | **$**      | **517**                                   | ** ** | **$** | **579** | ** ** |
| Net  unrecognized tax benefits                                                                                                                                                     |       | 248                                           |       | 440                                       |       | 431                                       |       |
| Tax  fines and penalties                                                                                                                                                           |       | 70                                            |       | 77                                        |       | 148                                       |       |
| **Unrecognized  tax benefits as of the end of the year**                                                                                                                           | ** ** | **$**                                         | **318**    | ** **                                | **$**      | **517**                                   | ** ** | **$** | **579** | ** ** |

 

The total amount of unrecognized tax benefits that, ifrecognized, would affect the effective income tax rate is $248, $440 and $431as of December 31, 2009, December 31, 2008 and December 31,2007. Accrued income tax penalties and interest were $70, $77 and $148 as of December 31,2009, December 31, 2008 and December 31, 2007. For the year ended December 31,2009, December 31, 2008 and December 31, 2007, the Company accruedadditional fines of $43, $50 and $79, respectively; and penalties (interest) of$26, $27 and $69, respectively.

 

F-33

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**16.**                     Equity

** **

*Treasury Stock acquisition*

* *

In2008 the Company acquired 274,465 own shares which constitute 0.62% of theCompany’s share capital, for total consideration of $3,014.

 

In2009 the Company acquired additional 1,879,513 shares which constitute 4.27% ofthe Company’s share capital, for total consideration of $51,788.

 

Subsequentlyduring the period January — April 23, 2010 the Company acquired fromthe open market 485,500 shares into treasury, which constitute 1.10% of theCompany’s share capital, for total consideration of $22,809.

 

TheCompany may purchase shares from time to time in the open market. The amountand timing of the repurchases are based on a variety of factors, includinggeneral business and market conditions, the availability of an open tradingwindow, cash requirements, and strategic investment opportunities among otherfactors.

 

*Stock split*

* *

Followinga resolution by the Board of Directors on October 17, 2009 to amend itsDepository Receipt program, Wimm-Bill-Dann Foods has completed a four-to-onesplit of its Depository Receipts on November 16, 2009. From this date,four Depository Receipts represent one common share. The number of commonshares remains unchanged.

 

Theshare split was carried out in order to increase the liquidity of the Company’sshares by facilitating the expansion of the shareholder base and providingexisting shareholders with additional flexibility in managing their portfolios.The stock split was carried out on a pro-rata basis and applies to all holdersof Depository Receipts and does not have an effect on the ownership structureof the Company or the total value of its share capital.

* *

*Dividends*

* *

In accordance with applicable legislation, the Company and its subsidiariescan distribute all profits as dividends or transfer them to reserves.

 

F-34

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**16.**                     Equity (continued)

** **

*Dividends (continued)*

* *

Dividends may only be declared from accumulatedundistributed and unreserved earnings as shown in the statutory financial statementsof both Russian and foreign Company’s subsidiaries. Dividends from Russiancompanies are generally subject to a 9% withholding tax for residents and 15%for non-residents, which can be reduced or eliminated if paid to foreign ownersunder certain applicable double tax treaties.

 

Effective January 1, 2008, intercompany dividendsmay be subject to a withholding tax of 0% (if at the date of dividendsdeclaration, the dividend-recipient company held a controlling (over 50%)interest in the share capital of the dividend payer for a period over one year,if the cost of acquisition of shares of the company paying dividends exceeded500 million rubles (or $16,5 million at the exchange rate as of December 31,2009)) or additional dividend tax could be imposed on the transfer ofundistributed earnings of subsidiaries to the Company (generally, tax rate isassumed as 9%).

 

In March 2010 the Board of Directors approvedmanagement’s proposal to pay 30 rubles (approximately $1 per share) per commonshare. This decision requires an approval by WBD shareholders at AnnualShareholders Meeting in May 2010.

 

*Net Income per Share*

* *

Net income per common share for presented reportingperiods was determined in accordance with ASC 260, *Earnings perShare,* by dividing income available to WBD Foods shareholders by theweighted average number of shares outstanding as of the reporting periods:

 
| ** **                                                                                       | ** ** | **Year****ended****December ****3****1****,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income available to  WBD Foods shareholders                                                  |       | $                                                  | 116,535    |   | $ | 101,712 |   | $ | 140,048 |   |
| Total weighted average  number of common shares outstanding during the period, basic and diluted |       | 42,763,668                                         |       | 43,993,827 |   | 44,000,000 |   |
| **Net  income per common share, basic and diluted**                                              | ** ** | **$**                                              | **2.73**   | ** ** | **$** | **2.31** | ** ** | **$** | **3.18** | ** ** |

 

There were no dilutive securities outstanding as of December 31,2009 and 2008.

 

F-35

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**17.**                     Financial Income andExpenses, net

 

Financialincome and expenses, net for 2009, 2008, and 2007 were comprised of thefollowing:

 
| ** **                                    | ** ** | **2009** | ** **             | **2008**   | ** ** | **2007**    | ** ** |
|-----------------------------------------------|------------|----------|------------------------|------------|------------|-------------|------------|
|                                          |       |     |                   |       |       |        |       |
| Interest expense                              |       | $        | 33,467                 |       | $          | 44,544      |       | $ | 34,988 |   |
| Interest income                               |       | (4,595   | )                      | (6,648     | )          | (2,952      | )          |
| Foreign currency losses  (gains), net         |       | 11,616   |                   | 61,357     |       | (18,120     | )          |
| Bank charges                                  |       | 2,687    |                   | 2,868      |       | 2,912       |       |
| Other financial (income)  expense, net        |       | 49       |                   | (617       | )          | 23          | ** ** |
| **Total  financial income and expenses, net** | ** ** | **$**    | **4****3****,****224** | ** ** | **$**      | **101,504** | ** ** | **$** | **16,851** | ** ** |

 

In2009 and 2008 our net income, attributable to WBD Foods shareholders wasnegatively affected by currency exchange rate fluctuations resulting in an$11.6 million and $61.4 million, respectively. The net foreign exchange lossprimarily arose from our U.S. dollars denominated debt.

 

**18.**                     Pension Costs

** **

In the normal course of business, WBD Foods and itssubsidiaries contribute to the Russian Federation state pension scheme onbehalf of its employees. Mandatory contributions to the governmental pensionscheme are expensed when incurred. Governmental pension contributions areincluded in personnel costs in the consolidated statements of income. Pensioncosts amounted to $19,138, $37,934 and $32,466 in 2009, 2008 and 2007,respectively. WBD Foods has no other pension obligations.

 

**19.**                     Segment Information

** **

The Company’s major reportable business segments aredairy,****beverages, and babyfood. These segmentsare strategic business units that produce and offer distinctive products, i.e.sterilized and pasteurized milk, yogurts, dairy desserts, and other dairyproducts in the dairy segment; fruit juices, nectars, juice based drinks andbottled mineral water in the beveragessegment; and milk- and juice-based babyfood products in the babyfood segment.

 

Management evaluates segment performance based onsegment profit or loss before the share attributable to noncontrollinginterests and deferred taxes. Transfers between segments are made at valuesthat approximate market values.

 

F-36

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**19.**                     Segment Information(continued)

** **

###### **Operating Segments — yearended December 31, 2009**

 
| ** **                                                                | ** ** | **Dairy**               | ** **    | **Beverages**   | ** ** | **Baby  food**  | ** ** | **Common  and  corporate assets/  expenses** | ** **     | **Consolidated**        | ** **              |
|---------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------|------------|-----------------|------------|----------------------------------------------|----------------|-------------------------|-------------------------|
| Total sales                                                               |       | $                       | 1,568,586     |            | $          | 406,760         |       | $                                            | 244,206        |                    | $                       | 3,350 |   | $ | 2,222,902 |   |
| Inter  segment sales                                                      |       | (38,339                 | )             | (151            | )          | —          |       | (3,350                                       | )              | (41,840                 | )                       |
| **Sales to external customers**                                           | ** ** | **1,530,247**           | ** **    | **406,609**     | ** ** | **244,206**     | ** ** | **—**                                   | ** **     | **2,181,062**           | ** **              |
| Cost  of sales                                                            |       | (1,080,629              | )             | (245,068        | )          | (127,040        | )          |                                         |           | (1,452,737              | )                       |
| **Gross profit**                                                          | ** ** | **4****49****,****618** | ** **    | **161,****541** | ** ** | **117,****166** | ** ** | **—**                                   | ** **     | **7****28****,****325** | ** **              |
| Operating  expenses                                                       |       | (312,235                | )             | (118,875        | )          | (38,050         | )          | (57,491                                      | )              | (526,651                | )                       |
| **Operating income (loss)**                                               | ** ** | **1****37****,****383** | ** **    | **42,****666**  | ** ** | **79,****116**  | ** ** | **(5****7****,****491**                      | **)**          | **2****01****,****674** | ** **              |
| Financial  income and expense, net and current provision for income taxes |       |                    |          |            |       |            |       |                                         |           | (87,282                 | )                       |
| **Net segment profit (loss)**                                             | ** ** | ** **              | ** **    | ** **      | ** ** | ** **      | ** ** | ** **                                   | ** **     | **$**                   | **1****14****,****392** | ** ** |
| Deferred  income tax benefit                                              |       |                    |          |            |       |            |       |                                         |           | 3,380                   |                    |
| Net  income attributable to noncontrolling interests                      |       |                    |          |            |       |            |       |                                         |           | (1,237                  | )                       |
| **Net income attributable to WBD Foods shareholders**                     |       |                    |          |            |       |            |       |                                         | ** **     | **$**                   | **1****16****,****535** | ** ** |
| **Total assets**                                                          | ** ** | **$**                   | **1,027,713** | ** **      | **$**      | **244,054**     | ** ** | **$**                                        | **185,041**    | ** **              | **$**                   | **31,996** | ** ** | **$** | **1,488,804** | ** ** |
| **Expenditure for property, plant and equipment**                         | ** ** | **$**                   | **76,845**    | ** **      | **$**      | **13,****220**  | ** ** | **$**                                        | **20,****809** | ** **              | **$**                   | **10,964** | ** ** | **$** | **12****1****,8****38** | ** ** |
| **Depreciation  and amortization**                                        | ** ** | **$**                   | **84,028**    | ** **      | **$**      | **13,587**      | ** ** | **$**                                        | **5,061**      | ** **              | **$**                   | **2,207** | ** ** | **$** | **104,883** | ** ** |

###### ** **

###### **Operating Segments — yearended December 31, 2008**

 
| ** **                                                                | ** ** | **Dairy**     | ** **              | **Beverages** | ** ** | **Baby********Food**   | ** ** | **Common and  corporate assets/  expenses** | ** **         | **Consolidated** | ** **  |
|---------------------------------------------------------------------------|------------|---------------|-------------------------|---------------|------------|------------------------|------------|---------------------------------------------|--------------------|------------------|-------------|
| Total sales                                                               |       | $             | 2,119,043               |          | $          | 474,127                |       | $                                           | 254,468            |             | $           | 5,511 |   | $ | 2,853,149 |   |
| Inter segment sales                                                       |       | (23,143       | )                       | (931          | )          | —                 |       | (5,511                                      | )                  | (29,585          | )           |
| **Sales  to external customers**                                          | ** ** | **2,095,900** | ** **              | **473,196**   | ** ** | **254,468**            |       | —                                      | ** **         | **2,823,564**    | ** **  |
| Cost of sales                                                             |       | (1,486,983    | )                       | (288,403      | )          | (135,104               | )          | (38                                         | )                  | (1,910,528       | )           |
| **Gross  profit**                                                         | ** ** | **608,917**   | ** **              | **184,793**   | ** ** | **119,364**            | ** ** | **(38**                                     | **)**              | **913,036**      | ** **  |
| Operating expenses                                                        |       | (435,689      | )                       | (145,491      | )          | (41,089                | )          | (45,624                                     | )                  | (667,893         | )           |
| **Operating  income (loss)**                                              | ** ** | **173,228**   | ** **              | **39,302**    | ** ** | **78,275**             | ** ** | **(45,662**                                 | **)**              | **245,143**      | ** **  |
| Financial income and  expense, net and current provision for income taxes |       |          |                    |          |       |                   |       |                                        |               | (141,348         | )           |
| **Net  segment profit (loss)**                                            | ** ** | ** **    | ** **              | ** **    | ** ** | ** **             | ** ** | ** **                                  | ** **         | **$**            | **103,795** | ** ** |
| Deferred income tax expense                                               |       |          |                    |          |       |                   |       |                                        |               | (54              | )           |
| Net  income attributable to noncontrolling interests                      |       |          |                    |          |       |                   |       |                                        |               | (2,029           | )           |
| **Net income attributable to WBD Foods shareholders**                     |       |          |                    |          |       |                   |       |                                        | ** **         | **$**            | **101,712** | ** ** |
| **Segment  total assets**                                                 | ** ** | **$**         | **1,012,001**           | ** **    | **$**      | **236,278**            | ** ** | **$**                                       | **79,403**         | ** **       | **$**       | **249,283** | ** ** | **$** | **1,576,965** | ** ** |
| **Expenditure for property, plant and equipment**                         | ** ** | **$**         | **1****40****,****706** | ** **    | **$**      | **2****2****,5****99** | ** ** | **$**                                       | **16****,****480** | ** **       | **$**       | **15****,****467** | ** ** | **$** | **19****5****,****25****2** | ** ** |
| **Depreciation  and amortization**                                        | ** ** | **$**         | **8****,****181**       | ** **    | **$**      | **1****6****,****864** | ** ** | **$**                                       | **5****,****861**  | ** **       | **$**       | **4****,****917** | ** ** | **$** | **115****,****823** | ** ** |

 

F-37

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**19.**                     Segment Information (continued)

** **

###### **Operating Segments — yearended December 31, 2007**

 
| ** **                                                                | ** ** | **Dairy**     | ** **    | **Beverages** | ** ** | **Baby********Food** | ** ** | **Common and  corporate assets/  expenses** | ** ** | **Consolidated** | ** **  |
|---------------------------------------------------------------------------|------------|---------------|---------------|---------------|------------|----------------------|------------|---------------------------------------------|------------|------------------|-------------|
| Total sales                                                               |       | $             | 1,853,840     |          | $          | 414,117              |       | $                                           | 171,753    |             | $           | — |   | $ | 2,439,710 |   |
| Inter segment sales                                                       |       | (1,382        | )             | —        |       | —               |       | —                                      |       | (1,382           | )           |
| **Sales  to external customers**                                          | ** ** | **1,852,458** | ** **    | **414,117**   | ** ** | **171,753**          | ** ** | **—**                                  | ** ** | **2,438,328**    | ** **  |
| Cost of sales                                                             |       | (1,311,383    | )             | (249,260      | )          | (94,236              | )          | —                                      |       | (1,654,879       | )           |
| **Gross  profit**                                                         | ** ** | **541,075**   | ** **    | **164,857**   | ** ** | **77,517**           | ** ** | **—**                                  | ** ** | **783,449**      | ** **  |
| Operating expenses                                                        |       | (362,642      | )             | (123,989      | )          | (31,860              | )          | (50,988                                     | )          | (569,479         | )           |
| **Operating  income (loss)**                                              | ** ** | **178,433**   | ** **    | **40,868**    | ** ** | **45,657**           | ** ** | **(50,988**                                 | **)**      | **213,970**      | ** **  |
| Financial income and  expense, net and current provision for income taxes |       |          |          |          |       |                 |       |                                        |       | (66,260          | )           |
| **Net  segment profit (loss)**                                            | ** ** | ** **    | ** **    | ** **    | ** ** | ** **           | ** ** | ** **                                  | ** ** | **$**            | **147,710** | ** ** |
| Deferred income tax expense                                               |       |          |          |          |       |                 |       |                                        |       | (4,893           | )           |
| Net  income attributable to noncontrolling interests                      |       |          |          |          |       |                 |       |                                        |       | (2,769           | )           |
| **Net income attributable to WBD Foods shareholders**                     | ** ** | ** **    | ** **    | ** **    | ** ** | ** **           | ** ** | ** **                                  | ** ** | **$**            | **140,048** | ** ** |
| **Segment  total assets**                                                 | ** ** | **$**         | **1,049,665** | ** **    | **$**      | **274,802**          | ** ** | **$**                                       | **61,503** | ** **       | **$**       | **147,132** | ** ** | **$** | **1,533,102** | ** ** |
| **Expenditure for property, plant and equipment**                         | ** ** | **$**         | **134,568**   | ** **    | **$**      | **21,548**           | ** ** | **$**                                       | **28,177** | ** **       | **$**       | **8,369** | ** ** | **$** | **192,662** | ** ** |
| **Depreciation  and amortization**                                        | ** ** | **$**         | **67,322**    | ** **    | **$**      | **14,071**           | ** ** | **$**                                       | **3,563**  | ** **       | **$**       | **1,618** | ** ** | **$** | **86,574** | ** ** |

 

For the years ended December 31, 2009, 2008, and2007, approximately 92%, 93% and 93% of sales were generated in and sold tocustomers in Russia respectively As of December 31, 2009 and 2008, thelong-lived assets of the Company located in Russia were $692,892 and $667,948,respectively.

 

**20.**                     Share-based Awards

** **

In 2006 the Company established stock option plan fora number of its executives. The exercise price of the options equals theaverage closing price of the stock over the 90 trading days periodpreceding each annual grant. Each tranche vests one-third annually over a threeyear period and can be settled in cash. The contractual terms of options arethree to five years from grant date.

 

Since April 1, 2007, a long-term incentive planfor top management was approved by the Board of Directors. According to thisprogram a certain number of senior management are rewarded with StockAppreciation Rights (“SAR”) linked to the price of the Company’s ADR.Commencing April 1, 2007 all outstanding stock options were converted intoSARs on the following basis: 1 stock option = 1 SAR.

 

Following a resolution by the Board of Directors on October 16,2009 to amend its Depository Receipt program, Wimm-Bill-Dann Foods hascompleted a four-to-one split of its Depository Receipts.  Before split one SAR represented one ADR,afterwards one SAR represents four ADR.

 

F-38

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**20.**                     Share-based Awards(continued)

** **

The exercise price of SARs equals the average closingprice of the stock over the 90 trading days period preceding each annualgrant. The exercise price of SARs granted in 2009 was $26.85. Each tranchevests one-third annually over a three year period and is settled in cash. Thecontractual terms of SARs are five years from grant date.

 

Asummary of the changes in the Company’s share-based awards is presented below:

 
| ** **                                     | ** ** | **Share-based  awards  ‘000** | ** ** | **Weighted  average  exercise price,  U.S. dollar** | ** **        |
|------------------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------|-------------------|
| **Outstanding  at December 31, 200****6** | ** ** | **225**                            | ** ** | **26.84**                                                | ** **        |
| Granted                                        |       | 363                                |       | 64.09                                                    |              |
| Forfeited                                      |       | (5                                 | )          | 63.86                                                    |              |
| Exercised                                      |       | (8                                 | )          | 39.23                                                    |              |
| **Outstanding  at December 31, 200****7** | ** ** | **575**                            | ** ** | **49.86**                                                | ** **        |
| Granted                                        |       | 426                                |       | 114.02                                                   |              |
| Exercised                                      |       | (202                               | )          | 38.20                                                    |              |
| Forfeited                                      |       | (63                                | )          | 84.93                                                    |              |
| **Outstanding  at December 31, 200****8** | ** ** | **736**                            | ** ** | **87.17**                                                | ** **        |
| Granted                                        |       | 388                                |       | 26.85                                                    |              |
| Exercised                                      |       | (182                               | )          | 48.82                                                    |              |
| Forfeited                                      |       | (86                                | )          | 90.89                                                    |              |
| **Outstanding  at December 31, 200****9** | ** ** | **856**                            | ** ** | **$**                                                    | **67.****6****1** | ** ** |
|                                                |            |                                    |            |                                                          |                   |  |

 

TheCompany expensed $21,011 $2,540 and $15,951 for all share-based awards for thetwelve months ended December 31, 2009, 2008 and 2007, respectively. As of December 31,2009, there was approximately $22,336 of total unrecognized compensation costrelated to non-vested SARs awards. The cost is expected to be recognized over aweighted average remaining requisite service period of 1.83 years. Theestimated weighted average fair value per share of non-vested SARs as of December 31,2009 and 2008 was $57.07 and $2.95, respectively.

 

Theremaining contractual term of the SARs awards outstanding as of December 31,2009 is 1.52 years and the SARs have aggregate intrinsic value of $24,457. Theestimated weighted average fair value per share of the outstanding share basedawards as of December 31, 2009 and 2008 was $18.84 and $3.02,respectively.

 

Asof December 31, 2009, 409,000 SARs granted were vested and exercisable,which have a $96.46 weighted average exercise price, 1.18 years of remainingcontractual life and the SARs have aggregate intrinsic value of $6,905 as of December 31,2009.

 

F-39

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**20.**                     Share-based Awards(continued)

** **

Cashpaid by the Company to settle SARs exercised in 2009, 2008 and 2007 amounted to$6,418, $17,903 and $578, respectively.

 

Inaccordance with FASB ASC 718 the awards have been accounted for as a liabilityand, as such, the awards’ fair value is remeasured at each reporting date untilthe date of settlement.

 

The determination of fair value of share-based awardson the date of grant and each subsequent reporting date, using an optionvaluation model, is affected by the Company’s stock price as well asassumptions regarding a number of complex and subjective variables. Thesevariables include, but are not limited to, the expected stock price volatilityover the term of the awards and projected employee SARs exercise behaviors.

 

A summary of the assumptions used in the applicationof the Black-Sholes option valuation model for grants of stock appreciationrights outstanding as of December 31 were as follows:

 
| ** **                  | ** ** | **2009**        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|-----------------|------------|----------|------------|----------|------------|
| Volatility (1)              |       | 61.00%-87.90%   |       | 66.22%   |       | 44.46%   |       |
| Risk-free interest rate (2) |       | 0.58%-1.69%     |       | 8.39%    |       | 6.08%    |       |
| Dividend yield (3)          |       | 1.049%          |       | 0%       |       | 0.41%    |       |
| Expected life (years) (4)   |       | 0.25-2.25 years |       | 3 years  |       | 3 years  |       |

 

----

(1)                      The volatility is based on historicalvolatility of the Company’s common stock over the term similar to the expectedterm of the award.

(2)                      The risk-free rate is based on the RussianFederation Government Bond with expected term similar to the expected term ofthe award.

(3)                      The dividend yield is based on expectedannual dividends per share and the share price as of the measurement date.

(4)                      The expected life is based on the contractual term of the share basedawards and assumption that the share based awards will be exercised after thevesting period but before end of contractual term.

 

**21.**                     Related Parties

** **

Milk Suppliers

 

During 2009, 2008 and 2007, the Companypurchased milk from certain milk supplying companies, which are controlled bymembers of its control group of shareholders, amounting to $18,771, $15,289 and$17,473, respectively. As of December 31, 2009 and 2008 accounts payableto these milk-supplying companies in respect of milk received amounted to $879and $475, respectively.

 

F-40

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**22.**                     Commitments andContingencies

** **

Russian Environment andCurrent Economic Situation

 

Russiacontinues economic reforms and development of its legal, tax and regulatoryframeworks as required by a market economy. The future stability of the Russianeconomy is largely dependent upon these reforms and developments and theeffectiveness of economic, financial and monetary measures undertaken by the government.

 

TheRussian economy is vulnerable to market downturns and economic slowdownselsewhere in the world. The ongoing global financial crisis has resulted incapital markets instability, significant deterioration of liquidity in thebanking sector, and tighter credit conditions within Russia. While the RussianGovernment has introduced a range of stabilization measures aimed at providingliquidity and supporting debt refinancing for Russian banks and companies,there continues to be uncertainty regarding the access to capital and cost ofcapital for the Company and its counterparties, which could affect the Company’sfinancial position, results of operations and business prospects.

 

Taxation

 

Russian tax, currency and customs legislationis subject to varying interpretations, and changes, which can occur frequently.Management’s interpretation of such legislation as applied to the transactionsand activity of the Company may be challenged by the relevant regional andfederal authorities.

 

Recent events within the Russian Federationsuggest that the tax authorities are taking a more assertive position in itsinterpretation of the legislation and assessments and as a result, it ispossible that transactions and activities that have not been challenged in thepast may be challenged.

 

As such, significant additional taxes, penalties andinterest may be assessed. We cannot determine the amount of unasserted claimsthat may manifest, if any, or the likelihood of any unfavorable outcome. Fiscalperiods remain open to review by the authorities in respect of taxes for threecalendar years proceeding the year of review. Under certain circumstancesreviews may cover longer periods.

 

Overall, managementbelieves that the Company has paid or accrued all taxes that are applicable asof December 31, 2009. Where uncertainty exists, the Company has accruedtax liabilities based on management’s best estimate of the probable outflow ofresources embodying economic benefits, which will be required to settle theseliabilities. Possible liabilities for non-income tax contingencies and incometax contingencies other than those that meet the more-likely-than-notrecognition threshold, identified by management at the balance sheet date asthose that can be subject to different interpretations of the tax laws andregulations, are not accrued in the consolidated financial statements.

 

F-41

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**22.**                     Commitments andContingencies (continued)

 

Taxation (continued)

 

In 2008 theRussian tax authorities carried out an audit of Wimm-Bill-Dann for fiscal years2004 through 2006 and found some of the Company’s suppliers negligent (i.e. notupholding their tax duties properly) and made a demand from the Company forreimbursement of VAT and income tax in the aggregate amount of approximately$7.8 million. The Company has appealed this decision with the higher taxauthorities as well as in court. As a result, the higher tax authorityrecognized that these claims were partially invalid and reduced the totalclaims to approximately $2.0 million. In March 2010 the court of firstinstance upheld claims of tax authorities and ruled this case against WBD. Wedo not agree with this decision and are going to appeal this ruling in thehigher courts. No amount has been accrued in relation to this claim.

 

Transfer Pricing

 

**Russian transfer pricing rules were established in1999, giving Russian tax authorities the right to control prices fortransactions between related entities and certain other types of transactionsbetween independent parties, such as foreign trade transactions or transactionswith significant price fluctuations. The Russian transfer pricing rules arevaguely drafted, leaving wide scope for interpretation by Russian taxauthorities and arbitration courts and their use in politically motivatedinvestigations and prosecutions. Management believes that the prices used bythe Company are market prices and, therefore, comply with the requirements ofRussian tax law on transfer pricing. However, due to the uncertainties ininterpretation of transfer pricing legislation, the tax authorities maychallenge our prices and**proposeadjustments. If such price adjustments are upheld by the Russian arbitrationcourts and implemented, our results of operations could be materially adverselyaffected. In addition, the Company could face significant losses associatedwith the assessed amount of prior tax underpaid and related interest andpenalties, which would have a material adverse effect on our financialcondition and results of operations.

** **

**Supply of Paper PackagingMaterials**

** **

**The majority of the Company’s paper packaging materials arepurchased from one supplier. There can be no assurance that, in the event of aloss of this supplier or unfavorable developments in the business practices ofthis supplier, substantially all of the current levels of packaging materialscould be purchased at comparable, or nearly comparable, prices on theinternational market.**

 

F-42

----

Table ofContents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31, 2009, 2008 and 2007

 

*(Amounts in thousands of U.S.dollars, except where otherwise stated)*

 

**22.**                     Commitments andContingencies (continued)

** **

Capital commitments

 

As of December 31, 2009, our capital commitmentsamounted to $33,794.

 

Operating leases

 

During the years ended December 31, 2009, 2008and 2007, the Company was not involved in any non-cancelable operating leasesarrangements. The operating lease expenses for the years were as follows:$9,187, $10,510 and $8,956, respectively.

 

Litigations and claims

 

The Company is involved in various other claims andlegal proceedings arising in the normal course of business. While these claimsmay seek substantial damages against the Company and are subject to uncertaintyinherent in any litigation, management does not believe that the ultimateresolution of such matters will have a material adverse impact on the Company’soperating results or financial condition.

 

**23.**                     Subsequent Events

** **

In February 2010, theCompany purchased from the open market 485,500 shares into treasury, whichconstitute 1.10% of the Company’s share capital, for total consideration of$22,809.

 

On February 10, 2010 theCompany a repaid ruble loan to Moscow Food Resources Department in the amount of 411.5 million rubles, which isthe equivalent of $13,608 and $13,548 at the exchange rates at December 31,2009 and February 10, 2010, respectively.

 

F-43

----