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**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, 2008**                                                    |
| **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 |
|------------------------------------------------------|--------|--------------------------------------------|
| AMERICAN DEPOSITARY SHARES, EACH                     |   | NEW YORK STOCK EXCHANGE                    |
| REPRESENTING ONE SHARE OF COMMON STOCK               |   |                                       |
| COMMON STOCK, PAR VALUE

20 RUSSIAN RUBLES PER SHARE |   | NEW YORK STOCK EXCHANGE(1)                 |

 

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

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

 

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Securities for which there is a reporting obligation pursuant toSection 15(d) of the Act:

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

 

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.

 

43,725,535shares of common stock, par value 20 Russian rubles each, as of December 31,2008.

 

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

 

17,594,900American Depositary Shares, each representing one share of common stock, as ofDecember 31, 2008

 

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

Yes: x  No: o

 

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) of theSecurities Exchange Act of 1934.

Yes: o  No: x

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes: x  No: o

 

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).

Yes: x  No: o

 

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. (Checkone):

 

| 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:

Item 17 o  Item 18 o

 

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).

Yes: o  No x

 

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| **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                                                     | 44  |
| Item 4A.Unresolved Staff Comments                                                      | 73  |
| Item 5.Operating and Financial Review and Prospects                                    | 73  |
| Item 6.Directors, Senior Management and Employees                                      | 104 |
| Item 7. Major Shareholders and Related Party  Transactions                             | 113 |
| Item 8. Financial Information                                                          | 114 |
| Item 9. Offer and Listing Details                                                      | 117 |
| Item 10.Additional Information                                                         | 118 |
| Item  11. Quantitative and Qualitative Disclosures about Market Risk              | 142 |
| Item 12.  Description of Securities Other than Equity Securities                       | 145 |
| **PART II**                                                                       | 146 |
| Item 13. Defaults, Dividend Arrearages and  Delinquencies                         | 146 |
| Item 14. Material Modifications to the Rights of  Security Holders and Use of Proceeds | 146 |
| Item 15.Controls and Procedures                                                        | 146 |
| Item 16A.Audit Committee Financial Expert                                              | 150 |
| Item  16B.Code of Ethics                                                               | 150 |
| Item 16C. Principal Accountant Fees and Services                                       | 150 |
| Item 16D. Exemption from the Listing Standards for  Audit Committees                   | 152 |
| Item 16E.Purchases of Equity Securities by the Issuer  and Affiliated Purchasers       | 152 |
| Item 16F.  Change in Registrant’s Certifying Accountant                           | 153 |
| Item 16G.  Corporate Governance                                                        | 153 |
| **PART III**                                                                      | 157 |
| Item 17.Financial  Statements                                                          | 157 |
| Item 18.Financial  Statements                                                          | 157 |
| Item 19. Exhibits                                                                 | 158 |

 

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

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**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 underlyingassumptions and other statements, which are other than statements of historicalfacts.

 

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

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** **

**PART I**

 

## ***Item 1.Identityof Directors, Senior Management and Advisors***

 

Notapplicable.

 

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

 

Notapplicable.

 

## ***Item 3. KeyInformation***

 

**A.Selected Financial Data**

 

Theselected consolidated financial data set forth below at December 31, 2008,2007, 2006, 2005 and 2004 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,**      | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **In thousands of U.S. Dollars,  except share and per share data** | ** ** |
| **Statement of Income Data:**                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Sales                                                          |       | $                                                                  | 2,823,564  |   | $ | 2,438,328 |   | $ | 1,762,127 |   | $ | 1,394,590 |   | $ | 1,183,986 |   |
| Cost of sales                                                  |       | (1,910,528                                                         | )          | (1,654,879 | ) | (1,194,159 | ) | (999,006 | ) | (858,767 | ) |
| Gross profit                                                   |       | 913,036                                                            |       | 783,449 |   | 567,968 |   | 395,584 |   | 325,219 |   |
| Selling and distribution expenses                              |       | (488,110                                                           | )          | (387,853 | ) | (246,054 | ) | (191,990 | ) | (173,433 | ) |
| General and administrative expenses                            |       | (171,400                                                           | )          | (180,922 | ) | (134,481 |   | (109,642 | ) | (92,816 |   |
| Other operating expenses                                       |       | (8,383                                                             | )          | (704 | ) | (31,812 | ) | (6,457 | ) | (6,047 | ) |
| Operating income                                               |       | 245,143                                                            |       | 213,970 |   | 155,621 |   | 87,495 |   | 52,923 |   |
| Financial income and expenses, net                             |       | (101,504                                                           | )          | (16,851 | ) | (15,480 | ) | (22,868 | ) | (14,618 | ) |
| Income before provision for income taxes and minority interest |       | 143,639                                                            |       | 197,119 |   | 140,141 |   | 64,627 |   | 38,305 |   |
| Provision for income taxes                                     |       | (39,898                                                            | )          | (54,302 | ) | (41,560 | ) | (30,712 | ) | (12,170 | ) |
| Minority interest                                              |       | (2,029                                                             | )          | (2,769 | ) | (3,197 | ) | (3,649 | ) | (3,161 | ) |
| Net income                                                     |       | $                                                                  | 101,712    |   | $ | 140,048 |   | $ | 95,384 |   | $ | 30,266 |   | $ | 22,974 |   |
|                                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Earnings per share—basic and diluted                      |       | $                                                                  | 2.31       |   | $ | 3.18 |   | $ | 2.17 |   | $ | 0.69 |   | $ | 0.52 |   |
| Dividends per share (1)                                        |       | $                                                                  | —     |   | $ | 0.12 |   | $ | 0.55 |   | $ | — |   | $ | — |   |
| Weighted average number of shares outstanding                  |       | 43,993,827                                                         |       | 44,000,000 |   | 44,000,000 |   | 44,000,000 |   | 44,000,000 |   |
| **Other Data:**                                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                           |       | $                                                                  | 195,252    |   | $ | 192,662 |   | $ | 129,963 |   | $ | 75,110 |   | $ | 72,639 |   |
|                                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cash provided by operating activities                          |       | $                                                                  | 321,190    |   | $ | 96,804 |   | $ | 169,954 |   | $ | 113,937 |   | $ | 71,720 |   |
| Cash used in investing activities                              |       | $                                                                  | (185,404   | ) | $ | (203,041 | ) | $ | (228,158 | ) | $ | (125,157 | ) | $ | (73,808 | ) |
| Cash (used in) provided by financing activities                |       | $                                                                  | 166,222    |   | $ | 91,429 |   | $ | (1,911 | ) | $ | 82,619 |   | $ | (16,159 | ) |

 

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(1)   No dividends were paid in 2008. Dividends paid in 2007are attributable as follows: $0.17 per share — for the years 2002, 2003 and2004, $0.08 per share — for the three months ended March 31, 2006 and$0.30 per share - for the nine months ended September 30, 2006.

 

4

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| ** **                                      | ** ** | **At December 31,**    | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **In thousands of U.S. Dollars** | ** ** |
| **Balance Sheet Data:**                         |       |                             |       |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                | 1,576,965  |   | $ | 1,533,102 |   | $ | 1,175,936 |   | $ | 920,557 |   | $ | 796,088 |   |
| Total net assets                                |       | 644,437                          |       | 673,124 |   | 497,494 |   | 387,043 |   | 370,916 |   |
| Total debt(1)                                   |       | 673,190                          |       | 578,930 |   | 442,999 |   | 371,646 |   | 283,168 |   |
| Total liabilities                               |       | 920,665                          |       | 846,116 |   | 659,465 |   | 508,895 |   | 407,845 |   |
| Total liabilities and shareholders’ equity |       | $                                | 1,576,965  |   | $ | 1,533,102 |   | $ | 1,175,936 |   | $ | 920,557 |   | $ | 796,088 |   |

 

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(1)   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,** |       |                                      |       |   |   |   |   |   |   |
| 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 |   |
| 2004                             |       | 29.45                                     |       | 27.75 |   | 28.73 |   | 27.75 |   |

 

----

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

 

OnJune 16, 2009, the exchange rate between the ruble and the U.S. dollar was31.15 rubles per one U.S. dollar.

 
| ** **         | ** ** | **Rubles per U.S. dollar** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| ** **         | ** ** | **High**                                  | ** ** | **Low** | ** ** |
| May 2009      |       | 32.97                                     |       | 30.98 |   |
| April 2009    |       | 34.10                                     |       | 33.17 |   |
| March 2009    |       | 36.23                                     |       | 33.27 |   |
| February 2009 |       | 36.43                                     |       | 34.56 |   |
| January 2009  |       | 35.41                                     |       | 29.39 |   |
| December 2008 |       | 29.38                                     |       | 27.36 |   |

 

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

 
| ** **                       | ** ** | **Inflation rate** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| **Year ended December 31,** |       |                    |       |
| 2008                             |       | 13.3                    | %          |
| 2007                             |       | 11.5                    | %          |
| 2006                             |       | 9.7                     | %          |
| 2005                             |       | 10.9                    | %          |
| 2004                             |       | 11.7                    | %          |

 

----

Source: Central Bank of Russia.

 

Effectivefrom January 1, 2003, Russia no longer met the criteria for a highlyinflationary economy. Inflation continued to decrease in Russia in 2004 through2006

 

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Theinflation rate in 2008 was affected by several factors relating to the worldfinancial crisis, including adverse trends in pricing, certain administrativedecisions of the CBR.

 

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 2008, 2007 and 2006, theruble appreciated in real terms against the U.S. dollar as follows:

 
| ** **                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Inflation (1)                                                                   |       | 13.3     | %          | 11.5     | %          | 9.7      | %          |
| Nominal appreciation of the ruble relative to the U.S. dollar (1)               |       | 3.1      | %          | 6.3      | %          | 4.0      | %          |
| Real appreciation/ (depreciation) of the ruble relative to the U.S.  dollar (1) |       | (19.9    | )%         | 6.7      | %          | 8.5      | %          |

 

----

(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 tothe Russian Federation”. Accordingly, investors should exercise particular carein evaluating the risks involved and must decide for themselves whether, inlight of those risks, their investment is appropriate. Generally, investment inemerging markets is suitable for sophisticated investors who fully appreciatethe significance of the risks involved and investors are urged to consult theirown legal and financial advisors before making an investment in our securities.

 

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**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 turmoil in the financial markets, consumerstend to purchase more economy brands and, to the extent that our businessstrategy depends on the expansion of the sales of premium brands andvalue-added products, our results of operations could suffer. Reducedconsumption of our products in any of our key markets could reduce our turnoverand 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.”

*** ***

***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 currentmarket conditions persist, or deteriorate further, we may be unable to secureadditional financing on commercially favorable terms or at all.   If we are unable to pursue additionalexpansion opportunities due to the lack of financing or otherwise, our futuregrowth, results of operations and market share would be materially adverselyaffected.

 

***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 results of operationsand financial condition could be materially adversely affected.***

 

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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 ourintegration efforts.

*** ***

***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 short periodof time, and we believe that our businesses will continue to grow for theforeseeable 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 and managerialcontrols and procedures to keep pace with our growth. We will also have tomaintain close coordination among our logistical, technical, accounting,finance, marketing and sales personnel. Management of growth will require,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.

 

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

 

***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***

 

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***there is a reasonable possibility that a materialmisstatement of the annual or interim statements will not be prevented ordetected on a timely basis.***

 

Thematerial weakness in our internal control over financial reporting asidentified by our management for the year ended December 31, 2008 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 normalcourse of 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 in additionalsignificant deficiencies or additional material weaknesses, failure to meet ourperiodic reporting obligations or result in material misstatements in ourfinancial statements. Any such failure could also adversely affect the resultsof periodic management evaluations and annual auditor attestations regardingthe effectiveness of our internal control over financial reporting requiredunder Section 404 of the Sarbanes-Oxley Act of 2002.

 

Theexistence of a material weakness could result in errors in our financialstatements that could result in a restatement of financial statements, cause usto miss our reporting deadlines and cause investors to lose confidence in ourreported financial information, leading to a decline in the price of our sharesand ADSs. See “Item 15. Controls and Procedures” for additional information.

*** ***

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

 

Althoughbeverages consumption in Russia continues to increase, our beverages productsales volume decreased in 2005 and stayed almost flat in 2006 due to marketcompetition from other domestic producers and increased activity by foreignproducers. Although our beverages sales volume increased year-on-year by 10.4%in 2007 and 3.7%****in 2008,continued and/or increased competition among juice and bottled water producersin Russia may cause future decline in the sales volumes of our beveragesproducts, as well as affect our beverages prices and profit margins and, consequently,may materially adversely affect our results of operations. “See Item 4.Information on Our Company—B. Business—Business Overview—Beverage productsand brands—Market trends and competition” for additional information regardingour competitors.

*** ***

***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 is very competitive, with more than 20 significant brands in 3fairly distinct price tiers, and also with noticeable private label offerings.As a result, prices are under pressure, and with the exception of increases forraw materials inflation, price increases in rubles are relatively rare. Interms of raw materials, most juice concentrate, and even sugar, areinternational commodities and are normally denominated in U.S. dollars or euro.Over 2005, 2006, and 2007, following the international growth trend experiencedin general, prices for these commodities were increasing significantly year onyear. Towards the end of 2008 prices seemed to be stabilizing, and we believethat in the near term raw material prices are more likely to fall thanincrease. Nonetheless, while a return to economic growth may be good forrevenue, it could also signal increases in raw material prices, which could putpressure on our juice products gross profit margins and, consequently,adversely affect our results of operations.

 

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***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 2006, 2007 and 2008. In addition, the uncertainty surrounding oilprices has lead to increased instability and unpredictable fluctuations in fueland transportation costs.

 

In2003, legislation was enacted which sets out the framework for thereorganization of the Russian Railways Ministry into OAO Russian Railroads, ajoint-stock company, to be followed by the eventual privatization of certain ofits functions. This reorganization and privatization have not been completed inaccordance with the timetable contemplated in the legislation and it is notclear whether they will be completed at all. However, if the privatization ofRussian Railroads or other factors result in increased railway transport costs,thereby decreasing our profit margins, our business and results of operations couldbe materially adversely affected.

*** ***

***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, and ultimately our failure to successfully develop newbrands, products and product categories could negatively affect our expansionstrategy and could significantly inhibit our future growth and profitability.

 

Inaddition, developing and maintaining awareness of our brands in a costeffective manner is critical to informing and educating the public about ourcurrent and future product offerings and is an important element in attractingnew consumers. The successful promotion of our brands will depend largely onthe effectiveness of our marketing efforts and on our ability to provide reliableand useful products at competitive prices. Brand promotion activities may notyield increased operating revenues, and even if they do, such operatingrevenues may not offset the operating expenses we incur in building our brands.Furthermore, our ability to attract new consumers and retain existing consumersdepends, in part, on our ability to maintain what we believe to be ourfavorable brand image. Negative publicity or rumors regarding our company, ourshareholders and affiliates or our services could negatively affect this brandimage, which could lead to loss of market share and revenues. In addition, ourfailure to successfully and efficiently promote and maintain our brands maylimit our ability to attract new consumers and retain our existing consumersand materially adversely affect our business, financial condition, results ofoperations and prospects.

*** ***

***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 and shortages of packaging and raw materials could have a material 

 

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adverse effect on ourresults of operations. For example, our results of operations may be affectedby the availability and pricing of packaging materials, principally cardboardand plastic containers, and raw materials, principally raw milk and juiceconcentrate. We are substantially dependent upon one supplier of packagingmaterials, Tetra Pak, which may make us more vulnerable to changes in globalsupply and demand and their effect on price and availability of thesematerials. Additionally, weather conditions and other factors beyond ourcontrol significantly influence the price and availability of our rawmaterials. A number of our raw materials, such as juice concentrate and 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. Moreover the substantial amountof packaging materials we are buying, as well as other raw materials, forexample juice concentrates are denominated in euro and/or U.S. dollars.Exchange rate changes have made packaging materials and other raw materialsmore expensive for us as the vast majority of our revenues are denominated inrubles.

 

Oursuccess also depends on our continued ability to be an effective advertiser ina market where media inflation on the leading national television channelsexceeded 31% in 2008. A substantial increase in the prices of any of theforegoing, 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. The devaluation of the ruble may also hamper our ability toacquire new equipment, as this equipment is often priced in U.S. dollars oreuros and, as a result, may become prohibitively expensive. Future delays innew equipment installation could inhibit our ability to add products and expandour production capacity, cause our output volume to suffer and, consequently,have a material adverse effect on our results of operations.

*** ***

***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 during this time period.

 

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 

 

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increase in demand formilk products in such densely populated countries as China, Indonesia, Algeriaand a number of other countries in Asia and Africa. The unprecedented increasein the price of raw and dry milk adversely affected our dairy profit margin in2007, and continued increases in raw milk prices could further reduce ourprofitability. Although raw milk prices were stable during 2008, we cannotguarantee that they will not increase further in the future. The shortage ofhigh quality raw milk, coupled with raw milk price increases, may also limitour ability to expand our production of high margin value-added dairy products.See “Item 5. Operating and Financial Review and Prospects—D. Trend Information”for additional information.

*** ***

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

*** ***

Russian federal andregional governments may regulate the prices of certain goods that areconsidered to have “social significance.” There is an established list of basic food products that are deemed tohave “social significance,” including dairy products such as certain types ofmilk and kefir. For example, 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 to May 1, 2008 with prices fixed at the January 2008level it was not extended and at the moment it is expired. Although thisarrangement with the Russian government did not significantly impact ourresults of operations as we were still able to freely set the prices for thevast majority of our products, any future price regulations by the Russiangovernment of raw milk or food products that we produce may materiallyadversely affect our business, financial condition and results 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 and 2008, babyfood purchases by the Moscow City Government comprised approximately26% and 18% of the total sales of our babyfood segment, respectively. We supplythese products to the Moscow City Government pursuant to a tender held on ayearly basis. In the event that we were to lose a tender, or the Moscow CityGovernment was to reduce significantly the purchase price or the amount ofproducts it purchases from our babyfood business, and we were unable to findalternative purchasers, then our revenues and profits from this business wouldsuffer, which could have a material adverse effect on our financial conditionand 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 theseentities, particularly as these customers become more sophisticated and attemptto force lower pricing levels and seek an increase in promotional programs. Forexample, in the spring of 2001, several Russian supermarket chains formed aloose alliance which publicly announced its intention not to purchase ourproducts. Although these supermarket chains now purchase our products, they maynot continue to do so, and they or other supermarket chains may attempt asimilar consolidation of market power in the future. In addition, two of Russia’slargest supermarket chains, Perekryostok and Pyatyorochka, merged in April 2006,which further strengthens the negotiating leverage in their dealings with us.Although we have not yet experienced any material adverse effect on ourbusiness, financial condition and results of operations as a result of thismerger, we cannot guarantee that we will not experience adverse consequences inthe future. A number of large 

 

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Western retailers, suchas German retailer Metro and French retailer Auchan, have also openedstores in our markets, which will put further pressure on prices.

 

Wealso compete with other brands for shelf space in retail stores. Retailers alsooffer other products, including their private labels that compete directly withour products. The recent economic downturn may change consumer spendingpatterns and lead to an increase in the consumption of private-label brands andto a decline in the consumption of higher margin national and regional brands,and this may negatively affect our revenues. In addition, retailers in Russiatypically charge food and beverage producers, including us and our competitors,for shelf space. If retailers give higher priority to other brands, purchaseless of, or even refuse to buy, our products, seek substantial discounts,charge unreasonable prices for shelf space, fail to offer sufficient shelfspace, or devote inadequate promotional support to our brands, it could lowerour turnover and reduce our competitiveness and profitability.

*** ***

***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 our business,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 2007 and 2008 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***

 

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***in the event of any successful challenge could include theinvalidation of such transactions or the imposition of other liabilities onsuch 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 successfullychallenged on the basis of non-compliance with applicable legal requirements bycompetent state authorities, counterparties in such transactions orshareholders of the relevant group members or their predecessors-in-interest, couldresult in the invalidation of such transactions and our corporate decisions,restrictions on voting control or the imposition of other liabilities. Becauseapplicable provisions of Russian law are subject to many differentinterpretations, we may not be able to defend successfully any challengebrought against such transactions, and the invalidation of any suchtransactions or imposition of any such liability may, individually or in theaggregate, have a material adverse effect on our business, financial conditionand 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. See “Item 5. Operating and FinancialReview and Prospects —A. Operating Results— Corporate and OperationalHighlights for 2008” for a description of the new Enterprise Resource Planning, or ERP system we are currentlyimplementing.

*** ***

***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 of 

 

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infringement. Any such litigation may result insubstantial costs and diversion of resources, and, if decided unfavorably tous, could have a material adverse effect on our business and results ofoperations.

*** ***

***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.***

 

Asof June 16, 2009, we had 89 pending trademark applications in Russia and24 pending 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 investing plans,excluding expenditures for acquisitions, we invested approximately $130.0million in 2006, $192.7 million in 2007 and $195.3 million in 2008. We spentapproximately $137.3 million in 2006 and $21.8 million in 2007 onacquisitions and approximately $3.3 million in 2008 for the buy out of minorityshareholders. However, we may not be able to meet our planned capital spendingneeds in the future in the event of the following potential developments:

 

·                  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, especially 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. Our ADSand GDS programs together account for 40% of our outstanding shares (thisamount was approved by the Russian securities regulator based on the prior limitand is not required to be reduced to 30%). 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.

 

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

 

Asof June 16, 2009, to our knowledge, approximately 44.20% 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 restated on January 16, 2002, which requires theparties to vote the same way. This group continues to be bound by thisagreement to vote as a block until any member of the group elects to withdrawfrom the agreement. This agreement gives them control over us and the abilityto elect a majority of the directors, appoint management and approve certain actionsrequiring the approval of a majority of our shareholders.

 

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 and CooperationAgreement, they will have the power to control the outcome of most matters tobe decided by vote at a shareholders’ meeting and as long as they hold, eitherdirectly or indirectly, a majority of our shares, they will control theappointment of a majority of directors and removal of directors. The group willalso be able to control or significantly influence the outcome of any vote on,among other things, any proposed amendment to our charter, proposedreorganizations and substantial asset sales or other major corporatetransactions. Thus, the group can take actions that may conflict with theinterest of holders of our 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.

*** ***

***Recently adopted changes in Russian law will limit theamount of advertising time permitted on television, which could increase ouradvertising expenses and have a material adverse effect on our business,financial condition and results of 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 new law, the amount of available advertising time decreased.In turn, 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 from thedecreased volume of advertising time they are permitted to sell. We are amongRussia’s top advertisers.

 

Accordingto Gallup, we were the twelfth largest advertiser in 2006 and the tenth largestadvertiser in 2007 and 2008. In 2006, 2007 and 2008 over 50% of our advertisingexpenditures related to television advertisements. At the same time, mediainflation in Russia has been 

 

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significant in recentyears, exceeding 35% in 2006 and 50% in 2007 and 2008. Imposition of the newlaw, coupled with overall media inflation in Russia, is likely to continue toincrease our advertising expenses. The increased cost of advertising, alongwith the decreased availability of advertising time slots, may also lead to adecrease in our television advertising which, consequently, could have amaterial adverse effect on our business, financial condition and results ofoperations.

*** ***

***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 adopt itsown 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 couldmaterially affect our business and results of operations. In particular, as weown a substantial number of our other subsidiaries through Wimm-Bill-Dann,(formerly Lianozovsky Dairy Plant) and as Wimm-Bill-Dann constitutes themajority of our production capacity, its loss would materially adversely affectour prospects, business and results of operations.

 

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 98.2% of the Wimm-Bill-Dann whichwe own, 15% was acquired in a separate investment tender held by the Departmentof State 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 the Wimm-Bill-Dann, theonly two participants were entities which were under common control, anarguable violation of this requirement. In the event that the Russiangovernment authorities were successfully to maintain that this tender was notduly held since the participants were under common control, we could lose 15%of our stake in the Lianozovsky Dairy Plant, materially adversely affecting ourresults of operations.

*** ***

***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 liquidation of a Russianlegal 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 liquidation of a legal 

 

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entity. Weaknesses inthe Russian legal system create an uncertain legal environment, which makes thedecisions of a Russian court or a governmental authority difficult, if notimpossible, to predict. If involuntary liquidation were to occur, suchliquidation could lead to significant negative consequences for our group.

 

Forexample, in Russian corporate law, negative net assets calculated on the basisof Russian Accounting Standards as at the end of the second or any subsequentyear of a company’s operation can serve as a basis for a court to order theliquidation of the company upon a claim by governmental authorities. ManyRussian companies have negative net assets due to very low historical assetvalues reflected on their Russian accounting standards balance sheets; however,their solvency, *i.e.*, theirability to pay debts as they come due, is not otherwise adversely affected bysuch negative net assets. The amount of net assets of some of our subsidiariesis below the minimum legal requirements. Although we are currently taking stepsto remedy this and these subsidiaries continue to meet all of their obligationsto creditors, there is a minimal 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.

*** ***

***Possible implementation of new federal or local governmentpolicies or selective application of existing policies, affecting the foodindustry could substantially and negatively affect our turnover and operatingmargin.***

 

Thepossible implementation of new federal or local government policies orselective application of existing policies, affecting the food industry couldhave a significant impact on our business. For example, the federal and localgovernments have been known to implement trade barriers, subsidies and otherpolicies favoring certain producers. Additionally, customs regulations inRussia are unclear, subject to frequent change and are applied inconsistently.The imposition of higher customs duties on products we import would increasethe costs of our products and reduce our profits, while the implementation ofprice controls on products we produce would reduce our operating margin. Forexample, federal customs regulations which were enacted in 2001 subjected in ajuice concentrate imports to the highest level of customs duties allowed forthat particular category of imports. In addition, federal customs regulationsenacted in 2002 stipulate minimum declaration amounts for imported goods. As aresult of such regulations, we may be forced to declare a higher value forimported goods than the amount actually paid and, consequently, pay a highertariff 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 

 

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product to the public tofile an application to obtain state registration for the product and its inclusionin the State Register of Permitted Food Products. Failure to comply withRegulation No. 988 could cause delays in introducing new food and beverageproducts, as well as the disallowance of certain tax benefits otherwiseavailable to producers of certain food products, such as baby food. Theimplementation of this regulation in June 2004 has caused delays in ourintroduction of certain new products and has increased production costs. We maycontinue to experience similar delays and increased costs in connection withRegulation 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.

 

OnDecember 19, 2008, the new technical regulations for all dairy products,including drinking milk, fermented dairy products, cheese, butter, margarine,yogurts and dairy deserts came into force. Recent legislation mandates thatproducts labeled as “milk” should not contain any dry milk, vitamins, orminerals. Any drinking milk that contains these ingredients must be labeled as “milkproduct” or “milk drink”. We have sought to comply with the new rules andhave changed our supply and production processes in accordance with them. Forexample, we included clauses in our supply contracts that the milk suppliedmust be in compliance with all of the requirements of these new regulations.Accordingly, we have also made changes to our packaging labels. While webelieve that we are in compliance with these new requirements, we cannotguarantee that the relevant regulatory authorities will judge us to be incompliance with these new labeling requirements. In addition, as the regulationapplies stricter requirements to raw milk, this may lead to price increases inour raw-milk supply costs which we may not be able to pass on to our customersand consequently have an adverse effect on our results.

 

OnOctober 27, 2008, a new federal law, “On the technical regulation forjuice production from fruits and vegetables,” was adopted and came into forceon April 27, 2009. The new regulations provide a definition for juices andnectars, define the level of concentration of juice in finished products,define types of juices and nectars and establish a list of food supplementsthat can be added into juice products and indicate the maximum permissibleconcentration of these supplements in juice products. The law also setsrequirements for the packaging of juice products and information that isrequired to be disclosed on the packaging of juice products. These regulationsalso contain other requirements for juice producers and equipment. All juiceproducts must now be certified according to Russian standards and it isprohibited to sell juice products in Russia without such certification. Whilewe believe that we are in compliance with these new requirements, we cannotguarantee that the relevant regulatory authorities will judge us to be in compliancewith these new requirements. We also cannot predict how these new requirementswill influence prices on the juice market and, consequently, any potentialnegative effect on our results.

 

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 against them, which would have amaterial adverse effect on our 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 domestic productionfacilities, while others, such as Coca-Cola and Pepsi, have acquired domesticproducers. These investments and acquisitions reduce the competitive advantagesthat we have over foreign competitors without 

 

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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 ourcommercial activities.***

 

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 and reporting requirements withrespect to such markets. Current Russian legislation does not clearly define “market”in terms of the types of services or the geographic area.

 

Our babyfood business was 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 respectiveapprovals from FAS for such merger. Although Moscow Baby Food Plant no longerexists it is still on the list of entities holding dominant position in theMoscow region baby food market. Wimm-Bill-Dann was not categorized by FAS asentity holding dominant position in the Moscow region baby food market, but anyruling 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.

 

***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.***

 

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*** ***

Followingthe sudden and, in some cases, substantial increases in food prices in 2007,FAS initiated inspections of food producers, including us, as well as distributorsand retail chains throughout Russia in order to determine whether these priceincreases were caused by price collusion among producers and retailers. Whilewe strongly believe that we have not violated and are not currently violatingany antimonopoly regulations, it is possible that FAS and its regionaldivisions will nonetheless determine otherwise.

 

Todate, the regional divisions of FAS have undertaken inspections of ouroperations in Omsk, Voronezh, St. Petersburg and Ufa.

 

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, were recognizedas holding a dominant position in the Voronezh regional market. This findingdid not result in any fines and/or any other sanctions.

 

Theinvestigation in St. Petersburg resulted in a number of antimonopolyproceedings and administrative proceedings in which the St. Petersburg regionalFAS alleged that we were engaging in unwarranted price increases for ourfinished products, as well as purchasing raw milk at below-market levels andassessed fines against us totaling $1.0 million. The investigation in St.Petersburg resulted in 4 antimonopoly litigations and 4 administrativelitigations based on two of the abovementioned antimonopoly litigations. One ofthe antimonopoly proceedings was ceased by St. Petersburg regional FAS. Theother antimonopoly proceeding was successfully appealed by us and was foundinvalid as well as one administrative proceeding based on it and we are waitingthat the other administrative proceeding based on this antimonopoly proceedingwill also be found invalid. We appealed the other two antimonopoly proceedingswhich are currently pending as well as administrative proceeding based on oneof them. In Krasnoyarsk, the regional FAS has requested that we provideinformation on the price at which we purchased raw milk this request did notresult in any investigation or proceeding against us. In March 2009, theregional FAS in Ufa conducted an investigation against our branch there tryingto find some provisions of our distribution contract violating antimonopolylegislation that resulted in proceedings against us for competition-blocking.The proceeding is currently pending.

 

InJune 2008, FAS initiated a new investigation into dairy producers,including us, connected with a decline in raw milk purchasing prices trying toinvestigate whether there was any collusion among milk producers to drive downthe prices paid to suppliers. Although we believe this decline is due toseasonal factors, we anticipate that we will be requested by FAS to disclosedetailed information regarding our raw milk purchasing prices. Although webelieve that we have complied with regulations on the procurement of raw milk,FAS may find otherwise, and our business and financial condition could beadversely affected.

 

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 

 

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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 in the past have carried out, and continueto 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. For example, in January 2006, we acquired a 20%stake in our subsidiary Moscow Babyfood Plant OJSC, from minority shareholdersfor cash consideration of $7.0 million increasing our beneficial ownership to97.34%. In January 2005, we acquired a 10% stake in our subsidiarySiberian Dairy Plant from minority shareholders for cash consideration of $1.1million increasing our beneficial ownership to 87.1%. In March and April 2004,we acquired a total additional 6.2% of our subsidiary Tsaritsino Dairy Plantfrom our minority shareholders for cash consideration of $3.4 million increasingour beneficial ownership to 97.6%. In addition, we acquired a 47.7% interest inour subsidiary Ufa Dairy Plant in September 2003 from minorityshareholders for cash consideration of $3.1 million increasing our beneficialownership to 96.5%.

 

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Shouldwe proceed to consolidate our businesses, we may trigger a legal requirementthat we redeem shares on shareholders’ demand. According to amendments to theFederal Law on Joint-Stock Companies, which came into effect on July 1, 2006,a holder of more than 95% of shares in an open joint-stock company has theright to buy out the remaining shares from the minority shareholders for cashconsideration equal to the amount determined by an independent appraiser. Thenew amendments also require a person purchasing 30%, 50%, 75% or more shares inan open joint-stock company to offer to other shareholders of this entity tosell their shares at a price not less than the acquisition price of therespective stake. Pursuant to this requirement, in 2007 we bought a 4.71% stakein Ochakovo Dairy Plant for cash consideration of $3.3 million and 0.60%of ordinary shares and 1.16% of preferred shares in Nazarovo Dairy Plant forcash consideration of approximately $0.4 million for both stakes, a 33.51%stake in Obninsk Dairy Plant for cash consideration of $11.9 million and a13.24% stake in Angarsk Dairy Plant for cash consideration of $0.8 million.

 

In2008, we acquired an additional 2.6% interest in WBD Beverages for cashconsideration of $3.3 million. As a result of this transaction, we obtained100% control in WBD Beverages.

 

Althoughwe are and strive to be in compliance with all regulations related toconsolidation, we can not guarantee that some of our minority shareholders maybring claims against us. See “Item 4. Information on Our Company—A.Historyand Development” for a description of our subsidiary mergers in 2008 and 2009.

** **

**RisksRelating to Our Financial Condition**

** **

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

*** ***

As a result of the credit market crisis(including uncertainties with respect to financial institutions and the globalcapital markets), 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 for our purchases of equipment, raw material and packaging may have amaterial adverse effect on our business, financial condition, results ofoperations 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.***

*** ***

Since the summer of 2007, turmoil in theinternational credit markets, the recession in the United States and severalmajor European economies and the collapse or near collapse of several largebanks and financial services companies in the United States and United Kingdomhave resulted in increased volatility in the securities markets in the UnitedStates and across Europe, including Russia. In addition, many financial market indicesin Russia and other emerging markets, as well as developed markets, havedeclined significantly since the summer of 2008, and continue to be depressedas of the date of this annual report. Continued volatility in the UnitedStates, European and/or Russian securities markets stemming from these or otherfactors may continue to adversely affect the price of our shares and ADSs.

 

The current downturn in the global financialmarkets has also caused some companies to experience difficulties accessing theircash equivalents, trading investment securities, drawing on revolvers, issuingdebt and raising capital generally. A continuation of this downturn may negativelyimpact our ability to obtain financing on commercially reasonable terms and thelevel and volatility of the trading price of our shares and ADSs, and couldhave a material adverse effect on our business, financial condition, results ofoperations and prospects.

 

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

 

TheRussian economy has been characterized by high rates of inflation, and theWorld Bank forecasted inflation to reach between 11%-13% in Russia in 2009. Aswe tend to experience inflation-driven increases in certain of our costs,including salaries and rents, which are sensitive to rises in the generalprice level in Russia, our costs in U.S. dollar terms will rise. In this situation,due to competitive pressures, we may not be able to raise the prices we chargefor our products and services sufficiently to preserve operating margins.Accordingly, high rates of inflation in Russia could increase our costs anddecrease 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 require us to repay our debt tothem in the event of deterioration in our financial condition.

*** ***

***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 

 

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law also provides that,for a period of 30 days after the notice, these creditors would have aright to accelerate the merged subsidiaries’ indebtedness and demandreimbursement for applicable losses. In the event that all or part of certainof 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 to consummatethe mergers may prevent us from optimizing our tax rates and oureffective 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 millionsyndicated loan agreement, bank loans and obligations under equipmentfinancing. As of December 31, 2008, our consolidated total debt wasapproximately $673.2 million, of which $75.5 million was secured by equipment.Our interest expense for the year ended December 31, 2008 was$44.5 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.

 

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. The recent global financial crisis and the highly volatilefinancial markets may materially adversely affect our ability to access thecapital and credit markets at a time when we would like or need to do so, whichcould have an impact on our ability to refinance maturing debts and/or react tochanging economic and business conditions. See also “—Continued turmoil in the credit markets couldcause our business, financial condition, results of operations and the price ofour shares and ADSs to suffer.”

 

Wemay not be able to generate sufficient cash flow or access internationalcapital markets or incur additional indebtedness to enable us to service or repayour indebtedness or to fund our other liquidity needs. We may need to refinanceall or a portion of our indebtedness on or before maturity, sell assets, reduceor delay capital expenditures or seek additional capital. Refinancing oradditional financing may not be available on commercially reasonable terms, andwe may not be able to sell our assets or, if sold, the proceeds there from maynot be sufficient to meet our debt-service obligations. Our inability togenerate sufficient cash flow to satisfy our debt service obligations, or torefinance debt on commercially reasonable terms, would have a material adverseeffect 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 costs, decrease our cash reserves, or make itmore difficult for us to comply with financial ratios and to repay our debtsand will affect the value of dividends received by holders of ADSs***.

 

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Over the past 15 years, the ruble hasfluctuated, at times substantially over short periods of time, against the U.S.dollar and, in particular, it has significantly depreciated against the U.S.dollar in 2008 as a result of the ongoing global financial crisis. For example,on December 31, 2008, the official exchange rate published by the CBR was29.38 rubles per one U.S. dollar, as compared to 24.55 rubles per one U.S.dollar on January 1, 2008. Furthermore, various press reports suggest thatthe ruble will continue to depreciate against the U.S. dollar through 2009, andas of June 16, 2009, the exchange rate was 31.15 rubles per one U.S.dollar. The ruble has also depreciated against the euro. On June 16, 2009,the official exchange rate was 43.30 rubles per one euro, as compared to 41.44rubles per one euro on January 1, 2008.

 

The CBR from time to time has imposed variouscurrency-trading restrictions in attempts to support the ruble. The ability ofthe government and the CBR to maintain a stable ruble will depend on manypolitical and economic factors. These include their ability to finance thebudget without recourse to monetary emissions, to control inflation and tomaintain sufficient foreign currency reserves to support the ruble.

 

A majority of our capital expenditure andliabilities and borrowings are either 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.

 

Furthermore, if the ruble declines against theU.S. dollar and/or euro and price increases cannot keep pace, we could havedifficulty repaying or refinancing our U.S. dollar- and/or euro-denominatedindebtedness. The devaluation of the ruble would also result in losses in thevalue of assets denominated in rubles, such as ruble cash deposits.

*** ***

***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 results of operations.***

 

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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 financial crisis, we face an increased risk that ourcustomers and/or debtors may refuse to or 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 results ofoperations.

 

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.***

 

Wehave used various initiatives to reduce our tax burden and several of our taxinitiatives have been challenged by the Russian tax authorities. There havealso been press reports of instances in which the Russian tax authorities havesuccessfully challenged methods similar to those we have used. If any of ourinitiatives are successfully challenged by the Russian tax authorities, wewould face significant losses associated with the assessed amount of tax deemedunderpaid and related interest and penalties. These losses could have amaterial adverse effect on our financial condition and results 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 have claimed, amongother things, that these suppliers are, in some cases, not registered astaxpayers, have not provided tax returns and/or not paid their taxes in full orat all. Although our subsidiaries perform extensive due diligence on each oftheir suppliers, they are not able to scrutinize thoroughly every aspect ofeach supplier’s business, including whether the supplier is in full compliancewith respect to its tax duties. As a result of these alleged breaches bycertain of our suppliers, the tax authorities have refused to reimburse VATpaid by our subsidiaries in an amount totaling approximately $1.0 million forservices rendered and goods provided by such suppliers. They also refused todiscount profit tax paid by our subsidiaries to the budget from the amountsunder transactions 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 lead to claims against us from the taxauthorities. For example in 2007, Trading Company Wimm-Bill-Dann received ademand from the tax authorities to pay taxes that were reimbursed to us in theaggregate amount of $0.5 million based on the decision by the tax authoritiesthat our supplier was negligent in paying its tax obligations. We filed a courtclaim seeking to invalidate this claim. 

 

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Although the court ruled against us in the first twoinstances, the court of the third instance ruled in our favor and remanded thecase back to the court of first instance for consideration. After beingreconsidered in the court of first instance, we appealed the decisions of thecourts that partially upheld our claims to the Constitutional Court of theRussian Federation, claiming that the existing tax practice is inconsistentwith the Russian Constitution. The case is currently pending.

 

In addition, in 2008 the Russian taxauthorities carried out an audit of Wimm-Bill-Dann for fiscal years 2004through 2006 and found some of our suppliers negligent in paying or complyingwith their tax obligations and demanded that we reimburse VAT and income tax inthe aggregate amount of approximately $7.8 million. In November 2008, weappealed this decision to higher tax authorities and in the court of firstinstance. The higher tax authorities partially invalidated these claims andreduced the total claims to approximately $2.0 million. The court proceeding isstill pending.

 

To the best of our knowledge, in December 2008,the Moscow Regional service of the Russian Interior Ministry launched aninvestigation against us for alleged tax code violations. We believe that thisinvestigation is based on an assessment by the Russian tax authorities for thefiscal years 2004 through 2006. We believe that there is no legal basis forthis investigation, and we have lodged an appeal with the Moscow CityProsecutor’s Office. The investigation is currently pending. Although wecontinue to provide the results of due diligence carried out on our suppliersto the relevant Russian authorities, we cannot exclude the possibility thatsome of these suppliers will be found to have been negligent by the taxauthorities.

 

***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 entities generallyare not insured. The weak banking infrastructure in Russia also exposes us toan increased risk of unauthorized transactions or charges on our accounts dueto bank error or actions by computer hackers.

 

In recent years, there has been a rapid increasein lending by Russian banks, which many believe has been accompanied bydeterioration in the credit quality of the borrowers. In addition, a robustdomestic corporate debt market is leading Russian banks to hold increasinglylarge amounts of Russian corporate ruble bonds in their portfolios, which isfurther deteriorating the risk profile of Russian bank assets. The seriousdeficiencies in the Russian banking sector, combined with the deterioration inthe credit portfolios of Russian banks, may result in the banking sector beingmore susceptible to market downturns or economic slowdowns, including due toRussian corporate defaults that may occur during any such market downturn oreconomic slowdown. In addition, the CBR has from time to time revoked thelicenses of certain Russian banks, which resulted in market rumors aboutadditional bank closures and many depositors withdrawing their savings.Recently a number of banks and credit institutions have lost their licenses dueto deficiency of capital and failure to meet the CBR requirements. If a bankingcrisis were to occur, Russian companies would be subject to severe liquidityconstraints due to the limited supply of domestic savings and the withdrawal offoreign funding sources that would occur during such a crisis.

 

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The recent disruptions in the global marketshave generally led to reduced liquidity and increased cost of funding inRussia. Borrowers have generally experienced a reduction in available financingboth in the inter-bank and short-term funding market, as well as in the longerterm capital markets and bank finance instruments. The non-availability of fundingto the banking sector in the Russian Federation has also negatively affectedthe anticipated growth rate of the Russian Federation. According to Standard &Poor’s, which in October 2008 revised the outlook on its long-termsovereign credit rating for the Russian Federation from “stable” to “negative,”Russia is at risk of recording a deficit by 2009. In addition to anticipatedslower asset growth on the Russian banking market, the Russian Federation isfacing significant inflation, a significant decline in stock prices and asubstantial outflow of capital from the country. The Russian government and theCBR provide financial support only to a limited number of banks, which mayresult in the liquidation of other banks and financial institutions. A combinationof these factors may result in a significant deterioration in the financialfundamentals of Russian banks, notably liquidity, asset quality andprofitability.

 

There is currently a limited number ofsufficiently creditworthy Russian banks and few ruble-denominated financialinstruments in which we can invest our excess ruble cash. We hold the bulk ofour excess ruble and foreign currency cash in Russian banks, includingsubsidiaries of foreign banks. Another banking crisis or the bankruptcy or insolvencyof the banks from which we receive or with which we hold our funds could resultin the loss of our deposits or affect our ability to complete bankingtransactions in Russia, which could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

Duringthe banking crisis in 1998 we have also experienced problems with transmittingtax payments through certain Russian banks and, as a result, are experiencingdifficulties with the Russian tax authorities. In particular, between 1998 and2007, several of our subsidiaries received tax assessments from the Russian taxauthorities for tax arrears totaling approximately $8.0 million. Each of thesetax assessments resulted from the failure of the subsidiaries’ banks to transfertax payments to the state budget upon receiving the relevant payment orders.While the Russian Tax Code provides that a taxpayer is deemed to have paid atax when the corresponding payment order is received by the taxpayer’s bank,press reports indicate that the Russian tax authorities have been actively andoften successfully challenging such payments if the tax payment is not in factreceived due to the failure of the bank to transfer such payment. Russiancourts often rule in favor of the Russian tax authorities in 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 pricing legislation became effectivein the Russian Federation on January 1, 1999. This legislation allows thetax authorities to make transfer pricing adjustments and impose additional taxliabilities with respect to all “controlled” transactions, provided that thetransaction 

 

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price differs from the market price by more than 20%. “Controlled”transactions include transactions with related parties, barter transactions,foreign trade transactions and transactions with unrelated parties withsignificant price fluctuations (*i.e*.,if the price with respect to such transactions differs from the prices onsimilar transactions conducted within a short period of time by more than 20%).Special transfer pricing provisions are established for operations withsecurities and derivatives. Russian transfer pricing rules are vaguelydrafted, generally leaving wide scope for interpretation by Russian tax authoritiesand courts. There has been very little guidance (although some court practiceis available) as to how these rules should be applied. Moreover, theMinistry of Finance of the Russian Federation is in the process of draftingamendments to the transfer pricing legislation, which may come into force inthe near future. The implementation of these amendments are expected toconsiderably toughen the existing law, as the proposed changes are expected,among other things, to effectively shift the burden of proving market pricesfrom the tax authorities to the taxpayer, cancel the existing permitteddeviation threshold and introduce specific documentation requirements forproving market prices. If the tax authorities were to impose significantadditional tax liabilities as a result of transfer pricing adjustments, itcould have a material adverse impact on our business, financial condition andresults 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.

** **

**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 to deposit shares intoour ADS facility may be affected by current or future governmental regulations.For example, under Russian securities regulations, no more than 30% of aRussian company’s shares and no more than 25% with respect to strategicallyimportant companies may be circulated abroad through sponsored depositaryreceipt programs. Prior to December 31, 2005, and at the time of ourinitial public offering, this threshold was 40%. Although we believe that thenew lower threshold does not apply to our ADSs, in the future, we may berequired to reduce the size of our ADS program or amend the depositaryagreement for the ADSs.

 

Because our ADS program is regularly at or nearcapacity, purchasers of our shares may not be able to deposit these shares intoour ADS facility, and ADS holders who withdraw the underlying shares from thefacility may not be able to re-deposit their shares in the future. As a result,effective arbitrage between our ADSs and our shares may not always be possible.Our shares are listed and trade on the RTS. Due to the limited public freefloat of our common stock, the public market for our shares is significantlyless active and liquid than for our ADSs. The cumulative effect of thesefactors is that our shares may from time to time, and for extended periods oftime, trade at a significant 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 as the United Kingdomand the United States, recognize a distinction between legal owners ofsecurities, such as the depositary, and the beneficial owners of securities,such as the ADS holders. In these jurisdictions, the shares held by thedepositary on behalf of the ADS holders would not be subject to seizure inconnection with legal proceedings against the depositary that are unconnectedwith the shares.

 

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Russian law may not, however, recognize adistinction between legal and beneficial ownership of securities. Russian lawgenerally treats a depositary as the owner of shares underlying the ADSs and,accordingly, may not recognize ADS holders’ beneficial ownership therein.

 

Thus, in proceedings brought against adepositary, whether or not related to shares underlying the ADSs, Russiancourts may treat those underlying shares as the assets of the depositary, opento seizure or arrest. In the past, a lawsuit was filed against a depositaryseeking the seizure of various Russian companies’ shares represented by ADSsissued by that depositary. In the event that this type of suit were to besuccessful in the future against our depositary, and the shares underlying ourADSs were to be seized or arrested, the ADS holders involved could lose theirrights to such underlying shares and all of the money invested in 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 ordinary shareholders will receive notice directly fromus and will be able to exercise their voting rights by either attending themeeting in person or voting by power of attorney.

 

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 for whichthe depositary does not receive timely voting instructions will not be voted atany meeting.

 

Inaddition, although securities regulations expressly permit the depositary tosplit the votes with respect to the shares underlying the ADSs in accordance withinstructions from ADS holders, there is little court or regulatory guidance onthe application of such regulations, and the depositary may choose to refrainfrom voting at all unless it receives instructions from all ADS holders to votethe shares in the same manner. ADS holders may thus have significant difficultyin exercising voting rights with respect to the shares underlying the ADSs.There can be no assurance that holders and beneficial owners of ADSs will (i) receivenotice of shareholder meetings to enable the timely return of votinginstructions to the depositary, (ii) receive notice to enable the timelycancellation of ADSs in respect of shareholder actions or (iii) be giventhe benefit of dissenting or minority shareholders’ rights in respect of anevent or action in which the holder or beneficial owner has voted against,abstained from voting or not given voting instructions.

*** ***

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

 

The market price of our ADSs experienced, and maycontinue to experience, significant volatility. For the period from January 1,2008 to December 31, 2008, the closing price of our ADSs on the New YorkStock Exchange has ranged from a low of $13.68 per ADS to a high of $144.40 perADS.

 

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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 other food and beverage companies;

·                  changesin financial estimates or other material comments by securities analysts relatingto 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 in nationaland 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

·                  impactand development of any lawsuit, currently pending or threatened, or that may beinstituted in the future.

 

In addition, the stock market in recent yearshas experienced extreme price and trading volume fluctuations that often havebeen unrelated or disproportionate to the operating performance of individualcompanies. These broad market fluctuations may adversely affect the price ofour 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 to convertrubles into U.S. dollars is subject to the availability of U.S. dollars in Russia’scurrency markets. Although there is an existing market within Russia for theconversion of rubles into U.S. dollars, including the interbank currencyexchange and over-the-counter and currency futures markets, the furtherdevelopment of this market is uncertain. At present, there is a limited marketfor the conversion of rubles into foreign currencies outside of Russia andlimited 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, dividends paid to anon-resident holder of the shares generally will be subject to Russianwithholding tax at a rate of 15%. The domestic tax rate applicable to dividendspayable by Russian companies to non-resident individuals has been reduced from30% to 15% effective from January 1, 2008. This tax may potentially bereduced to 5% or 10% for legal entities and organizations and to 10% forindividuals under the Convention between the United States of America and theRussian Federation for the Avoidance of Double Taxation and the Prevention ofFiscal Evasion with respect to Taxes on Income and Capital, or the UnitedStates—Russia income tax treaty, provided a number of conditions are satisfied.However, the Russian tax rules on the application of double tax treatybenefits to individuals are unclear and there is no certainty that advanceclearance would be possible. The Russian tax rules applicable to ADSholders 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 the beneficialowners of the underlying shares for the purposes of double tax treatyprovisions 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 and

 

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taxation of income of beneficial owners, it is unclearhow the Russian tax authorities and courts will ultimately treat the ADSholders in this regard. Thus, we may be obliged to withhold tax at standardnon-treaty rates when paying out dividends and U.S. ADS holders may be unableto benefit from the United States—Russia income tax treaty. See also “Item 10.Additional Information —E. Taxation” for additional information.

*** ***

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

 

Under Russian tax legislation, gains realizedby non-resident legal entities or organizations from the disposition of sharesand securities of Russian organizations, as well as financial instrumentsderived from such shares, such as the ADSs, may be subject to Russianwithholding income tax if immovable property located in Russia constitutes morethan 50% of our assets. However, no procedural mechanism currently exists towithhold and remit this tax with respect to sales made to persons other thanRussian companies and foreign companies with a registered permanentestablishment in Russia. Gains arising from the disposition of the foregoingtypes of securities on foreign stock exchanges by non-resident holders who arelegal entities or organizations are not subject to taxation in Russia.

 

The taxation of income of non-residentindividuals depends on whether this income is received from Russian ornon-Russian sources. The Russian tax laws do not give a definition of how the “sourceof income” should be determined with respect to the sale of securities, otherthan that income from the sale of securities “in Russia” should be consideredas Russian source income. As there is no further definition of what should beconsidered to be a sale “in Russia,” the Russian tax authorities have a certainamount of freedom to conclude what transactions take place in or outsideRussia, including looking at the place of the transaction, the place of theissuer of the shares or other similar criteria.

 

Non-residents who are individuals are taxableon Russian-source income. Provided that gains arising from the disposition ofthe foregoing types of securities and derivatives outside of Russia by U.S.holders who are individuals not resident in Russia for tax purposes will not beconsidered Russian source income, then such income should not be taxable inRussia. However, gains arising from the disposition of the same securities andderivatives “in Russia” by U.S. holders who are individuals not resident inRussia for tax purposes may be subject to tax either at the source in Russia orbased on an annual tax return, which they may be required to submit with theRussian 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.securities laws.

 

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 legalrecourse for claims related to your investment in the ADSs. The depositagreement provides for actions brought by any party thereto against us to besettled by arbitration in accordance with the Commercial Arbitration Rules ofthe American Arbitration Association, provided that any action under the U.S.federal securities laws or the

 

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rules orregulations promulgated there under may, but need not, be submitted toarbitration. The Russian Federation is a party to the United Nations (New York)Convention on the Recognition and Enforcement of Foreign Arbitral Awards, butit may be difficult to enforce arbitral awards in the Russian Federation due toa number of factors, including the inexperience of Russian courts ininternational commercial transactions, official and unofficial politicalresistance to enforcement of awards against Russian companies in favor offoreign investors and Russian courts’ inability to enforce such orders andcorruption.

*** ***

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

 

Ownership of Russian joint stock company shares(or, if the shares are held through a nominee or custodian, then the holding ofsuch nominee or custodian) is determined by entries in a share register and isevidenced by extracts from that register. Currently, there is no centralregistration system in Russia. Share registers are maintained by the companiesthemselves or, if a company has more than 50 shareholders or so elects, bylicensed registrars. Regulations have been issued regarding the licensingconditions for such registrars, as well as the procedures to be followed byboth companies maintaining their own registers and licensed registrars whenperforming the functions of registrar. In practice, however, these regulationshave not been strictly enforced, and registrars generally have relatively lowlevels of capitalization and inadequate insurance coverage. Moreover,registrars are not necessarily subject to effective governmental supervision.Due to the lack of a developed share registration system in Russia,transactions in respect of a company’s shares could be improperly orinaccurately recorded, and share registration could be lost through fraud,negligence, official and unofficial governmental actions or oversight byregistrars incapable of compensating shareholders for their misconduct. Thiscreates risks of loss not normally associated with investments in othersecurities markets. Further, the depositary, under the terms of the depositagreement, will not be liable for the unavailability of our shares or for thefailure to make any distribution of cash or property with respect thereto dueto 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.

*** ***

***Russian thin-capitalization rules could affect ourability to deduct interest on certain borrowings.***

 

Russianthin-capitalization rules limit the amount of interest that can bededucted by a Russian company on debt payable to non-resident shareholders.Until January 1, 2006, these rules applied only to loans issued to aRussian company by a foreign company owning directly or indirectly more than20% of the share capital of the Russian company. However, thin-capitalization rules thatcame into effect on January 1, 2006 extend the rules’ application to debtissued to a Russian company by another Russian company that is affiliated withsuch foreign company, as well as to debt issued to a Russian company which issecured by such foreign company or such affiliated Russian company. It is notyet fully clear how these new rules will be applied in practice by theRussian tax authorities.

 

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**RisksRelating to the Russian Federation**

 

**EconomicRisks**

 

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

 

Since the dissolution of the Soviet Union in1991, the economies of Russia and other CIS countries where we operate haveexperienced periods of considerable instability and have been subject to abruptdownturns. Most notably, following the Russian government’s default on itsruble-denominated securities in August 1998, the CBR stopped its supportof the ruble and a temporary moratorium was imposed on certain hard currencypayments. These actions resulted in the immediate and severe devaluation of theruble and a sharp increase in the rate of inflation, a substantial decline inthe prices of Russian debt and equity securities, and an inability of Russianissuers to raise funds in the international capital markets. These problemswere aggravated by the subsequent near collapse of the Russian banking sector,with the termination of banking licenses of a number of major Russian banks.This crisis had a severe impact on the economies of Russia and the other CIScountries.

 

While the economies of Russia and the other CIScountries where we operate have experienced positive trends in recent years,such as increases in gross domestic product, relatively stable nationalcurrencies, strong domestic demand, rising real wages, increased disposableincome, increased consumer spending and a relatively reduced rate of inflation,these positive trends have been supported, in part, by increases in globalcommodity prices, and may not continue or may abruptly reverse. For example,the current financial crisis, as well as any future economic downturns orslowturns in Russia or the other CIS countries where we operate could lead todecreased demand for our products, decreased revenues and negatively affect ourliquidity and ability to obtain debt financing, which would have a material adverseeffect on our business, financial condition and results of operations. Inparticular, the recent financial crisis has led to a managed devaluation of theruble creating a significant decline in Russia’s gold and foreign currencyreserves.  In addition, the Russianeconomy is experiencing decreased production of goods and services, a fall inconsumer demand and a decline in real wages and an increase in the inflationrate. The decline in global prices for raw materials, especially for oil andnatural gas, has weakened the government’s finances and may lead to a budgetdeficit and a decrease in Russia’s GDP in 2009 and beyond.

*** ***

***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 one of the Moscowpower substations built in 1963 caused a major power outage in a large sectionof Moscow and some surrounding regions. The blackout disrupted ground electrictransport, 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.

 

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***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 Russian economy is especially vulnerable to the price of oil and gas on theworld market and a decline in the price of oil and gas could slow or disruptthe Russian economy. Recent military conflicts and international terroristactivity have also significantly impacted oil and gas prices, and poseadditional risks to the Russian economy. Russia is also a major producer andexporter of metal products and its economy is vulnerable to world commodityprices and the imposition of tariffs and/or antidumping measures by the UnitedStates, the European 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 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 and governmentaland administrative decisions implementing them, as well as

 

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certain transactionsconsummated pursuant to them, have in the past been challenged in the courts,and such challenges may occur in the future. This lack of consensus may hinderour long-term planning efforts and creates uncertainties in our operatingenvironment, both of which may prevent us from effectively and efficientlyimplementing 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.

*** ***

***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 presses 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 the currentfinancial crisis. Labor and social unrest may have political, social andeconomic consequences, such as increased support for a renewal of centralizedauthority, increased nationalism, including restrictions on foreign involvementin the economy 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

 

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and business decisionsthat we make, many of which do not exist in countries with more developedmarket 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;

·                  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.

 

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, or in requirements that we cease certain of our business activities,or in criminal and administrative penalties applicable to our officers. Anysuch decisions, 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,

 

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or any violation of,current and future laws or regulations could require material expenditures byus or otherwise have a material adverse effect on our business or financialresults. See “Item 4. Information on Our Company—B. Business Overview—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 criminaland administrative penalties applicable to its officers. Also, in the course,or as a result, of an environmental investigation, regulatory authorities canissue an order halting part or all of the production at a plant which hasviolated environmental standards. We have been, at various times, subject toadministrative sanctions for failure to comply with environmental regulationsrelating to effluent discharge and to minor administrative sanctions forviolations relating to waste disposal. In the event that production at one ofour facilities was partially or wholly prevented due to this type of sanction,our production capability would suffer significantly and our operating resultswould suffer.

*** ***

***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 conductsecurities-related transactions. While some important areas are subject tovirtually no oversight, the regulatory requirements imposed on Russian issuersin other areas result in delays in conducting securities offerings and inaccessing the capital markets. It is often unclear whether or how regulations,decisions and letters issued by the various regulatory authorities apply to. Asa result, we may be subject to fines and/or other enforcement measures despiteour best efforts at compliance, which could have a material adverse effect onour business, 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.Enforcement of court orders can in practice be very difficult in Russia. All ofthese factors make judicial decisions in Russia difficult to predict andeffective redress uncertain. Additionally, court

 

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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 adequate compensation, wouldhave a material adverse effect on our business, financial condition, results ofoperations 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, act selectivelyor arbitrarily, without hearing or prior notice, and sometimes in a manner thatis inconsistent with legislation or influenced by political or commercialconsiderations. Selective or arbitrary governmental actions have reportedlyincluded the denial or withdrawal of licenses, sudden and unexpected tax auditsand claims, criminal prosecutions and civil actions. Federal and local governmententities have also used ordinary defects in matters surrounding share issuancesand registration as pretexts for court claims and other demands to invalidatesuch issuances and registrations or to void transactions. Moreover, the governmentalso has the power in certain circumstances, by regulation or government acts,to interfere with the performance of, nullify or terminate contracts. Standard &Poor’s has expressed concerns that “Russian companies and their investors canbe subjected to government pressure through selective implementation ofregulations and legislation that is either politically motivated or triggeredby competing business groups.” In this environment, our competitors may receivepreferential treatment from the government, potentially giving them acompetitive 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

 

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·               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 debts of oursubsidiaries. This liability could have a material adverse effect on ourbusiness, results of operations and financial condition.

*** ***

***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 assets calculatedaccording to the Russian accounting standards, regardless of whether the transactionis 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

 

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controlling shareholdersin the future may not act in the best interests of minority shareholders, andthis could materially and adversely affect the value of the shares 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.

 

***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 theHigh Arbitration 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 therecharacterization of the transaction. There has been very little furtherguidance on the interpretation of this concept by the tax authorities orcourts, but it is likely that the tax authorities will actively seek to applythis concept when challenging tax positions taken by taxpayers in Russiancourts. While the intention of this Resolution might have been to combat abuseof tax laws, in practice, there is no assurance that the tax authorities willnot 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.In addition, 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, recent amendments to the Tax Codeof the Russian Federation, effective January 1, 2007, provide for theextension of the three-year statute of limitations if the actions of thetaxpayer created insurmountable obstacles for the tax audit. Because none ofthe relevant terms is defined, tax authorities may have broad discretion toargue that a taxpayer has “obstructed” or “hindered” or “created insurmountableobstacles” in respect of a tax audit and to ultimately seek review and possiblyapply penalties beyond the three-year term. There is no guarantee that the taxauthorities will not review our compliance with applicable tax law beyond thethree-year limitation period. Any such review could, if it concluded that wehad significant unpaid taxes relating to such

 

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periods, have a material adverse effect on ourbusiness, financial condition, results of operations and/or prospects.

 

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 profit orloss against the loss or profit of any of our other subsidiaries. In addition,intercompany dividends are subject to a withholding tax of 0% or 9% (dependingon whether the recipient of dividends qualifies for Russian participationexemption rules), if being distributed to Russian companies, and 15% (or lower,subject to benefits provided by relevant double tax treaties), if beingdistributed to foreign companies. If the receiving company itself pays adividend, it may offset tax withheld against its own withholding liability ofthe onward dividend although not against any withholding made on a distributionto a foreign company. These tax requirements impose additional burdens andcosts on our operations, including management resources.

 

Anti-crisis tax measures were recently adoptedto 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 expense deductibilitythresholds.

 

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 beenchallenged in the past may now be challenged. The foregoing factors raise therisk of the imposition of arbitrary or onerous taxes on us, which couldadversely affect the 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.

 

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## ***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 products withforeign-sounding names due to their perceived higher quality and novelty and,since its introduction, the “Wimm-Bill-Dann” name has become a brand name recognizedin the majority of Russian households.

 

In order to takeadvantage of the opportunities arising from the privatization of Russianstate-owned assets, our current shareholders began acquiring shares in theLianozovsky Dairy Plant in Moscow, and continued to expand their juiceproduction business. Following their acquisition of a majority stake in theLianozovsky Dairy Plant in 1995, they added dairy products to the portfolio,thus becoming a dairy and juice producer. Our growth has been accomplished, inpart, through significant acquisitions, including the following:

 

·                  In1995, we acquired majority control of the Lianozovsky Dairy Plant (renamed asWimm-Bill-Dann in 2006);

·                  In1996 and 1997, we acquired majority stakes in the Moscow Babyfood Plant, the TsaritsinoDairy Plant and the Ramenskiy Plant (renamed as Wimm-Bill-Dann Beverages in2007);

·                  In1998 and 1999, we began to expand into regions outside Moscow, acquiring dairyplants in Novosibirsk, Nizhny Novgorod and Vladivostok;

·                  In2000, 2001 and 2002, we acquired majority stakes in dairy plants in Ufa,Bashkortostan and the Krasnodar region in Russia, as well as dairy plants inKiev, Ukraine and Bishkek, Kyrgyzstan;

·                  In2001, we acquired 100% interests in dairy plants in the Altaisky and Voronezhregions of Russia;

·                  In2002, we acquired control of three dairy plants in the Krasnodar, Belgorod andSamara regions of Russia;

·                  In2002, we acquired control of a dairy plant in Kharkov, Ukraine;

·                  In2002, we acquired a 100% interest in the Roska Dairy Plant (renamed Baltic Milkin 2004) in St. Petersburg;

·                  In2002, we acquired control of production site in Tula and a large warehousecomplex in the Moscow region;

·                  In2002, we acquired control of a dried milk plant in Buryn, Ukraine;

·                  In January 2003,we acquired a 100% interest in Siberian Cheese, a refrigeration and warehousingfacility in Novosibirsk adjacent to our principal Siberian dairy productionfacility;

·                  In August 2003,we acquired underground wells in the Essentuki area of Russia and a waterprocessing and bottling factory which produces “Essentuki” brand mineral waterthrough our purchase of 100% interests in the companies Healing Springs andGeiser;

·                  In December 2004,we acquired Atamanskoe farm, a raw milk production company;

·                  InApril, July and September 2005, we acquired three raw milk productioncompanies, Plemzavod Za Mir i Trud, Zavety Ilyicha and TrudFarms;

·                  In July 2005, we acquired 66.3% control of the Obninsk Dairy Plantin the Kaluga region which we increased to 96.45% in May 2007 and to99.84% in December 2007;

·                  In July 2005,we acquired a 100% interest in the Kursk Babyfood Plant in the Kursk region;

·                  In October 2005,we acquired a 100% interest in the Essentuki Mineral Water Plant at CMW(Caucasian Mineral Waters) in the town of Essentuki in the Stavropol region;

·                  In December 2005,we acquired a controlling stake in Nazarovskoe Milk in the Krasnoyarsk region;

 

 

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·                  In December 2005,we acquired a 100% interest in the Pervouralsk City Dairy Plant in theSverdlovsk region;

·                  In January 2006,we increased our aggregate ownership in the Moscow Babyfood Plant to 97.3%;

·                  In September 2006,we acquired a 100% interest in the Surgut City Dairy Plant in Western Siberia;

·                  In November 2006,we acquired 93.74% control of the Moscow-based dairy producer Ochakovo;

·                  In December 2006,we acquired 100% control of the Omsk-based dairy producer Manros-M; and

·                  In December 2006,we acquired 83.36% control of Angarsky Dairy Plant (MOLKA), one of the largestdairy enterprises in Irkutsk region;

·                  In October 2007,we acquired 100% control of dairy producer Georgian Foods in Tbilisi, Georgia.

·                  In July throughDecember 2008 we increased interest in the WBD Beverages up to 100% byacquiring additional 2.6% interest from minority shareholders.

 

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 in2007, we merged 14 of our subsidiaries (Tsaritsino Dairy Plant, Ufa DairyPlant, 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 Baby Food Plant, Moscow BabyFood Plant, Timashevsk Dairy Plant and Vladivostok Dairy Plant) into Wimm-Bill-Dann(formerly Lianozovsky Dairy Plant). In 2008 we merged nine other subsidiariesinto Wimm-Bill-Dann (Surgut Dairy Plant, Ochakovo Dairy Plant, Obninsk DairyPlant, Pavlogradsky Dairy Plant, Krutinsky Dairy Plant, Angarsky Dairy Plant(MOLKA), Anna milk, SP Julia, 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”. Each ADS represents one underlyingshare of our 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 2008 Standard &Poor’s Governance Services assigned our Governance, Accountability, ManagementMetrics and Analysis (GAMMA) score 7+, which is the highest score in Russia.

 

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.

 

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**B.Business Overview**

 

Weare one of Russia’s largest manufacturers of food products. Our reportablebusiness segments in 2008 were dairy, beverage and babyfood. In 2008, the dairysegment accounted for 74.2% of our sales, the beverages segment, which includesjuice and bottled mineral water, accounted for 16.8% of our sales and thebabyfood segment accounted for 9.0% of our sales.

** **

Sinceour founding in 1992, we have become the market leader in Russia in the dairymarket and one of the market leaders in the juice market. In the dairy market,according to an AC Nielsen study of 24 major cities, including Moscow and St.Petersburg, we were the market leader at the end of 2008 with a 31.0% marketshare in value. In the Russian juice market, according to a Business Analyticasurvey of Russia as a whole, we had a 17.9% market share in value at the end of2008. In 2008 we strengthened our market leadership in the babyfood market witha 25.0% market share in volume terms (according to MEMRB), while our valueshare reached 18.3%.

 

Wecurrently have 37 manufacturing facilities in Russia, Ukraine, Kyrgyzstan,Uzbekistan and Georgia as well as distribution centers in 30 cities throughoutRussia and the CIS. During 2008, we employed, on average, 18,485 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 control. All of our products are made accordingto our own recipes and reflect our understanding of consumer demands andtastes.

 

Our principal dairyproducts include:

 

·                  Traditionalproducts, such as sterilized and pasteurized milk, butter and cream, as well astraditional sour-milk products such as kefir, cottage cheese, soft cottagecheese and sour cream;

 

·                  Yogurts and dairydesserts, such as traditional and drinking yogurt, fruit-flavored milk andkefir, puddings and flavored cottage cheese; and

 

·                  Cheese products,including hard yellow and processed cheese.

 

Our principal beverageproducts include:

 

·                  Juice and nectarsproduced from juice concentrate;

 

·                  Enriched juice-baseddrinks;

 

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

 

·                   Bottled naturalmineral water; and

 

·                  Drinking water.

 

Our babyfood productsinclude:

 

·                  Liquid dairyproducts for infants under the age of three;

 

·                  Juices and waterfor infants under the age of three;

 

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

 

·                  Dry formula forfeeding babies, developed in close co-operation with the Research Institute ofthe Russian Medical Academy;

 

·                  Products forpregnant women and nursing mothers; and

 

·                  Other foodproducts for children.

** **

**BusinessGoals and Strategy**

 

Our strategy for the period 2009-2012 is tobuild upon our strong existing brands (‘brand equity’), established marketposition, strong management team and organizational resources and 

 

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scale within Russia and the CIS in order to increasesales and profitability, realize long-term efficiency gains, strengthen 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 for our industry.

 

Ourapproach takes into account both the challenges and opportunities presented byglobal financial downturn and its impact on the economies of Russia and CIS. Weare making use of our experience gained during the 1998 financial crisis tomake short and medium-term adjustments to our product mix and marketingefforts, as well as endeavoring to maintain sustainable debt ratios. We believethat the continued implementation of our long-term strategy, with its emphasison building upon existing brand equity, cost controls and innovation willbetter position us to weather the economic downturn as well as benefit from afuture recovery in consumption.

** **

**BusinessGoals**

 

Ourbusiness goals for 2012 are aimed at achieving qualitative and quantitativeresults which increase the shareholder value of the Company and establishingfoundation for sustainable growth over a five to ten-year time horizon. AsRussia’s leading manufacturer of food products, it is both our core mission anda vital component of our individual and corporate brand image to beacknowledged by both consumers and regulators as one of the country’s top foodcompanies in terms of health and nutrition.

 

Amongthe goals we will endeavor to achieve by 2012 are:

 

·                  our top-10 brandsby revenue should be among the top-50 FMCG brands in Russia.

 

·                  newly launchedand innovative products should be making a substantial contribution to ourrevenue, while we should have enhanced the market positions of our top existingbrands in dairy, beverages and babyfood.

 

·                  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.

 

·                  we will 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.

** **

**BusinessStrategies**

 

Ourstrategy is focused on the core principles of Growth, Efficiency and WinningOrganization. These principles are relevant across all of our business units aswell as departments serving the group as a whole, including Marketing, Sales,Operations, Finance, Human Resources, Research and Development and CorporateCommunications. These key elements are as follows:

 

·                  Growth: growing brands to increase market share in all segments, growmargins and profit and increase our future potential in the marketplace via:

 

·          *Focusedmarketing*: make our strategic brands truly national, optimizingour portfolio and channeling investment and other resources to core brandswhich will serve as a base for innovation and entry into new categories andsegments;

 

·          *Increasedmarket share*: seek to have the best product offering in leadingproduct categories as well as making the requisite investments in marketing togrow the 

 

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equityof our brands and allow for accelerated innovation and further qualityimprovements;

 

·          *M&A*: enter newproduct categories and geographic markets through carefully selectedacquisitions;

 

·          *Drivingmargins and profitability:*intelligently manage pricing and volume mix, optimizeinput costs (recipes, raw materials and packaging) and better manage discountsand bonuses;

 

·          *Improvedroute-to-market*: further develop a winning distribution model whileaiming to achieve status as best supplier for our partners and superior salesexecution in key cities and channels.

 

·                  Efficiency: optimizing the supply chain, increasing the efficiency of ourassets and reducing working capital via:

 

·          *Costoptimization*: reduce supply-chain and procurement costs, cut theunit cost of manufacturing and optimize production lines while making the bestuse of existing assets;

 

·          *Strictmanagement of working capital:*reduce inventories andincrease the effectiveness of expenditure through tight controls over capitalinvestments as well as marketing and sales costs.

 

·                  Winning organization: build an agile, fast learning team capable ofexecuting well and fast via:

 

·          *Developinghuman potential*: provide continuous opportunities for training andfurther education while developing career plans and identifying key skills;

 

·          *Rewardingperformance:*establish clear incentives for success and space forinnovation;

 

·          *Creatingthe right environment:*maintain strong corporate culture based on values andcreativity, establish clear lines of responsibility and reporting whilereducing both the institutions and mindset of bureaucracy wherever possible.

 

**CurrentOperations**

** **

**DairyIndustry**

** **

***Consumption.***Russian dairyconsumption is relatively low compared to most European countries and ischaracterized by two primary trends—the comparatively solid development of themarket for traditional dairy products and a more rapidly developing market foryogurts and desserts.

 

Weestimate, based on a combined data from Comcon, AC Nielsen, USDA, Euromonitor,Canadian dairy and Russian State Statistics, that per capita consumption of packageddairy products in Russia was approximately 65.3, 67.4 and 65.5 kg per year in2006, 2007 and 2008, 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. We estimate that per capita consumption of traditional packaged dairyproducts in Russia decreased by 3% to approximately 52.2 kg in 2008, fromapproximately 53.8 kg in 2007. The per capita decrease was driven by stronginflation observed in Q4 2007.

 

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Sinceits first widespread commercial appearance in Russia in the early 1990s, thepopularity of yogurt has increased. For instance, the consumption of such productsas drinkable yogurt, functional foods/drinks and flavored milk is relativelyhigh among certain groups of consumers and comparable with milk consumptionlevels. While, the per capita consumption of these products remains relativelylow, we believe that this segment of the dairy market has a high long-termgrowth potential as household incomes increase in Russia over time.

 

Accordingto our estimates, annual per capita consumption of yogurts and dairy dessertsin Russia was also affected by the inflation in late 2007 and decreased by atleast 3% to about 8.4 kg in 2008.

 

Accordingto our estimates, annual cheese consumption (yellow, white and processed) inRussia stayed flat at approximately 4.9 kg per capita in 2008.

 

***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. The milk processing sector, however, still remains fragmented,and currently includes over 1,400 registered producers compared to 1,600 in2006, according to the official register of manufacturers. The process ofconsolidation in the sector is under way, with the less efficient producersgoing out of business or being acquired by larger companies.

 

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 desserts was growingat a higher rate than the traditional dairy market. It is also developing tocater to changing consumer tastes with more attention being paid to freshhealth and wellness products.

 

Wehave made significant investments in the development of our own farms and alsoestablishing long-term relationships with third-party raw milk suppliers. Thesesteps help us to address the seasonal problem of raw milk deficits and increasethe quality of the raw milk we purchase. The government has also started alarge scale program aimed at the revival of the agricultural sector in 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

 

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packaging andingredients. While Russian juice consumption levels have recovered from the effectsof the 1998 financial crisis, it is still relatively low compared to mostEuropean countries.

 

Weestimate that annual per capita juice and mineral water product consumption inRussia in 2008, 2007 and 2006 was approximately 21.0 liters, 21.1 liters and18.7 liters, respectively, based on data of Business Analytica and Canadean.

 

Consumptionof bottled water in Russia is now on par with juice consumption. We believethat Russia has strong growth potential in this sector in comparison with percapita consumption in developed markets.

 

***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 a majority of the foreign companies to leave themarket, and also forced 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 2008, according to a BusinessAnalytica survey of ‘Total Urban Russia’ (cities with a population of over100,000 people), the four largest producers in Russia had an 84% share of thejuice market. The industry has been experiencing consolidation, as demonstratedby the increase in acquisition activity. According to the Business Analytica survey,during 2008, there were more than 200 brands of juice products in the Russianjuice market, although 10 of them accounted for 72% of the market. 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 2008, the top-ten bottled water producers in Russia had jointly a67% market share in Moscow and a 61% market share in the ten largest cities ofRussia 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;

 

·                  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. We estimate thatover 80% of nationwide babyfood product sales are in the European part ofRussia.

 

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

 

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the birth of theirsecond and following children. More and more Russian women go back to workshortly after giving birth. Many of them rely on ready-to-eat babyfood.

 

***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 various dairyproducts. Although only a small number of these government-sponsored productionsites have since been built, domestic and foreign producers of babyfood startedto acquire production facilities in Russia in the second half of the 1990s.Since 2000, the babyfood market has grown substantially with additional typesof products being introduced and increased consumption due to the increasingbirth rate in Russia.

 

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 74.2%, 16.8% and 9.0% of our net sales in 2008, respectively. Our principalgeographic market is Russia, with Moscow being the most significant one. Thefollowing table sets forth our annual consolidated net sales, the proportion ofconsolidated net sales accounted for by our main business lines, our reportedannual production volumes and their growth rates:

 
| ** **                             | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|----------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Dairy products**                     |       |        |       |        |       |        |       |
| Sales  (in million USD)                |       | 2,095.9     |       | 1,852.5     |       | 1,320.9     |       |
| Annual  sales growth (% year on year)  |       | 13.1        | %          | 40.2        | %          | 31.6        | %          |
| Percent  of total sales                |       | 74.2        | %          | 76.0        | %          | 75.0        | %          |
| Sales  volume (in th. tons)            |       | 1,453       |       | 1,599       |       | 1,354       |       |
| Annual  volume growth (% year on year) |       | (9.2        | )%         | 18.2        | %          | 13.2        | %          |
| **Beverage products**                  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Sales  (in million USD)                |       | 473.2       |       | 414.1       |       | 324.1       |       |
| Annual  sales growth (% year on year). |       | 14.3        | %          | 27.8        | %          | 6.9         | %          |
| Percent  of total sales                |       | 16.8        | %          | 17.0        | %          | 18.4        | %          |
| Sales  volume (in million liters)      |       | 509         |       | 491         |       | 445         |       |
| Annual  volume growth (% year on year) |       | 3.7         | %          | 10.3        | %          | 2.1         | %          |
| **Baby food products**                 | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Sales  (in million USD)                |       | 254.5       |       | 171.8       |       | 117.2       |       |
| Annual  sales growth (% year on year)  |       | 48.2        | %          | 46.6        | %          | 33.5        | %          |
| Percent  of total sales                |       | 9.0         | %          | 7.0         | %          | 6.6         | %          |
| Sales  volume (in th. tons)            |       | 111         |       | 87          |       | 66          |       |
| Annual  volume growth (% year on year) |       | 27.5        | %          | 31.9        | %          | 14.7        | %          |
| **Total net sales (in million USD)**   | ** ** | **2,823.6** | ** ** | **2,438.3** | ** ** | **1,762.1** | ** ** |

 

**DairyProducts and Brands**

 

Ourprincipal dairy product lines, types of products, principal brands, and theirapproximate percentage of our total dairy revenue in 2008, 2007 and 2006 are asfollows:

 
| **Product line**  | ** ** | **Main brands**                                                                                                                                                     | ** ** | **Approximate  percentage of  total dairy in  2008** | ** ** | **Approximate  percentage of   total dairy in  2007** | ** ** | **Approximate  percentage  of total dairy  in 2006** | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| Essential Dairy   |       | “Vesely  Molochnik”, “M”, “Kubanskaya Burenka”, “33 Cows”, “Pastushok”                                            |       | 41                                                   | %          | 41                                                    | %          | 39                                                   | %          |
|              |       |                                                                                                                                                                |       |                                                 |       |                                                  |       |                                                 |       |
| Value-Added Dairy |       | “Little  House in the Village”, “Beauty”, “Imunele”, “Chudo”, “Bio-Max”, “Lamber”, “Mazhitel” |       | 59                                                   | %          | 59                                                    | %          | 61                                                   | %          |

 

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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 illustrates ourestimates of the current market segment positioning for our major brands, aswell as a general description of the purchasers which each market segmentcovers:

 
| **Production 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”                   |       | “Beauty”, “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” |       | “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 the premium segment of the market we launched a broadselection of products throughout 2004 and 2005, including our flagshipfunctional product Imunele. In 2007, we extended our functional range toinclude Beauty with aloe vera, the first product of its kind on the Russiandairy market.

 

***Market trends and*****competition**. According toour estimates, the total market for packaged dairy products in Russia was9.3 billion liters in 2006, 9.6 billion liters in 2007. In 2008, the marketdeclined to 9.3 billion liters due to significant price increases, caused bythe growth of global raw milk prices at the end of 2007. Over the short-term,we believe that consumption may stay flat or even decline due to the currenteconomic downturn and the potential reduction of household incomes in Russia.At the same time, given existing low per capita consumption, we see this marketsegment as providing a long-term opportunity for growth. In particular, Russianhouseholds 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.

 

Whilea certain degree of consolidation is taking place in the Russian dairyindustry, the milk processing sector in Russia remains fragmented and includesmore than 1,400 large, medium and small enterprises. Due to the high degree offragmentation, the market is very competitive in pricing terms. From 2000 tothe present, we have expanded our distribution capacity, reduced our sales towholesalers, increased our sales to retailers and increased advertising. Wealso remain committed to our regional expansion strategy and are constantlyexpanding our regional product

 

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offerings as consumerspending has grown steadily in the regions. Cutting costs and improving thequality of our products remain our main focus areas. We believe that thesestrategies and strengthening marketing investment have increased publicawareness and loyalty to our products and will help us mitigate the negativeeffects of the current economic downturn. We have also increased our productionof value-added products that are available in attractive and convenientpackaging.

 

Inthe dairy market, according to an AC Nielsen study of 24 major cities,including Moscow and St. Petersburg, we were the market leader at the end of2008 with a 31.0% market share in volume terms*. In the traditional dairymarket, we lead the market with a 30.3% market share in volume terms. In theenriched dairy market, our share was 25.0% in volume terms at the end of 2008.In yogurts and desserts, we were the market leader with 44.2% in volume terms.

 

Intraditional dairy, we compete primarily with local producers, such as Unimilk,Voronezhsky M.K. (Molvest), as well as with a number of smaller regionalproducers. In enriched dairy, we compete primarily with Groupe Danone. In thesegment for yogurts and desserts and, to some extent, for children’s foodsproducts, we compete with foreign producers such as Danone, Campina and Ehrmannwho continue to invest in their businesses in Russia. We view the followingproducers as our primary competitors:

 

·          *GroupeDanone*, a French company which is the most active foreign producerin Russia and aggressively promotes its products. It has a dairy plant in theVolga region where it produces yogurts, as well as a dairy plant in the Moscowregion. We understand that Danone may have plans to build a new plant inSiberia. Both domestically produced and imported products are sold under theDanone brand name across Russia through its own distribution network. Keybrands are Activia, Actimel, Rastishka and Danissimo. According to the ACNielsen study of 24 cities, in 2008, Danone had a 12.3% market share in yogurtsand desserts in volume terms and a 7.2% share of the total Russian dairy marketin 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 study of 24 cities, in 2008, Unimilk hada 14.9% market share in traditional dairy, a 7.9% market share in yogurts anddesserts and 14.7% share of the total Russian dairy market in volume terms.

 

·          *Ehrmann*,a German company producing yogurts at its plant located in the Moscow region.Its brand names Ehrmigurt, Yogurtovich, Fruktovich and Uslada were developedspecifically for Russian consumers. According to the AC Nielsen study of 24cities, Ehrmann had a 4.1% market share in yogurts and desserts in 2008 involume terms.

 

·          *VoronezhskyM.K.,* a Russian company producing a wide range of dairy products.Its main brand names are Vkusnoteevo and Ivan Poddubniy. According to the ACNielsen study of 24 cities, Voronezhsky M.K had a 4.1% market share intraditional dairy and a 3.7% share of the total Russian dairy market in volumeterms in 2008.

 

·          *Campina*is an international co-operative dairy company that specializes in productionof milk, yogurt and desserts. Its main brand names are Campina, Fruttis,Nezhniy, Stupinskoe and Yogho!. In May 2008, Campina and Friesland Foods,another large international dairy co-operative, signed a merger agreement.According to the AC Nielsen study of 24 cities, Campina had an 8.0% marketshare in yogurts and desserts in 2008 and a 1.2% share of the total Russiandairy market in volume terms.

 

Recenttrends also indicate that industry consolidation may lead to the emergence oflarger domestic producers, which could become our significant competitors.

 

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

 

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Foreigndairy manufacturers generally have large promotional budgets and advanced productionknow-how, allowing them to offer quality and innovative products, and strongdistribution networks. While foreign manufacturers in the past generally tendedto focus on niche markets, usually in the premium segment, they are nowincreasingly offering products to the average Russian consumer with an averageincome. For example, Danone owns two plants in Russia and has introducedseveral of its yogurt brands into the Russian market, some of which weredeveloped specifically for Russian consumers. Dutch company Campina also owns adairy plant in Russia that produces fresh yogurts and yogurts with a long shelflife. In addition, the German companies Ehrmann and Onken produce yogurt atRussian plants, and Onken launched its own dairy production factory in Russiain 2003. Foreign cheese producers also launched production facilities in 2003,including French company Lactalis and German company Hochland. In 2004,Lactalis acquired Foodmaster International, a company owning seven dairyfactories in Kazakhstan, Moldova and Ukraine that produce milk, kefir, sourcream, yogurt and cheese. In Russia, Lactalis owns Lactalis Istra, a factorylocated near Moscow with capacity to produce up to 6,000 metric tons of cheeseannually, and in Ukraine it owns a dairy plant in Nikolaev that producesvarious dairy products. Due to their increased domestic production of yogurtand dairy desserts, foreign producers have become our main competitors in thesesectors, whereas we mainly compete with domestic producers in the traditionaldairy sector.

 

Webelieve that we have several important competitive advantages that will allowus to maintain a leading position in the Russian dairy market: strong anddiversified brands, stable access to raw milk, a broad distribution network,new product development focus, a substantial in-house R&D department,modern production assets and technology, access to external capital and astrong management team. We also benefit from our strong regional productionbase, while our foreign competitors must generally transport their yogurts andpremium segment desserts from Moscow to the regions, which is costly andlogistically 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**

** **

Ourprincipal beverage product lines and types of products and brands are asfollows:

 
| **Product Line**                                  | ** ** | **Brands and Types of Products**                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Juice and nectars produced from juice concentrate |       | ·      “J7,”  covering 14 kinds of fruit and berry juices and nectars

·      “100%  Gold,” covering 9 kinds of fruit juices and nectars

·      “Lovely  Garden,” covering 17 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                                                                                                                                                                                                                                                                                                                |
|                                              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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 segments, and WBD juice products arepresented in all of them.~~~~ We havebenefited from investments into “J7” and Essentuki marketing and distributionduring 2007 and 2008.

 

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Forexample, in 2007, we introduced new packaging design and marketing approachesfor “J7” branded products. The main packaging for the brand remains TetraPrisma and PET packaging. The portfolio of “Lovely Garden” was improved andstrengthened via additional introductions of ‘Future Consumption’ packs andsmaller format 0.5 liter packs, which had not been used previously for “LovelyGarden”. In addition, the use of 2-liter packaging was extended to otherflavors and 1.5-liter packs were launched along with the 0.5 liter format inthree flavors. “Wonder Berry” remained in 1-liter and 0.33 liter packs. At theend of 2007, we moved from 0.425 liter PET bottles to 0.39-liter formats for “J7”and “Lovely Garden”. A new pack design in new Tetra Prisma packaging waslaunched for “100% Gold” juices and nectars in the 1-liter format. In 2008, welaunched “J7 Imuno” enriched line, “Lovely Garden” line was extended with “IcedGrapefruit” and “Winter Story” seasonal flavors.

 

In2007, “J7” was repositioned to the premium segment. The following chartillustrates our estimates of the current market-segment positioning for ourmajor brands, as well as a general description of the purchasers within eachmarket segment:

 
| **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

Men and women in the middle to upper-middle income  bracket                                                                                                                                                                                                                     |       | “J7”

 

                                                                                          |       | “Wonder  Berry”                                                          |       | “J7 Exotic”     |       | “Essentuki”         |
|            |       |                                                                                                                                                                                                                                                                                        |       |                                                                                                                   |       |                                                                               |       |                           |       |                          |
| Value for Money |       | Aged 20-45

· 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

· Self-confident,  rational, but not trend setters |       |  

 

 

 

 

 

 

“100%  Gold Premium”  “Lovely Garden” |       |  

 

 

 

 

 

 

“Lovely  Garden” |       |                           |       | “Rodniki  Rossii”   |
|            |       |                                                                                                                                                                                                                                                                                        |       |                                                                                                                   |       |                                                                               |       |                           |       |                          |
| Econom          |       | Aged 25-45

Men and women typically with children and below  average incomes; family oriented                                                                                                                                                                                               |       | “100%  Gold Classic”                                                                                         |       |                                                                               |       |                           |       | “Novoessentukskaya” |

 

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 bottlednatural mineral water to purified or ordinary tap water. We remain committed toexpanding our Essentuki production capacity. At the end of 2008 we introducedthe “Rodniki Rossii” natural drinking water brand.

 

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

 

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water, and offer bothstill and carbonated waters in a variety of sizes, providing consumers with anenhanced choice.

 

***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 2007 was approximately 51 liters per capita, as opposed to nationalper capita consumption of approximately 21.5 liters per capita (accordingto a Canadean survey). The most dynamic growth in recent years has been in thelower-middle price bracket, which we expect will continue to drive marketgrowth in the foreseeable future.

 

Thetotal market for juice products, defined as the total consumption ofdomestically produced and imported products, accounted for 3,007 millionliters in 2008, according to Business Analytica, from 3,030 million litersin 2007. The market declined in 2008 due to a significant price increases inthe juice market. We believe that the present economic downturn may result in aslight decline in volumes in 2009.

 

Themarkets for juice products in Moscow, the Moscow region and St. Petersburg arerelatively mature compared to other regions of Russia, and are expected toexhibit relatively modest growth rates in the future, with particular growthexpected in the upper-middle product segment. We believe that significantgrowth opportunities lie in the regions of Russia. In many of these regionsjuice is still a novelty and we believe that with rising household incomesthere will be a growing demand for juice offerings in the lower-middle pricesegment. The operating environment has been challenging since the 1998financial crisis. Competitive pressures have intensified because of the lowpurchasing power of households outside of Moscow and St. Petersburg and therising number of domestic producers. We initially responded to this competitivechallenge by introducing two new brands, one targeted at the middle-marketprice segment and the other at the mass-market price segment. In addition, wehave been revising our juice distribution network, reducing the number ofdistributors we work with and building stronger relationships with distributorspossessing direct distribution capabilities. We believe that, together with thelaunch of new products, the increased share of higher-priced products in ourproduct mix, increased advertising, new packaging and increased productioncapacity, these strategies will increase public awareness of our products andour sales, which will allow us to expand our market share.

 

Inthe Russian juice market, according to a Business Analytica survey of Russia asa whole, we had an 18% market share in value terms at the end of 2008.

 

Ourprincipal competitors in the Russian juice market include the followingcompanies:

 

·                  *Multon*is based in St. Petersburg and, according to Business Analytica, had a22% market share in Russia in 2008. Dobry, Rich and Nico are key brands of thecompany. Multon has gained significant market share since 1998 primarilythrough aggressive pricing policies and advertising. In 2007 it launched theRich Fruit drinkable puree. Multon was acquired by Coca-Cola in April 2005.

 

·                  *Lebedyansky* is based in theLipetsk region and, according to Business Analytica, had a 26% market share inRussia in 2008. Tonus, Ya, Fruktovy Sad and other brands have become well-knownamong Russian consumers. In March 2008, PepsiCo announced the acquisitionof 100% of Lebedyansky juice business.

 

·                  *Nidan* is aNovosibirsk-based Russian company that had a 15.0% market share in Russia in2008. Moya Semya is a major brand of the company. Other key brands are Capriseand Champion. In 2007 Lion Capital, a British investment fund, acquired 75% ofNidan’s shares.

 

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Themarket shares presented above for our principal competitors are in value termsand are as of the end of 2008.

 

Themarket for mineral water is characterized by rising consumption, as well asmany local brands that are strong in their respective home regions. Accordingto Business Analytica, the total market for bottled water in Russia slightlyincreased to 3,395 million liters in 2008 from 3,349 million liters in 2007.Russian bottled-water producers dominated the market, with a 66% market sharein value terms, while the combined share of the two market leaders, PepsiCo andCoca-Cola, amounted to 34%, according to a Business Analytica survey of Russia’s10 largest cities in 2008. According to the same survey, we were among thetop-ten water producers in Russia, with a 2.7% market share by value in 2008.Market growth in recent years has been driven mainly by the increasedconsumption of bottled water sold in large format packaging and which isconsumed for drinking and used for cooking. While there may be a short-termnegative impact on the market due to the present economic downturn, we believethat this market will continue to expand over the longer term due to increasingawareness of the importance of food and water quality.

 

**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 2008, babyfood products comprised 9.0% of our total sales.

 

Weare currently developing our babyfood division by focusing on geographicalexpansion, developing a full range of products and increased production. Inaddition, we plan to launch new products, and expand the range of the existingones.

 

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.

 

***Market trends and competition.*** The babyfoodmarket in Russia has been experiencing dynamic growth in recent years,supported by improved market conditions, including rising average incomes, morestringent government regulation of babyfood production and the introduction ofvarious state-supported social programs aimed at improving domestic birth ratesand providing maternity assistance. As a result of these improved conditionsand increased 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 such producers have begun to focus onestablishing local production capacity in Russia. The babyfood market isalready consolidated, with the top six players accounting for approximately 73%of the total value in 2008, according to MEMRB. Given the present low percapita consumption and the long-term trend of increasing household incomes, webelieve this market segment continues to have strong growth potential. Anotherfactor driving the growth of the Russian babyfood market is the increase in thenumber of infants aged four and under by 3.5% in 2005, by 2.5% in 2006 and by2.6% in 2007, according to the Federal State Statistics Service.

 

Accordingto MEMRB, we were the market leader in dairy products for babies and infants inRussia in 2008, with a 73% value share.

 

**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 and win market share in other segments. A high-technologyresearch and development capability is a crucial competitive advantage for usand a key to our long-term profitability growth.

 

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OurResearch and Development (R&D) base, employing more than 20 people, islocated at Wimm-Bill-Dann in Moscow, the company’s flagship enterprise and oneof the largest and one of the best technically equipped dairy productionfacilities in Europe. The factory has its own testing platform and its R&Dcapacity creates and tests new products for the company’s dairy, beverages andbabyfood units. It works closely with our 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 — changing how they are consumed — and wholly new products forthe Russian market. New packaging technology can turn a product into aconvenient snack or meal, such as “Vesely Molochnik” kasha with a spoon. All ofthese innovations are aimed at providing higher margin goods for the companyand nutritious, convenient and tasty foods for the consumer.

 

Looking forward, new product development is beingconducted in line with our mission of providing healthy, high-quality and safefoods for the entire family. Functional foods, products aimed at women andconvenience products for busy lifestyles are key areas of focus. The departmentis working to develop new, enriched products that deliver added nutritionthrough the use of biologically active ingredients that help deliver essentialnutrients. In the first quarter of 2009 we launched our new mineral water “RodnikiRossii” brand and multicategory “Zdraivery” brand for children. In babyfood,R&D is focused on filling out our range and enhancing product quality.

 

Muchof our new product development effort over the past three years has focused onhigher-margin, value-added yogurt and dessert products. At present, we arefocused on the development of value-added dairy products oriented towardsRussian consumers, taking into consideration the general deficit of micro- andmacro-nutrients in the diets of the average Russian consumer, and leveragingour superior understanding of Russian taste preferences.

 

Throughout2007 and 2008, we actively developed our yogurt and dairy dessert products. Forexample, in mid-2008, we introduced Chudo spoonable yogurts and curd dessertsin a family format.

 

In2008, we also extended the line of “Chudo” whipped fruit curds, and we addedfour ‘double flavor’ products to this product category. We launched a new curdsand spoonable yogurts product line, representing a new type of product for theRussian marketplace.

 

Inthe beverages segment, we launched new vegetable tomato-based varieties underour “Lovely Garden” brand during 2008. We also introduced Rodniki Rossiinatural still and carbonated mineral water in 1.5 liters format and in 5 litersfamily format, our first water brand in the value segment.

 

Inthe babyfood segment we launched a new dry formula product under the “Agusha”babyfood brand in 2008, including the “Gold” line and “Original” line, eachwith two varieties.

 

The“Agusha” Gold line is a formula enriched with essential vitamins, microelementsand fatty acids especially developed to meet the needs of the babies. Theformula reinforces immunity, enables comfortable digestion, and aids in brainand eye developments.

 

The“Agusha” Original line of dry formulas aids the healthy growth of older babies.Both varieties of formula were developed by our R&D experts in closeco-operation with the Research Institute of Russian Medical Academy.Additionally, during 2008, we launched five kinds of dry cereals enriched withfruit. These products offer a mother and her baby healthy options to supplementa dairy-based diet. The product range of “Agusha” purees was also extended withsix new varieties of vegetable purees for babies aged eight months and older.We continue to develop new products under our “Agusha” brand.

 

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**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 “Agusha” a popular babyfood brand.

 

Ourmarketing strategy is directed at turning our leading portfolio of brands intoan even stronger competitive advantage. We will aim to accelerate brandbuilding based on a deeper understanding of consumers and a faster reaction tonew trends in the marketplace. As the cost of advertising on Russian televisioncontinues to rise, we will concentrate on more focused and more efficientcampaigns to reach target consumer audiences.

 

Ourinvestment in some 10 power brands in 2007 and 2008 is aimed at increasingtheir average selling price and market share, while achieving the right productmix. We believe our most successful brands still have considerable untappedpotential.

 

Injuice, the “J7” brand saw radical changes in 2007, with a new advertising campaign,new packaging, improved taste profile and new pricing structure.

 

Insteadof viewing products within the context of a single market niche, all of ourpower brands are today being positioned 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 $57.9 million in 2005, $76.2million in 2006, $138.0 million in 2007 and $142.3 million in 2008 constituted4.1%, 4.3%, 5.7%, and 5.0% of net sales, respectively. Though we are, in someinstances, able to obtain volume discounts, we expect these expenditures, as apercent of net sales, to increase significantly due to market competition andannual media inflation. According to Gallup, in Russia, we were the tenthlargest advertiser in 2005, the twelfth largest advertiser in 2006, the tenthlargest advertiser in 2007 and the tenth largest in 2008. In 2007, we begansystematic testing of the quality of our advertising and continued this in2008. We saw positive results with several key brands, including “J7”, “LittleHouse in the Village”, “Chudo” and “Agusha”. In 2008 developed strongcommercial campaigns for the “J7”, “Chudo” and “Agusha” brands.

 

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 musician.

 

**Salesand Distribution**

** **

Accordingto Russia’s Federal Statistics Agency, total retail sales in Russia grew 13.0%year-on-year in 2008.

 

SevenRussian regions (Moscow, St. Petersburg, Moscow region, Sverdlovsk region, theRepublic of Bashkortostan, Tyumen region and Krasnodar region) accounted for42.1% of total retail turnover, including 17.1% in Moscow alone.

 

Inrecent years, individuals in Russia have been spending an increasing percentageof their incomes on consumer goods. In 2008, the cash income of the populationgrew 19.9% compared to 2007, and purchase of goods and services grew by 25.9%.This income growth has led to growth in

 

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demand as well as achange in its structure, as consumers began to buy more expensive and higherquality goods.

 

Notably,the share of products being sold in open markets continued to decline sharplyin 2008. According to the Business Analytica, the beverages segment retailvolume at open markets in 2008 was 12.8% in comparison with 15.6% in 2007. Thedairy retail volume at open markets, according to an AC Nielsen, was 8% in2008, comparing to 10% in 2007 and in babyfood volume declined by 0.7% in 2008,according to the MEMRB. The decline of open markets reflects the fact thatmodern stores provide a more comprehensive range of products across a widerrange of price categories. Consumers are also increasingly dissatisfied withthe quality of products, environment and lack of convenience inherent inshopping at open markets.

 

Theabsolute size of the retail market has continued to grow every year, withRussia’s regional markets seeing the fastest rate of recent growth. Accordingto Business Analytica and AC Nielsen data, the share of sales via modernformats, such as supermarkets, hypermarkets and discounters, in the overallvolume of retail sales is increasing rapidly. According to Business Analytica, theshare of juice sold in modern format outlets grew from 11.6% of total juicesales in 2006 to 13.5% in 2007 and to 16.8% in 2008. The corresponding share ofall dairy products grew from 63% in 2006 to 67% in 2007 and to 73% in 2008(according to an AC Nielsen).

 

InMoscow, the country’s largest single market, this ratio is considerably higherand in the last few years, foreign and domestic retail chains have focused onexpanding in large regional cities, in particular targeting fast-growing butunder-served regions such as the Urals and Siberia. We believe that theexpansion of retail chains creates additional opportunities for marketexpansion and has a generally positive effect. In particular, retail chainsprovide increased business transparency, new technologies that enhance salesand marketing efforts, and offer manufacturers new opportunities to increasethe volume and geography of sales.

 

**Sales**

** **

In2008 we significantly increased our retail coverage and undertook the reorganizationof our sales and distribution functions in order to increase efficiency. As apart of this long term plan we merged our dairy and babyfood sales forces. As aresult, we increased sales in our babyfood group by 48.2% in value terms, whilereducing selling and delivery costs.

 

In2008, as part of our strategy to expand of the geography of our distributionnetwork, we launched two new distribution centers in Sochi and Izhevsk. Inorder to improve the control procedures over trade marketing activitiesprovided by the distribution centers we hired a team of regional fieldmanagers. We also sell our products directly from production sites.

 

Akey part of our strategy is to enhance control over the “route-to-market” andcollaborate with retailers to ensure key brands are well positioned in retailoutlets, priced correctly and maintained at the same high quality as when theyleft the factory. Investment in our own fleet of cold-chain delivery vehiclesrepresents a substantial upfront cost, but ensures better control andflexibility over deliveries of perishable dairy products. Across the Company, improvementsare being made to the supply chain to reduce costs, maintain quality andtightly track products from the factory to the consumer.

 

Another key strategic direction is thedevelopment and increased efficiency of our field sales force. In particular,we implemented Oracle Demantra software that optimized our sales and productionforecasting process which is essential in terms of general economic downturn.In addition, we implemented a sales-force information system which allowed usto control and manage the direct sales of each independent distributor.

 

Wealso implemented new merchandising standards which improved the availabilityand off-take of some of our higher margin products. In the dairy and babyfoodsegments we produce and

 

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distribute various freshproducts with short shelf lives and providing effective cold chain is the oneof pillars of our supply chain strategy.

*** ***

**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. We are also developing our sales throughexclusive distributors, who dedicate 100% of their business to our products.

 

Wesell our products through various sales channels, including independentdistributors and wholesalers, supermarket chains, small- and medium-sizedgrocery stores, open air markets, pavilions and restaurants.

 

**Independentdistributors**

** **

Inorder to improve the transparency of our relationships with independentdistributors, in 2008 we started implementation of a sales-force informationsystem which will allow us to control and manage the direct sales of eachdistributor with further roll-out starting 2009.

 

Asa percentage of total sales during 2008, in value terms, we sold 49% of ourdairy products, 72% of beverages and 39% of babyfood products through largechains of independent distributors and this process is supervised by our salesteams.

 

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 have established relationships,purchase dairy, beverage and babyfood products from us. In 2008 we started toconsolidate our base of distributors and decreased the total number ofdistributors from 240 to 173, which has increased our ability to manage thedistribution system more effectively while, at the same time, enhancing theprofitability of our partners by providing them with greater economies of scale.

 

During2008, our beverage-product distribution network consisted of 16 regional salesoffices throughout Russia. In Moscow, our independent distributors actprincipally as logistical coordinators, as our sales representatives workdirectly with retail outlets and other customers in making sales, while relyingon the distributors 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.

 

Independentdistributors purchase directly from us and then resell our products throughtheir own distribution centers. Given the importance of these customers, weprocess orders from independent distributors relatively quickly. We launchedour Internet-based ordering system in Moscow in January 2000, and allorders by our dairy product distributors in Moscow and the Moscow region arenow placed 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.

 

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** **

**Directsales**

** **

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

 

Asa percentage of our total sales during 2008, in terms of product value, we sold38% of our dairy products, 23% of beverages and 25% of babyfood productsdirectly through our national and local key accounts. We believe that theimportance of these customers to our business will continue to grow in thecoming years. We want to become and remain the supplier of choice for thesecustomers by further developing key supplier relationships and improvingcustomer service standards.

 

Whilewe increased national and local key-account relationships and sales in 2008,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 and even caused the bankruptcy of two key accounts.

 

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.

 

**Exportprogram**

** **

Webegan exporting our juice products, in particular our “Wonder Berry” traditionalberry-juice drinks, to Western markets in 1999, mainly focusing on Russiancommunities abroad. We selected this product because of its distinctiveness andthe opportunity it presented to take advantage of the expansion of thered-berry juice market in Europe.

 

Wecurrently export our juice products to the United States,Canada, certain CIS countries, France, Israel, Latvia, Estonia andLithuania, Mongolia and China. Our juice products are distributed in thesecountries through independent distributors and are sold in variousnational and multinational retail chains. Our products are also exported andsold through various sales channels in CIS countries such as Kazakhstan,Georgia, Armenia and Moldova, and we further developed our distribution channels,marketing efforts and sales in Belarus during 2008. We also export our “Essentuki”mineral water, principally to the United States, Canada and Moldova. Ourproduction facilities were certified in 2007 to export “Essentuki” to Ukraine.

 

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 five-time recipient, mostrecently in 2008, 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 System (QS) is a clearly defined set of procedures that aimed atensuring control of the quality process control and quality assurance.

 

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OurQS undertakes Supplier Assessment audits to ensure that our suppliers providematerials that meet our exacting quality standards. This includes raw materialsfor making our products, packaging and equipment. Our experts work withexisting and prospective suppliers to ensure their goods can demonstratecompliance with our quality, safety and performance standards. Suppliers aregraded and assigned Key Production Indicators (KPIs) based on criteria thatmeasure product quality, delivery, cost and responsiveness. This work not onlyensures suppliers meet our standards but helps make them more efficient,lowering our input costs.

 

TheQS plays a critical role in the ongoing technological integration across all ofour factories and trading groups. In the dairy business unit, where we havemade substantial investments since 2003 in modernizing acquired productionfacilities, quality control experts have led the Unification Project, aimed atestablishing tight coordination of the manufacturing process at a number of ourgeographically dispersed plants. The consistent application of manufacturingprocedures and technology ensures that plants operating thousands of kilometersapart can make products with consistently high and uniform taste and quality.

 

Wehave our own certified research laboratory with a team of scientists andexperts. Samples of all our primary ingredients and samples of our finalproducts undergo microbiological analysis and in-depth testing. In addition, wehave laboratories at all of our plants that perform quality checks on ourproducts at all stages, including quality checks on the raw milk supplied byfarms to us, the materials at our production facilities and the finishedproducts in our warehouses.

 

TheTrade QS measures the quality of the product and packaging once our productsenter the market place. 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 high standardsset by us for our consumers.

 

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,All-Russian Institute of Dairy Industry and the GFL-Laboratory in Berlin,Germany. This collaboration has provided our employees with scientific advice,solutions to technical problems and on-site training. We also work closely withseveral multinational raw material and additive suppliers in order to benefitfrom their collective technical expertise as we develop new products andevolving 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 work actively 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 have establisheda nation-wide toll-free hot-line in Russia and Ukraine. The number is printedon our packaging used for all of our products.

 

Wehave been upgrading and expanding our facilities with advanced technologicalengineering. Our significant investments in manufacturing have enabled ourproducts to compete with those of leading domestic and internationalmanufacturers. For example, at the Wimm-Bill-Dann and Tsaritsino Dairy Plants,we installed new equipment improving the quality of raw milk used in production;at the Timashevsk Dairy Plant, we installed an automated system that controlsproduction processes; and at the Vladivostok Dairy Plant, we modernized thewater purification

 

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system. In addition, thereconstruction of the Moscow Babyfood Plant and installation of new productionlines there have allowed us to improve the quality of the products produced atthis plant. All of the lines at the Moscow Babyfood Plant are now equipped withaseptic technology. The method of ultrafiltration we use at this plant alsoallows us to produce children’s cheese paste which retains its most beneficialnutrient, serum protein, giving it a higher nutritional value than similarproducts manufactured at other plants.

 

During2006, we installed a new and innovative line for fruit preparation that allowsus to improve the quality of jams used in our products. A unique technology foraseptic dairy-based sauce production was developed and implemented atWimm-Bill-Dann. A new filling line with a tunnel autoclave was installed at theKursk Babyfood Plant. New technologies for purification of raw juice wereimplemented at Ramenskoye.

 

In2007, we completely overhauled our newly acquired plants, Manros and AngarskyDairy Plant (MOLKA). They are now fully operational. We ceased operations atOchakovsky Dairy Plant and moved the production facilities to our othersubsidiaries.

 

Wecontinued to extend the Company’s Quality and Safety Management System. In2008, our Quality and Safety Management System was certified as being incompliance with the requirements as set out by international quality standards;fourteen of our dairy and three of our beverage plants were granted ISO 9001Certificates, and five of our dairy and two of our beverage plants were grantedISO 22000 Certificates. During 2009, we plan to develop and certify the Qualityand Safety Management System for a number of other operations.

 

Oneof our strategic objectives is to improve the status of the production testlaboratories operating at our production facilities. By the end of 2008, 95% ofour operations successfully completed the process of accreditation and weregranted laboratory accreditation certificates pursuant to GOST R ISO/MEC 17025.

 

**Food RawMaterials**

** **

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

 

·                  raw milk, whichwe generally 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 and do not engage in asignificant amount of barter transactions. We purchase certain raw materialssuch as bacteria cultures, juice concentrates and flavors from foreignmanufacturers when products of appropriate quality are not available locally.

 

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-

 

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term milk supplycontracts, leasing milking and refrigeration equipment to local producers,providing selected local milk producers with working capital loans, assistingwith long-term subsidized bank financing arrangements, contracting directlywith farmers and avoiding middlemen and working with the state authorities thatregulate 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 temporary storage of milk at farms and other technical devices thatincrease the productivity of farms. The type of equipment provided depends onthe needs of each particular farm.

 

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.

 

In February 2008, we opened a new mega-farm complex in theVolosovsk District near St Petersburg, built in place of the Trud collectivefarm, which we had acquired in 2005. The state-of-the-art farm is designed for 1,200 Holstein milking cows.

 

**Seasonality**

** **

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 have commenced andexpanded the production of powdered milk at some of our dairy productionfacilities for use in production during the winter months.

 

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.

 

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

 

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Russians travel to thecountryside for vacations in the summer and are unable to transport suchproducts, which have a short shelf life.

 

**Packaging**

** **

TetraPak supplied approximately 65% of our total packaging materials in value termsin 2008 (including carton, plastic, foil and other materials), and we aresubstantially dependent upon 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.

 

Wehave established similar relationships with companies such as SIG Combibloc(aseptic paper for juice and milk) and Elopak (nonaseptic paper for dairyproducts).

 

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

 

Weare focused on two main areas 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, including warehousing facility in Tomilino. Theinsurance coverage has been taken out on an “All Risks” basis coveringbuildings and equipment at our production facilities for the total sum of $1.0billion. We have insurance for business interruption at manufacturingfacilities with the total coverage of $1.0 billion.

 

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We have product liability insurance with $2.5 millionliability coverage per insurance case within the territory of Russia, the CIScountries and Mongolia, $5.0 million liability coverage per insurance caseworldwide except for the territory of Russia, the CIS countries and Mongolia,with the cumulative coverage of $5.0 million for the production anddistribution operations of dairy, soft drinks, juices and babyfood in Russia.

 

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**

** **

Asidefrom federal executive bodies and their structural subdivisions that haveauthority over general issues, such as defense, internal affairs, security,border service, justice, tax enforcement and rail transport, there are a largenumber of government agencies directly involved in regulating and supervisingthe 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.

 

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*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), monitors the sanitary conditions of production sites andequipment, fulfillment of sanitary standards for raw material and finishedproduct storage at manufacturing plants, compliance with sanitary standards forthe storage and sale of food products, their quality and safety at wholesaleand retail outlets and businesses catering to the public. The Service alsocarries out inspections 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 Fito-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**

** **

Russianlegislation regulating quality and safety of food and beverages includes thefollowing acts:

* *

*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 oncethey so conform. It also establishes general requirements for themanufacturing, packaging, storage, transportation and sale of food products andbeverages, and for 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 tomanufacturing processes, operations, storage, transportation, selling andutilization. Amendments to this law, dated May 1, 2007, provide for the adoptionof obligatory 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 andoperating margin.”

 

*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

 

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producers intending todevelop and offer a new food product to the public are required to file anapplication for the product’s state registration and incorporation into theState Register of Permitted Food Products. Such applications are reviewed bythe Federal Service for Supervision in the Area of Protection of ConsumerRights and Human Welfare (together with the Federal Service 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 thesanitary-epidemiological examination of products. Government bodies whichmonitor sanitary and health issues conduct sanitary-epidemiologicalexaminations of samples of each product and issue a conclusion as to whethersuch product satisfies the prescribed requirements. Products that have notundergone a hygienic evaluation may not be produced, shipped, used, sold orcertified.

 

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

 

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requirements. Milkproducts, babyfood, juice, certain water products and other beverages aresubject to mandatory certification. Conformity symbols evidencing that themanufacturer has undergone certification procedures are required to be printedon a product’s packaging. Failure to mark a product with a required conformitysymbol carries possible administrative sanctions.

 

**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.

 

**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 thefollowing information: the name of the product, information regarding itscertification, conditions of use (if necessary), contraindications (if any),preservatives and food additives, net mass or volume, ingredients, nutritionalvalue, conditions of storage, shelf life, name and address of the manufacturerand other information. The law also authorizes a wide range of government andpublic agencies to monitor producers’ compliance with the requirements of thelaw and imposes 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.

 

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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 exceed 0.35 liters. In addition, such products may be producedonly by separate specialized factories or manufacturing lines that are subjectto 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. In 2007the significant increase in raw milk prices led to investigations carried outby FAS towards our subsidiaries, as well as other large Russian milk producersand Chain retailers (for more information see “D. Risk Factors – Risks Relatingto Our Business and Industry – Further restrictions on our 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 the regulation of our prices and restriction of ourcommercial activities.”). Because of our significant market position, theFederal Antimonopoly Service monitors our activities and our subsidiaries arerequired to notify the Federal Antimonopoly Service on the monthly basis on ourmilk products prices and raw milk prices. We are also required to notify theFederal Antimonopoly Service and/or apply for its prior approval for theacquisition of other companies.

 

**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 June 16,2009.

 
| **Plant**                            | ** ** | **Ownership********Interest** | ** ** | **Country of  Incorporation** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|
| Wimm-Bill-Dann Plant (1)             |       | 98.20                         | %          | 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                                 |       | 96.38                         | %          | 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                |       |

 

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(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

 

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**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 2006, 2007 and 2008 we investedapproximately $518.0 million in the modernization of our existingproduction facilities and $162.4 million in the acquisition of new productionsubsidiaries.

 

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 $162,994 per employee in 2006, $220,145 per employee in 2007 and$287,473 per employee in 2008.

 

In2006 we started working with an international management consulting firm on atraining and business-process optimization program at the Wimm-Bill-Dann andthe Moscow Babyfood Plant in an effort to increase asset utilization, to cutcosts, and to raise labor productivity. As a result, we were able to reduce ouremployee headcount during 2007, excluding the plants we acquired during thesecond half of 2006. Our efforts to further optimize business processescontinue, and in 2008 we undertook a re-organization across all the regions andfunctions which resulted in a significant reduction in staff numbers whilemaintaining the same level of production and services. We believe these effortshave improved our efficiency, making the company more streamlined and betterpositioned challenges presented by the current economic downturn.

 

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                                            |       |
| **Siberia and Far East Russia**       |       |                                      |       |                        |       |                                         |       |
| Karasuk Dairy Plant                   |       | 1999                                      |       | 1952                        |       | 5                                            |       |
| **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                                            |       |

 

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| (1)    | “Acquisition”  means the purchase of more than 50% of the issued share capital. Only plants  acquired by us as of June 16, 2009 are included in this table.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (2)    | Formerly Lianozovsky Dairy Plant.  In April and May 2007, the following subsidiaries were merged into  Wimm-Bill-Dann: Tsaritsino Dairy Plant, 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 Babyfood Plant, Moscow Babyfood Plant, Timashevsk Dairy  Plant, Vladivostok Dairy Plant, Obninsk Dairy Plant, Annino Dairy Plant,  Angarsky Dairy Plant (MOLKA), Surgut Dairy Plant and Manros-M. On  March 5, 2007, we sold Novokuibyshevskmoloko — our Samara region-based  subsidiary. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (3)    | Formerly Ramenskiy Dairy Plant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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| (4) | Formerly Kiev Dairy Plant No 3. In  December 2007 Buryn Powder Milk Plant and Kharkov Dairy Plant were  merged into Wimm-Bill-Dann Ukraine. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

* *

*As of December 31,2008 and 2007 the assets that served as collateral for certain of our short-and long-term loans consisted of the following:*

* *

·                  Inventory in the amounts of $niland $3.2 million, respectively;

 

·                  Property, plant and equipment witha net book value of $75.5 million and $78.0 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.*

* *

**A.Operating Results**

** **

**Overview**

** **

Weare one of the largest Russian manufacturers of dairy and juice products, withsales of $2,823.6 million, $2,438.3 million and $1,762.1 million in 2008,2007 and 2006, respectively. Our reportable business segments in 2008 weredairy products, beverage products and babyfood products. In 2008, the dairysegment accounted for 74.2% of our sales, the beverages segment, which includesjuice and bottled mineral water products, accounted for 16.8% of our sales andthe babyfood segment accounted for 9.0% of our sales. In 2007, the dairysegment accounted for 76.0% of our sales, the beverages segment accounted for17.0% of our sales and the babyfood segment accounted for 7.0% of our sales. In2006, the dairy segment accounted for 75.0% of our sales, the beverages segmentaccounted for 18.4% of our sales and the babyfood segment accounted for 6.6% ofour sales. Our principal geographic market is Russia, which accountedapproximately for 93% of our sales in each of 2008, 2007 and 2006. We also haveproduction facilities and distribution chains in the CIS countries of Ukraine,Kyrgyzstan, Uzbekistan and Georgia, as well as a distribution center inKazakhstan.

 

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.

 

The appreciation in real terms of theruble against the U.S. dollar tends to result in an increase in our costs andrevenues, while depreciation of the ruble against the U.S. dollar in real termstends to result in a decrease in our costs and revenues. Following the generaleconomic downturn, the ruble depreciated against the U.S. dollar in 2008 by19.9%. The ruble depreciated by 2.4% against the U.S. dollar based on theaverage exchange rate in the year ended December 31, 2008 as

 

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compared to the average exchange rate in the yearended December 31, 2007. This generally resulted in a decrease in thereported U.S. dollar value of our ruble-denominated assets and liabilities. Additionally,nominal depreciation of the ruble against the U.S. dollar has a similar effectwhen income statements of our non-U.S. dollar-denominated subsidiaries aretranslated into U.S. dollars while preparing our consolidated financialstatements. As a result of the ruble depreciation, in 2008 the translation lossincreased to $127.4 million, compared to a gain of $41.0 million recognized in2007. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to OurFinancial Condition—Rubledepreciation could increase our costs, decrease our cash reserves, or make itmore difficult for us to comply with financial ratios and to repay our debtsand will affect the value of dividends received by holders of ADSs.”

 

In 2009, the Company experienced significant adversecurrency fluctuations. The U.S. dollar and euro exchange rates increased from29.38 and 41.44 as at December 31, 2008 to 31.15 and 43.30 as at June 16,2009, respectively. The effect of this change in exchange rate on the amountsoutstanding as of December 31, 2008 would have resulted in a foreigncurrency loss of approximately $15.7 million for the period from January 1,2009 through June 16, 2009.

 

In2008, our net income decreased by 27.3% to $101.7 million from $140.0 millionin 2007 primarily due to the adverse effect of foreign currency exchangelosses, which were $58.8 million in 2008 in comparison with a gain of $18.1million in 2007. Our sales increased by 15.8% in 2008, including year-on-yearsales increases of 13.1%, 14.3% and 48.2% in the dairy, beverage and babyfoodsegments, respectively. By volume, dairy segment sales were lower by 9.2%,beverage segment sales increased by 3.7% and babyfood sales volume increased by27.6% in 2008.

 

Thegross margin in the dairy segment decreased slightly to 29.1% in 2008 from29.2% in 2007. The gross margin in the beverage segment decreased to 39.1% in2008 from 39.8% in 2007 due to constant raw material (primarily concentrates)prices growth in the first half of 2008. The gross margin in the babyfoodsegment increased to 46.9% in 2008 from 45.1% in 2007, driven by a growingshare of non-dairy babyfood and a decreased share of babyfood produced byco-packing in our sales.

 

Ourselling and distribution expenses increased in 2008 as compared to 2007 inabsolute terms and also as a percentage of sales, from 15.9% to 17.3%. Inparticular, our personnel and transportation costs were higher in 2008, whichis in line with improving of our route-to-market initiatives.

 

Overthe past three years, we have been constructing new capacity, modernizingexisting capacity and making strategic acquisitions. Our capital expenditures(excluding acquisitions) in 2008, 2007 and 2006 were $195.3, $192.7 and $130.0million, respectively. Expenditures for acquisitions of subsidiaries in 2008,2007 and 2006 totaled $3.3, $21.8 and $137.3 million (exclusive of advancesmade in 2006 for acquisitions completed in 2007), respectively.

 

Asof December 31, 2008, we had a total of $673.2 million in outstandingdebt (consisting of loans, notes payable and vendor financing obligations), ofwhich $158.6 million was repaid in March 2009. Of our total indebtednessas of December 31, 2008, 41.3% was denominated in foreign currency and58.7% was denominated in rubles.

 

Below is a summary ofour operational highlights for 2008 and the beginning of 2009.

 

**Corporateand Operational Highlights for 2008**

 
| January  |   | On January 31, 2008, the following subsidiaries  were merged into Wimm-Bill-Dann (formerly Lianozovsky Dairy Plant): Surgut  City Dairy Plant OJSC, Ochakovo Dairy Plant OJSC, Anna milk CJSC, Angarsky  Dairy Plant OJSC, Obninsk Dairy Plant OJSC. |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| February |   | We opened a new mega-farm complex in the Volosovsk District  near St Petersburg, built in place of the Trud collective farm, which we acquired in 2005. The state-of-the-art farm  is designed for  1,200 Holstein milking cows.                          |

 

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| February                           |   | We launched a major  project to implement a new Enterprise Resource Planning (ERP) information  system that will cover finance, sales, supply and logistics and will be based  on Oracle E-Business Suite software.                                                                                                                                                                                                                                                                                                                                             |
|------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| March                              |   | In March and April 2008, WBD Foods issued  five-year ruble-denominated bonds for a total value of 5 billion rubles. The  interest rate of the first coupon was established at an auction at an  annual rate of 9.30% and the bond yield to the annual offer amounted to 9.52%  annually.                                                                                                                                                                                                                                                                   |
| March                              |   | We launched the production of Agusha  babyfood and Imunele functional products at our Manros-M production facility in  the Omsk Region, Siberia.                                                                                                                                                                                                                                                                                                                                                                                                                     |
| April                              |   | On April 25, 2008, we entered into a syndicated  loan agreement with ING Bank N.V., ABN Amro N.V. and CALYON as mandated lead  arrangers, pursuant to which the mandated lead arrangers and a syndicate lent  to us a principal amount of $250 million on May 8, 2008. The loan  matures on April 25, 2011, and interest is payable by us quarterly in  arrears at an annual rate of LIBOR+1.75%.                                                                                                                                                     |
| May                                |   | We began to produce premium segment juice under “J7”  and “100% Gold Premium” brands in Siberia.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| May                                |   | On May 15, 2008 and on May 7, 2008, we  repaid our 2003 and 2007 Eurobond loans with the accrued interest,  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| June                               |   | We launched a new powdered baby-milk product under  the “Agusha” trade mark, among the most popular babyfood brands in Russia.  “Agusha” is the only powdered baby milk product developed jointly with  Russian Academy of Medical Sciences.                                                                                                                                                                                                                                                                                                     |
| November                           |   | We launched a novel yogurt product for the Russian  marketplace, yogurt with whole berries produced under the “Chudo” brand.                                                                                                                                                                                                                                                                                                                                                                                                                               |
| December                           |   | We entered into two credit lines with Sberbank and  Alfa Bank for the total amount of 2,550 million rubles ($86.7 million at the  exchange rate as at December 31, 2008), including 1,300 million rubles  ($44.3 million at the exchange rate as of December 31, 2008) maturing in  June 2009 and 750 million rubles ($25.5 million at the exchange rate as  at December 31, 2008) payable in December 2009. The remaining 500  million rubles ($16.9 million at the exchange rate as at December 31,  2008) payable in May 2010. |
| December – 16 June, 2009 |   | Our 100% owned subsidiary Wimm-Bill-Dann Finance  purchased in the open market 1,561,473 of our ordinary shares for total  consideration of $30.6 million, which constituted 3.55% of our share capital.                                                                                                                                                                                                                                                                                                                                                             |

** **

**Corporateand Operational Highlights for 2009**

 
| January  |   | We changed our supply and production processes for  all dairy products in accordance with new technical regulations which came  into force on December 31, 2008.                                                                                         |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| February |   | We successfully launched a pilot program for our ERP  information system at Baltiyskoe Moloko.                                                                                                                                                                |
| February |   | We launched a new brand for children — “Zdraivery”.                                                                                                                                                                                            |
| February |   | We  launched the production of “Rodniki Rossii” brand mineral water sourced from  the Essentuki region of Russia.                                                                                                                                   |
| 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                                                                                                       |
| March    |   | We launched a new line of yogurt and desserts under  our well-known brand “BioMax”.                                                                                                                                                                 |
| March    |   | We  launched “Lubimy Sad” ice tea, an entirely new product that marks our entry  into a new and fast-growing market.                                                                                                                                |
| March    |   | We  carried out the repayment of 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, respectively) from  operational cash flows. |

 

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| May-June |   | The  Company issued bonds on MICEX raising cash of 3 billion rubles, ($96.9  million at the exchange rates at the dates of transactions). The bonds are  due in February 2013, and bondholders have a put option exercisable on  September, 2010, at 100% of nominal value plus accrued interest. |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**Resultsof Operations**

 

Thefollowing table summarizes the results of our operations for the years ended December 31,2008, 2007 and 2006:

 
|                                 |   |                    |      | **% of** |   |                    |   | **% of** |   |                    |   | **% of** |      |
|--------------------------------------|--------|-------------------------|-----------|---------------|--------|-------------------------|--------|---------------|--------|-------------------------|--------|---------------|-----------|
|                                 |   | **2008**                |      | **sales**     |   | **2007**                |   | **sales**     |   | **2006**                |   | **sales**     |      |
|                                 |   | **(in thousands)** |      |          |   | **(in thousands)** |   |          |   | **(in thousands)** |   |          |      |
| Sales                                |   | $                       | 2,823,564 |          | 100.0  |                    | $      | 2,438,328     |   | 100.0                   |   | $             | 1,762,127 |   | 100.0 |   |
| including:                           |   |                    |      |          |   |                    |   |          |   |                    |   |          |      |
| Dairy                                |   | 2,095,900               |      | 74.2          |   | 1,852,458               |   | 76.0          |   | 1,320,901               |   | 75.0          |      |
| Beverages                            |   | 473,196                 |      | 16.8          |   | 414,117                 |   | 17.0          |   | 324,074                 |   | 18.4          |      |
| Baby  Food                           |   | 254,468                 |      | 9.0           |   | 171,753                 |   | 7.0           |   | 117,152                 |   | 6.6           |      |
| Cost of  sales                       |   | (1,910,528              | )         | 67.7          |   | (1,654,879              | )      | 67.9          |   | (1,194,159              | )      | 67.8          |      |
| Gross  profit                        |   | 913,036                 |      | 32.3          |   | 783,449                 |   | 32.1          |   | 567,968                 |   | 32.2          |      |
| Selling  and distribution expenses   |   | (488,110                | )         | 17.3          |   | (387,853                |   | 15.9          |   | (246,054                | )      | 14.0          |      |
| General  and administrative expenses |   | (171,400                | )         | 6.1           |   | (180,922                | )      | 7.4           |   | (134,481                |   | 7.6           |      |
| Other  operating expenses            |   | (8,383                  | )         | 0.3           |   | (704                    | )      | 0.0           |   | (31,812                 | )      | 1.8           |      |
| Operating  income                    |   | 245,143                 |      | 8.7           |   | 213,970                 |   | 8.8           |   | 155,621                 |   | 8.8           |      |
| Financial  income and expenses, net  |   | (101,504                | )         | 3.6           |   | (16,851                 | )      | 0.7           |   | (15,480                 | )      | 0.9           |      |
| Provision  for income taxes          |   | (39,898                 | )         | 1.4           |   | (54,302                 | )      | 2.2           |   | (41,560                 | )      | 2.4           |      |
| Minority  interest                   |   | (2,029                  | )         | 0.1           |   | (2,769                  | )      | 0.1           |   | (3,197                  | )      | 0.2           |      |
| Net Income                           |   | $                       | 101,712   |          | 3.6    |                    | $      | 140,048       |   | 5.7                     |   | $             | 95,384    |   | 5.4 |   |
| Volume                               |   |                    |      |          |   |                    |   |          |   |                    |   |          |      |
| Dairy  (th. tons)                    |   | 1,453                   |      |          |   | 1,599                   |   |          |   | 1,354                   |   |          |      |
| Beverages  (th. tons)                |   | 509                     |      |          |   | 491                     |   |          |   | 445                     |   |          |      |
| Baby  Food (th. tons)                |   | 111                     |      |          |   | 87                      |   |          |   | 66                      |   |          |      |

 

**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,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | ** **                                 | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **        | ** ** | **2008**                                   | ** ** | **sales** | ** ** | **2007** | ** ** | **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 |   |
| Baby food         |       | 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 

 

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2007 to $0.930 per literin 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:

 
| ** **                    | ** ** | **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 millionin 2008, reflecting the significant capital expenditures we have been making toincrease our production capacity by improving our facilities and overallinfrastructure.

 

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

 

**GrossProfit**

** **

Ourgross profit increased by 16.5% to $913.0 million in 2008 from$783.4 million in 2007. Our gross margin increased to 32.3% in 2008 from32.1% in 2007.

 

Grossmargin in our dairy segment changed insignificantly to 29.1% in 2008 from 29.2%in 2007. Gross margin in our beverages segment decreased to 39.1% in 2008 from39.8% in 2007 due to raw material purchase prices (juice concentrates).

 

Grossmargin in our babyfood segment increased to 46.9% in 2008 from 45.1% in 2007mainly due to increased selling prices and a shift in our product mix in favorof higher margin, value-added products.

 

**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 |   |
| Warehouse                               |       | 13,285                  |       | 11,534 |   |
| Materials and supplies                  |       | 13,124                  |       | 11,249 |   |
| Bad debt expense                        |       | 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 increase in expenses was due our continued investmentsinto major brand promotions and a launch of a range of new products. Theincrease was primarily attributable to TV advertising expenses due to theincreased volume of TV advertisements placed as well as growth in advertisingprices on Russia’s leading national television channels, which, in 2008,exceeded 50%. Despite this media advertising price inflation, we were able toobtain volume discounts and manage the cost increases 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%).

 

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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, and decreasedas a percentage of sales to 6.0% in 2008 from 7.4% in 2007. Our general andadministrative 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 |   |
| Depreciation                              |       | 17,700                  |       | 9,512 |   |
| Audit, consulting and legal fees          |       | 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.

 

**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.

 

**FinancialIncome and Expenses**

** **

Financial income and expenses comprised the following:

 

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| ** **                              | ** ** | **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% againstthe 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:

 

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|                                                                            |   | **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 2005-2008, 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 carryforward of $19.2 million expiring as follows:

 
| ** **                            | ** ** | **(in thousands)** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| December 31, 2010 - 2014         |       | $                  | —     |   |
| December 31, 2015                |       | 6,114              |       |
| December 31, 2016 and thereafter |       | 13,132             |       |
| Total loss carryforward               |       | $                  | 19,246     |   |

 

**MinorityInterest**

** **

Theminority interest reflects the net income and losses of our subsidiaries thatare attributable to the minority shareholders in those subsidiaries. In 2008,net income attributable to minority shareholders of our subsidiaries decreasedto $2.0 million from $2.8 million in 2007. Net income attributable tothe minority interests in the dairy segment was $1.5 million in 2008 and $2.0million in 2007, respectively.

 

**NetIncome**

** **

Netincome decreased in 2008 to $101.7 million (3.6% of sales) from $140.0million (5.7% of sales) in 2007, primarily as a result of the increase in financialexpenses explained above.

 

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** **

**YearEnded December 31, 2007 Compared to Year Ended December 31, 2006**

** **

**Sales**

 

Salesincreased by 38.4% to $2,438.3 million in 2007 from $1,762.1 millionin 2006. The dairy business was our largest segment, representing 76.0% ofsales in 2007 compared to 75.0% in 2006.

 
| ** **        | ** ** | **Year ended December 31,** | ** **       |
|-------------------|------------|--------------------------------------------|------------------|
| ** **        | ** ** | ** **                                 | ** **       | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **        | ** ** | **2007**                                   | ** **       | **sales** | ** ** | **2006** | ** ** | **sales** | ** ** |
| ** **        | ** ** | **(in thousands)**                    | ** **       | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Dairy products    |       | $                                          | 1,852,458        |   | 76.0 |   | $ | 1,320,901 |   | 75.0 |   |
| Beverage products |       | 414,117                                    |             | 17.0 |   | 324,074 |   | 18.4 |   |
| Baby food         |       | 171,753                                    |             | 7.0 |   | 117,152 |   | 6.6 |   |
|              |       | $                                          |  2,438, 328 |   | 100.0 |   | $ | 1,762,127 |   | 100.0 |   |

 

Salesin our dairy segment increased by 40.2% to $1,852.5 million in 2007 from$1,320.9 million in 2006. We sold 1,599.5 thousand tons of dairyproducts in 2007 and 1,353.5 thousand tons of dairy products in 2006. Theaverage selling price increased by 18.7% from $0.976 per kilogram in 2006 to$1.158 per kilogram in 2007 driven by a favorable sales mix, ruble priceincreases and ruble appreciation. Our improved dairy sales were driven by our increasedpresence in the regions of Russia and the CIS, especially in North West andSouthern Russia, the addition of new products to our portfolio and further optimizationof our product portfolio, the launch of new product lines and increasedmarketing activities.

 

Salesin our beverages segment increased by 27.8% to $414.1 million in 2007 from$324.1 million in 2006. We sold 490.6 million liters of juice andwater in 2007 and 447.0 million liters of juice and water in 2006. The averageselling price increased by 16.4% from $0.725 per liter in 2006 to $0.844 perliter in 2007, primarily due to changes in our product mix in favor of higherpriced brands and ruble price increases.

 

Salesin our babyfood segment increased by 46.6% to $171.8 million in 2007 from$117.2 million in 2006. We sold 87.4 thousand tons of babyfood products in 2007and 66.3 thousand tons in 2006. The average selling price increased by 11.2%from $1.768 per kilogram in 2006 to $1.966 per kilogram in 2007 driven by rubleprice increases and ruble appreciation.

 

In2007, 54% of our sales revenues came from regional Russia and other CIScountries. Regional sales represented 53%, 66% and 24% of dairy, beverages andbabyfood segment revenues in 2007, respectively. Over a number of years, wehave focused 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 84.9% and 82.6% of our total cost ofsales in 2007 and 2006, respectively. The table below sets forth these costsfor both 2007 and 2006:

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                   | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Raw materials                 |       | $                                          | 1,405,801  |   | 84.9 |   | $ | 986,477 |   | 82.6 |   |
| Personnel                     |       | 90,207                                     |       | 5.5 |   | 68,464 |   | 5.7 |   |
| Depreciation and amortization |       | 65,879                                     |       | 4.0 |   | 50,136 |   | 4.2 |   |
| Utilities                     |       | 42,554                                     |       | 2.6 |   | 29,240 |   | 2.5 |   |
| Goods for resale              |       | 7,341                                      |       | 0.4 |   | 22,556 |   | 1.9 |   |
| Other                         |       | 43,097                                     |       | 2.6 |   | 37,286 |   | 3.1 |   |
| Total cost of sales           |       | $                                          | 1,654,879  |   | 100.0 |   | $ | 1,194,159 |   | 100.0 |   |

 

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Rawmaterial costs increased by 42.5% in 2007. Raw materials increased as apercentage of sales to 57.7% in 2007 from 56.0% in 2006. Raw material costsaccounted for 60.3% of dairy sales in 2007 compared to 57.5% in 2006. This wascaused by an unprecedented rise in raw milk prices, which outpaced theincreases in selling prices. Raw material costs accounted for 44.3% babyfoodsales in 2007 compared to 41.2% in 2006, owing to the same reason. Raw materialcosts decreased to 51.4% of beverage sales in 2007 from 55.0% in 2006 due toenhanced cost control measures and centralized procurement, undertaken from 2006.

 

Inthe dairy segment, 86.3% of our raw material costs were ruble-denominated and13.7% were hard-currency-denominated in 2007, whereas 83.9% of these costs wereruble-denominated and 16.1% were hard-currency-denominated in 2006. In thebabyfood segment, 65.5% of our raw material costs were ruble-denominated and34.5% were hard-currency-denominated in 2007, unchanged as of 2006. In thebeverages segment, 21.2% of our raw material costs were ruble-denominated and78.8% were hard-currency-denominated in 2007, while the majority of our rawmaterial costs were hard-currency-denominated in 2006.

 

Personnelexpenses increased by 31.8% in 2007 as compared to 2006. The average number ofproduction personnel increased in 2007 by 2.5% to 11,076 (including Ochakovo,MOLKA, Manros-M and Surgut dairy plants acquired at the end of 2006) comparedto 10,811 in 2006 (excluding Ochakovo, MOLKA, Manros-M and Surgut) mainly dueto increased utilization of manufacturing facilities and growth in productionvolumes in 2007.

 

Depreciationand amortization increased by 31.4% from $50.1 million in 2006 to$65.9 million in 2007, due to the fact that we have been makingsignificant capital expenditures to increase our production capacity byimproving our facilities and overall infrastructure.

 

Utilitycosts increased in by 45.5% in 2007 due to larger production and warehousingfacilities, as well as an increase in production volumes and electricity andgas tariffs.

 

Goodsfor resale include various dairy products that we purchase from independentproducers and resell.

 

**GrossProfit**

** **

Ourgross profit increased by 37.9% to $783.4 million in 2007 from$568.0 million in 2006. Our gross margin decreased to 32.1% in 2007 from32.2% in 2006.

 

Grossmargin in our dairy segment decreased to 29.2% in 2007 from 30.5% in 2006 dueto the unprecedented rise in raw milk prices. Our raw milk purchase priceincreased 64.8% year-on-year in ruble terms (77.5% in U.S. dollar terms) in thefourth quarter and 27.7% year-on-year in ruble terms (35.7% in U.S. dollarterms) for the full year 2007.

 

Grossmargin in our beverages segment increased to 39.8% in 2007 from 35.3% in 2006.This increase was primarily due to better pricing and discount management whichlargely offset higher sugar and concentrate costs and a shift in our productmix in favor of value-added products. As a result, the increase in the averageselling price outpaced the increase in cost of sales

 

Grossmargin in our babyfood segment increased to 45.1% in 2007 from 43.1% in 2006mainly due to increased selling prices and a shift in our product mix in favorof higher margin, value-added products.

 

**Sellingand Distribution Expenses**

** **

Sellingand distribution expenses increased by 57.6% between 2007 and 2006. As a percentageof sales, selling and distribution expenses increased to 15.9% in 2007 from14.0% in 2006. Our selling and distribution expenses in 2007 and 2006 were asfollows:

 

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| ** **                              | ** ** | **Year ended**     | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **December 31,**   | ** ** |
| ** **                              | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** |
| Advertising and marketing               |       | $                       | 137,965    |   | $ | 76,194 |   |
| Personnel                               |       | 83,901                  |       | 55,955 |   |
| Shipping and handling                   |       | 111,228                 |       | 73,565 |   |
| Bad debt expense                        |       | 1,650                   |       | 3,130 |   |
| Materials and supplies                  |       | 11,249                  |       | 9,369 |   |
| Warehouse                               |       | 11,534                  |       | 10,986 |   |
| Other                                   |       | 30,326                  |       | 16,855 |   |
| Total selling and distribution expenses |       | $                       | 387,853    |   | $ | 246,054 |   |

 

Advertisingand marketing expenses increased in 2007 by 81.1% or $61.8 million inabsolute terms, and increased by 1.4% as a percentage of sales to 5.7% in 2007from 4.3% in 2006. The increase in expenses was due to our continuedinvestments into major brand promotions, media advertising cost inflation onRussia’s leading national television channels, which, in 2007, exceeded 50% andgeneral increases in marketing costs. Despite this media advertising price inflation,we were able to obtain volume discounts and manage the cost increases moreeffectively.

 

Personnelexpenses increased by 49.9% in 2007 as compared to 2006. The average number ofemployees in our selling and distribution department increased to 5,712 in 2007(including Surgut, Manros, Ochakovo, and MOLKA dairy plants acquired in late2006) from 5,355 in 2006 (excluding Surgut, Manros, Ochakovo, and MOLKA dairyplants) mainly due to the development of our branch network in 2007. Ourpayroll cost per employee increased by 42.1% to $14,689 in 2007 from $10,336 in2006, mainly due to implementation of a performance based reward system as wellas enhancing the quality of our sales force in 2007. Our personnel costs as apercentage of sales increased to 3.4% in 2007 from 3.2% in 2006. Our personnelcosts as a percentage of sales increased to 3.4% in 2007 from 3.2% in 2006.

 

Shippingand handling costs, which primarily consist of external transportation costs, increasedby 51.2% in 2007 as compared to 2006. Our transportation expenses as apercentage of sales slightly increased to 4.6% in 2007 from 4.2% in 2006. Theincrease in transportation costs was mainly due to the expansion of our salesin the regions and increased transportation tariffs and fuel prices for motortransportation expenses, which accounted for approximately half of beveragestransportation expenses.

 

Wecontinued to maintain control of our bad debt expenses, which decreasedslightly to 0.1% as a percentage of sales in 2007 from 0.2% in 2006. See “B.Liquidity and Capital Resources—Critical Accounting Policies andEstimates—Allowance for Doubtful Accounts” below.

 

**Generaland Administrative Expenses**

** **

Generaland administrative expenses increased by 34.5% in 2007 as compared to 2006, anddecreased as a percentage of sales to 7.4% in 2007 from 7.6% in 2006. Ourgeneral and administrative expenses in 2007 and 2006 were as follows:

 

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| ** **                                | ** ** | **Year ended**     | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **December 31,**   | ** ** |
| ** **                                | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Personnel                                 |       | $                       | 102,195    |   | $ | 78,227 |   |
| Taxes other than income tax               |       | 17,200                  |       | 12,789 |   |
| Audit, consulting and legal fees          |       | 10,636                  |       | 10,506 |   |
| Depreciation                              |       | 9,512                   |       | 7,215 |   |
| Materials and supplies                    |       | 4,654                   |       | 2,462 |   |
| Communication costs                       |       | 3,647                   |       | 2,731 |   |
| Rent                                      |       | 3,278                   |       | 2,670 |   |
| Other                                     |       | 29,800                  |       | 17,881 |   |
| Total general and administrative expenses |       | $                       | 180,922    |   | $ | 134,481 |   |

 

Personnelexpenses increased by 30.6%, while the average number of employees decreased to3,008 in 2007 (including Surgut, Manros, Ochakovo, and MOLKA dairy plantsacquired in late 2006) compared to 3,159 in 2006 (excluding Surgut, Manros,Ochakovo, and MOLKA dairy plants). Our average cost per employee increased by38.5% to $33,978 in 2007 from $24,532 in 2006, due to wage inflation,compensatory payments made during the process of personnel headcountoptimization and SAR program implemented for some of our key managers in 2007.

 

Ourexpenses for audit, consulting and legal services remained approximately flatshowing an increase of 1.2% in 2007 compared to 2006.

 

Depreciationexpense increased by 31.8% from $7.2 million in 2006 to $9.5 millionin 2007, reflecting capital expenditures made to support our expansion into theregions of Russia and the CIS.

 

**OtherOperating Expenses**

** **

Otheroperating expenses decreased by 97.8% to $0.7 million in 2007 from $31.8million in 2006.Other operating expenses were unusually high in 2006, due to aone time impairment charge of $16.3 million to our operating income, partiallyto cover the writing down of Valdai mineral water facility in beverage businessunit and the closing off of a small dairy plant in Novokuibyshevsk in dairybusiness unit.

 

**OperatingIncome**

** **

Operatingincome increased by 37.5% to $214.0 million in 2007 from $155.6 million in2006, as a result of cost control measures undertaken in the last two years.Our acquisitions made at the end of 2006 also contributed to the improvement ofour operating income. As a percentage of sales, operating income remainedstable at 8.8% in 2007 as in 2006.

 

**FinancialIncome and Expenses**

** **

Financialincome and expenses comprised the following:

 
| ** **                              | ** ** | **Year ended**     | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **December 31,**   | ** ** |
| ** **                              | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** |
| Interest expense                        |       | $                       | 34,988     |   | $ | 27,898 |   |
| Interest income                         |       | (2,952                  | )          | (4,372 | ) |
| Foreign currency losses (gains), net    |       | (18,120                 | )          | (10,288 | ) |
| Bank charges                            |       | 2,912                   |       | 2,070 |   |
| Other financial expenses (income), net  |       | 23                      |       | 172 |   |
| Total financial income and expense, net |       | $                       | 16,851     |   | $ | 15,480 |   |

 

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Interestexpense increased by 25.4% in 2007 compared to 2006. This was mainly due to anincrease in our average debt, including a $150 million Loan Participation Notesissued in February 2007.

 

Wereceived interest income of $3.0 million from free cash management in 2007compared to $4.4 million in 2006.

 

In2007, we incurred total foreign exchange gains, net of $18.1 million,mainly comprised of gains and losses from U.S. dollar-denominated andeuro-denominated debt. For accounting purposes we used the exchange rates as ofDecember 31, 2007 compared to December 31, 2006 for our hard currencydenominated liabilities. Based on these rates, the U.S. dollar depreciated by6.7% against the ruble, while the euro appreciated by 3.6% against the ruble.

 

**Provisionfor Income Taxes**

** **

Ourprovision for income taxes for the years ended December 31, 2007 and 2006was as follows:

 
| ** **                           | ** ** | **Year ended**     | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **December 31,**   | ** ** |
| ** **                           | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in thousands)** | ** ** |
| Current provision                    |       | $                       | 49,409     |   | $ | 48,232 |   |
| Deferred income tax charge/(benefit) |       | 4,893                   |       | (6,672 | ) |
| Total provision for income taxes     |       | $                       | 54,302     |   | $ | 41,560 |   |

 

Provisionfor income taxes amounted to $54.3 million in 2007 and $41.6 millionin 2006. These provisions comprise current income tax charges of$49.4 million in 2007 and $48.2 million in 2006, and a deferred taxexpense of $4.9 million in 2007 and the expense of benefit of$6.7 million in 2006. Deferred tax benefits and charges arise on temporarydifferences between the bases of computing income under domestic tax principlesand U.S. GAAP.

 

Our historical relationship between pretax earningsfor financial reporting purposes and taxable income for income tax purposes,for the years ended December 31, 2007 and 2006 was as follows:

 
| ** **                                                                      | ** ** | **Year ended**     | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                      | ** ** | **December 31,**   | ** ** |
| ** **                                                                      | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                                                      | ** ** | **(in thousands)** | ** ** |
| Income before provision for income taxes                                        |       | $                       | 197,119    |   | $ | 140,141 |   |
| Russian statutory tax rate                                                      |       | 24                      | %          | 24 | % |
| Income tax provision at Russian statutory rate                                  |       | 47,309                  |       | 33,634 |   |
|                                                                            |       |                    |       |   |   |
| Tax effect of expenses not deductible for national statutory taxation  purposes |       | 12,758                  |       | 10,829 |   |
| Tax effect of income not taxable for national statutory taxation  purposes      |       | (2,396                  | )          | (2,172 | ) |
| Tax effect of income tax at different rates                                     |       | (947                    | )          | (849 | ) |
| Increase (decrease) in valuation allowance                                      |       | (2,741                  | )          | (370 | ) |
| Tax effect of other permanent differences                                       |       | 319                     |       | 488 |   |
| Provision for income taxes                                                      |       | $                       | 54,302     |   | $ | 41,560 |   |

 

In 2007, our effective income tax rate was 27.5%compared to the Russian statutory income tax rate of 24.0% and, in 2006, oureffective income tax rate was 29.7% compared to the Russian

 

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statutoryincome tax rate of 24.0%. This decrease in 2007 of our effective income taxrate is primarily driven by an increase in taxable profits accompanied by adecrease in the group’s non-deductible expenses as a percentage of sales in2007, compared to 2006, as well as utilization of losses incurred in previousperiods by certain subsidiaries which were merged into Wimm-Bill-Dann OJSC in2007.Such losses were not deemed recoverable during previous periods.

 

For Russian income tax purposes, certain of oursubsidiaries have accumulated tax losses incurred in 2005-2007, which may becarried forward for use against their future income within 10 years. Thereare no restrictions for use of accumulated tax losses effective January 1,2007. As of December 31, 2007, for statutory income tax purposes, we hadtax losses available to carryforward of $18.8 million.

 

**MinorityInterest**

** **

Theminority interest reflects the net income and losses of our subsidiaries thatare attributable to the minority shareholders in those subsidiaries. In 2007,net income attributable to minority shareholders of our subsidiaries decreasedto $2.8 million from $3.2 million in 2006. Net income attributable tothe minority interests in the dairy segment was $2.0 million in 2007 and $1.9million in 2006, respectively.

 

**NetIncome**

** **

Netincome increased in 2007 to $140.0 million (5.7% of sales) from$95.4 million (5.4% of sales) in 2006, primarily as a result of theincrease in operating income explained above, which was partially offset by anincrease in income tax expense.

 

**B.Liquidity and Capital Resources**

* *

**CapitalRequirements**

** **

Weneed capital to finance the following:

 

·                  repayment ofdebt;

 

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

 

·                  acquisitions; and

 

·                  dividend payouts.

 

In2008, we continued to purchase property, plant and equipment in order toincrease production capacity and to improve infrastructure at our new andexisting subsidiaries.

 

**GlobalEconomic Conditions**

 

Recentglobal market and economic conditions have been unprecedented and challenging,with tighter credit conditions and recession in most major economies continuinginto 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 ourcustomers, including our ability to refinance maturing liabilities and accessthe capital markets to meet liquidity needs. See also “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Financial Condition— We maybe adversely affected by the current economic environment” and “—Continuedturmoil in the credit

 

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markets could cause ourbusiness, financial condition, results of operations and the price of ourshares and ADSs to suffer.”

 

**CapitalExpenditures**

** **

Ourtotal capital expenditures in 2008, excluding acquisitions, amounted to$195.3 million. Capital expenditures in our dairy segment amounted to$140.7 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 $22.6 million and related mainly to theinstallation of new production lines and the modernization of our warehouseinfrastructure. Capital expenditures in our babyfood segment amounted to $16.5million. Our corporate and common capital expenditures, including thoserelating to IT infrastructure and software implementation, including ERP,totaled $15.5 million.

 

Ourcapital expenditures, excluding acquisitions, for the period from 2006 to 2008are set forth in the following table:

 
| ** **                        | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **In millions of U.S. Dollars**  | ** ** |
| Dairy segment                     |       | $                                | 140.7      |   | $ | 134.6 |   | $ | 93.3 |   | $ | 368.6 |   |
| Beverages segment                 |       | 22.6                             |       | 21.5 |   | 13.5 |   | 57.6 |   |
| Baby food segment                 |       | 16.5                             |       | 28.2 |   | 19.4 |   | 64.1 |   |
| Corporate and common expenditures |       | 15.5                             |       | 8.4 |   | 3.8 |   | 27.7 |   |
| Total capital expenditures        |       | $                                | 195.3      |   | $ | 192.7 |   | $ | 130.0 |   | $ | 518.0 |   |

** **

Asof December 31, 2008, our capital commitments amounted to $32.2 millionmainly attributable to construction projects and acquisitions of equipment. Weplan to finance our capital commitments through cash generated by operatingactivities.

 

**Acquisitionsof Subsidiaries and Purchase of Minority Stakes**

 

During2008, 2007 and 2006, we made a number of acquisitions for total considerationof $3.3 million, $21.8 million and $137.3 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 purchase minority stakes.The following table summarizes our acquisitions in the last three years:

 

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| ** **                                                                           | ** ** | **Direct owner****-****ship** | ** ** | ** **                         | ** **  |
|--------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|-------------|
| ** **                                                                           | ** ** | **interest**                       | ** ** | **Acquisition cost**          | ** **  |
| ** **                                                                           | ** ** | **acquired,********%**             | ** ** | **(in US$********‘000)** | ** **  |
| **2008**                                                                             |       |                               |       |                               |        |
| WBD Beverages (purchase of minority stake)                                           |       | 2.57                               |       | $                                  | 3,263       |   |
| **Total**                                                                            |       |                               |       | $                                  | **3,263**   |   |
| **2007**                                                                             |       |                               |       |                               |        |
| Ochakovo Dairy Plant (purchase of minority stake)                                    |       | 4.71                               |       | $                                  | 3,312       |   |
| Obninsk Dairy Plant (purchase of minority stake)                                     |       | 33.51                              |       | 11,877                             |        |
| Niva Farm                                                                            |       | 94.62                              |       | 1,185                              |        |
| Angarsky Dairy Plant (MOLKA) (purchase of minority stake)                            |       | 13.24                              |       | 830                                |        |
| Georgian products                                                                    |       | 100.00                             |       | 1,100                              |        |
| Acquisition of minority interests in subsidiaries                                    |       | 17.08                              |       | 2,746                              |        |
| Other                                                                                |       | various                            |       | 750                                |        |
| **Total**                                                                            | ** ** |                               |       | **$**                              | **21,806**  |   |
| **2006**                                                                             |       |                               |       |                               |        |
| Ochakovo Dairy Plant                                                                 |       | 93.74                              |       | $                                  | 66,792      |   |
| Manros                                                                               |       | 100.00                             |       | 51,336                             |        |
| Angarsky Dairy Plant (MOLKA)                                                         |       | 83.36                              |       | 4,908                              |        |
| Surgut Dairy Plant                                                                   |       | 100.00                             |       | 4,536                              |        |
| Wimm-Bill-Dann OJSC (formerly Lianozovsky Dairy Plant) (purchase of  minority stake) |       | 0.26                               |       | 812                                |        |
| Nazarovo Dairy Plant (purchase of minority stake)                                    |       | 30.35                              |       | 1,982                              |        |
|                                                                                 |       |                               |       |                               |        |
| Moscow Baby Food Plant (purchase of minority stake)                                  |       | 20.00                              |       | 6,955                              |        |
| **Total**                                                                            | ** ** |                               |       | **$**                              | **137,321** |   |

 

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 issuance to finance capitalexpenditures and acquisitions. In addition, we finance a portion of ourequipment purchases through vendor financing. The availability of external financingis influenced by many factors, including our financial position and marketconditions. Under certain circumstances, we may be required to repay certainindebtedness. See “Item 3. Key Information—D. Risk Factors—Risks Relating toOur Financial Condition—Covenants in our debt agreements restrict our abilityto borrow, invest and engage in various activities, which could impair ourability to expand or finance our future operations.” The global economicdownturn may also affect our ability to refinance maturing liabilities andaccess debt and the capital markets to meet liquidity needs. See also “—GlobalEconomic Conditions” above, “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Financial Condition— We may be adversely affected by the currenteconomic environment” and “—Continued turmoil in the credit markets could causeour business, financial condition, results of operations and the price of ourshares and ADSs to suffer.”

 

**Debt**

** **

Ourdebt consists of notes, bank loans and vendor financing for property, plant andequipment, of which 63% are at fixed rates. The following table summarizes ourdebt position as of December 31, 2008 and 2007:

 

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| ** **                                      | ** ** | **At December 31,** | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **2008**                      | ** ** | **2007**                      | ** ** |
| ** **                                      | ** ** | **(in thousands)**       | ** ** |
| Long-tem debt, including current portion:       |       |                          |       |                          |       |
| Notes                                           |       | $                             | 247,647    |                          | $          | 405,922 |   |
| Bank loans                                      |       | 335,789                       |       | 41,086                        |       |
| Vendor financing                                |       | 23,476                        |       | 33,103                        |       |
| Total long-term debt, including current portion |       | 606,912                       |       | 480,111                       |       |
| Short-term debt                                 |       | 66,278                        |       | 98,819                        |       |
| Total debt                                      |       | $                             | 673,190    |                          | $          | 578,930 |   |
| **Denominated in:**                             |       |                          |       |                          |       |
| U.S. dollars                                    |       | $                             | 256,084    |                          | $          | 315,305 |   |
| Euro                                            |       | $                             | 22,099     |                          | $          | 23,034 |   |
| Rubles                                          |       | $                             | 395,007    |                          | $          | 240,591 |   |

 

Ourdebt matures as follows:

 
| **Year**            | ** ** | **(in thousands)** | ** ** |
|---------------------|------------|-------------------------|------------|
| 2009                |       | $                       | 248,656    |   |
| 2010                |       | $                       | 143,520    |   |
| 2011                |       | $                       | 261,057    |   |
| 2012                |       | $                       | 6,652      |   |
| 2013 and thereafter |       | $                       | 13,305     |   |

 

**Notes**

** **

***U.S. Dollar Notes***

*** ***

On May 21, 2003,UBS (Luxembourg) S.A. issued 8.5% Loan Participation Notes due 2008 for thesole purpose of funding a $150.0 million loan (the “Loan Notes”) to us. TheLoan Notes bore interest at an annual rate of 8.5%, payable semi-annually inarrears on May 21 and November 21 of each year. The Loan Notesmatured and were fully repaid in May 2008.

 

On February 6,2007, UBS (Luxembourg) S.A. issued 7.5% Loan Participation Notes due 2008 forthe sole purpose of funding a $150.0 million loan (the “Loan”) to WBD Foods.The Loan bore interest at an annual rate of 7.5%, payable in two installmentson November 14, 2007 and May 14, 2008. The loan matured and was fullyrepaid in May 2008.

 

***Ruble Notes***

*** ***

On December 21,2005, we issued 3.0 million non-convertible ruble-denominated notes at a facevalue of 1,000 rubles each. The offering raised a total of 3.0 billion rubles($102.1 million at the exchange rate as of December 31, 2008 of which$13.6 million has been repaid as of December 31, 2008). The notes areredeemable by us on December 15, 2010. The interest rate of the coupon is9%. Interest is payable semi-annually in arrears, commencing on June 21,2006.

 

In March and April 2008,we placed bonds on the Moscow Inter-bank Currency Exchange (MICEX) with a totalnominal value of 5 billion rubles ($170.2 million at the exchange rate as of December 31,2008, of which $11.0 million (324 million rubles) has been repaid as of December 31,2008). The bonds have a maturity of five years and coupons are paid on ahalf-yearly basis. The interest rates for both coupons in the first year areequal and amount to 9.30% annually, and the rates for subsequent coupons willbe set by our Board of Director hereinafter based on the market conditions. Thebonds are due in March 2013, and bondholders have a put option exercisableon March 6, 2009, at 100% of nominal value plus accrued interest. Thebonds are classified as current debt as of December 31, 2008.

 

On March 6,2009, we repaid these bonds in the amount of 4,660.3 million rubles ($158.6million and $129.9 million at the exchange rates at December 31, 2008 and March 6,2009, respectively) from our operational cash flow sources. The balanceoutstanding as of March 6, 2009

 

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was15.7 million rubles ($0.5 million and$0.4 million at the exchange rates at December 31, 2008 and March 6,2009, respectively). The rates for the three subsequent coupons for the nextone and a half years were set at 15% annually.

 

In May and June 2009, the Company issuedbonds on MICEX raising cash of 3 billion rubles, ($96.9 million at the exchangerates at the dates of transactions). The bonds are due in February 2013,and bondholders have a put option exercisable in September, 2010, at 100% ofnominal value plus accrued interest. The annual interest rate of the coupon is15.0% for the next one and half years. The interest is payable semi-annually,commencing in September, 2009.

 

**Bank Loans**

** **

Substantiallyall of our long-term bank loans as of December 31, 2008 consisted of rubleand euro-denominated loans from Sberbank, Russian Agricultural Bank, UniCreditBank and Moscow City Government at effective interest rates ranging from 1.8%to 9.8%. Our short-term debt balance as of December 31, 2008 consisted ofloans from Alfa Bank, VTB Georgia, Sberbank and UniCredit Bank at interestrates ranging from 3.3% to 16.0%.

 

In particular, on December 2, 2008 we enteredinto a secured loan agreement with Sberbank lending for 1.25 billion rubles($42.5 million at the exchange rate as of December 31, 2008). Of thisamount, 750 million rubles ($25.5 million at the exchange rate as of December 31,2008) is payable in December 2009, and 500 million rubles ($16.9 millionat the exchange rate as of December 31, 2008) in May 2010.   On June 3, 2009 the Company repaid theentire amount of the loan to Sberbank.

 

On December 17,2008 we entered into short-term unsecured loan agreement with Alfa Bank in theamount of 1.3 billion rubles ($44.3 million at the exchange rate as of December 31,2008) which was repaid in May 2009.

 

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 the mandated leadarrangers and syndicate lent to us a principal amount of $250 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%.

 

**Guarantees**

** **

At December 31, 2008 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 $0.25 million.

 

Theabove-mentioned syndicated loan is unconditionally and irrevocably guaranteedby Wimm-Bill-Dann and Wimm-Bill-Dann Beverages pursuant to guarantees dated April 25,2008 entered into with ING Bank N.V. as the agent.

 

**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.

 

**VendorFinance**

** **

Wehave agreements with suppliers of equipment, which provide financing forperiods ranging from 1 to 9 years. As of December 31, 2008 and 2007,vendor financing obligations were $6.0 million and $14.0 million, respectively,12.1 million euro and 11.1 million euro, respectively

 

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(equivalent to $17.0 million and $16.3 million as of December 31,2008 and 2007, respectively) and 11.1 million rubles and 68.7 million rubles,respectively (equivalent to $0.4 million and $2.8 million as of December 31,2008 and 2007, respectively). This financing is provided at average interestrate of 7.85%.

 

**CashFlows**

** **

Asummary of our cash flows from continuing operations is as follows:

 
| ** **                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                       | ** ** | **(in thousands)**                    | ** ** |
| Cash provided by operating activities                            |       | $                                          | 321,190    |   | $ | 96,804 |   | $ | 169,954 |   |
| Cash used in investing activities                                |       | (185,404                                   | )          | (203,041 | ) | (228,158 | ) |
| Cash provided (used in) by financing activities                  |       | 166,222                                    |       | 91,429 |   | (1,911 | ) |
| Impact of exchange rate differences on cash and cash equivalents |       | (58,208                                    | )          | 7,950 |   | 7,322 |   |
| Net increase (decrease) in cash                                  |       | $                                          | 243,800    |   | $ | (6,858 | ) | $ | (52,793 | ) |
| Cash paid for acquisition of property, plant and equipment       |       | $                                          | (189,003   | ) | $ | (189,049 | ) | $ | (127,713 | ) |
| Cash paid for acquisition of subsidiaries, net of cash acquired  |       | (4,050                                     | )          | (24,850 | ) | (134,367 | ) |
| Vendor financed acquisitions of property, plant and equipment    |       | 6,967                                      |       | 6,860 |   | 5,561 |   |

 

In2008, we financed our capital expenditures and acquisitions exclusively throughoperating cash flows.

 

Wespent $185.4 million on our investment activities in 2008, includingacquisitions of property, plant and equipment of $189.0* million, acquisitionsof subsidiaries of $4.0** million, investments in direct financing leases of$0.8 million and $6.5 million proceeds from disposal of property, plant andequipment.

 

Wereceived $166.2 million on our financing activities in 2008, including netproceeds from long-term notes payable of $195.8 million, net repayment ofshort-term and long-term loans of $26.6 million and treasury stock acquisitionof $3.0 million.

 

**WorkingCapital**

** **

Ourshort-term demands for liquidity, including seasonal fluctuations in workingcapital requirements, are met by cash flows from operations.

 

Weexperienced significant depreciation of the ruble against the U.S. dollar in2008. The ruble depreciated by 19.9% against the U.S. dollar as of December 31,2008 in comparison with December 31, 2007. This generally resulted in adecrease in the reported U.S. dollar value of our ruble-denominated assets andliabilities. In order to avoid the misleading in working capital informationpresentation, we recalculated the key ratios using ruble-denominated balances.

 

Asof December 31, 2008, our cash and cash equivalents balance was $277.2million, of which $175.0 million was ruble-denominated, $100.0 million was euroand U.S. dollar-denominated and $2.2 million was denominated in othercurrencies. We intentionally increased our cash position at December 31,2008 in anticipation of repaying the ruble bonds in March 2009.

 

Ournet working capital*** balance was $219.6 million. Our working capital positionas of December 31, 2008 decreased from $308.5 million as of December 31,2007 primarily due to decrease in trade receivables and inventory. Our networking capital, excluding currency translation effects, decreased by $45.6million or by 14.8% as of December 31, 2008 in comparison

 

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* Cash paid forproperty, plant and equipment in the amount of $189.0 million, which differsfrom our capital investments of $195.3 million due to change in payables forproperty, plant and equipment.

** This amount consistsof cash consideration, paid for WBD Beverages minority interest acquisition of$3.3 million and repayment of outstanding acquisition due on WBD Georgia,acquired in 2007, of $0.7 million.

*** Net working capitalis calculated as total current assets net of cash and cash equivalents balanceless sum of trade accounts payable, advances received, taxes payable, accruedliabilities and other current payables.

 

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with that as of December 31,2007. We believe that our working capital is sufficient for our presentrequirements.

 

Taxesreceivable slightly decreased by $0.8 million to $64.9 million as of December 31,2008 from $65.7 million as of December 31, 2007. Excluding currencytranslation effects, taxes receivable increased by $12.0 million or by 18.2% incomparison with the balance as of December 31, 2007. 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. In2008, $20.7 million of VAT was recovered from the state budget in cash.

 

Tradeaccounts payable increased to $133.9 million at December 31, 2008 from$130.7 million at December 31, 2007. Excluding currency translationeffects, trade accounts payable increased by $29.5 million or by 22.6%. Tradepayables turnover averaged 27 days as of December 31, 2008 and26 days as of December 31, 2007.

 

Tradereceivables decreased from $157.6 million as of December 31, 2007 to$125.5 million as of December 31, 2008 after the allowance for bad debtsof $5.8 million, as compared to $3.7 million as of December 31, 2007.Trade receivables, excluding currency translation effects, decreased by $7.4million or by 4.7%. Trade receivables turnover averaged 20 days as of December 31,2008 and 19 days as of December 31, 2007.

 

Inventorydecreased from $261.3 million as of December 31, 2007 to $226.0 million asof December 31, 2008. Excluding currency translation effects, theinventory balance increased by $9.2 million or by 3.5%. Turnover of inventoryin days as of December 31, 2008 amounted to 50 days, as compared to48 days as of December 31, 2007. The increase of the inventorybalance was primarily driven by accumulation of powdered milk stock.

** **

**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.

 

In 2008, 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 November 10, 2008 Moody’schanged the outlook on our Ba3 corporate family rating to negative. Moody’sstated that the change in the outlook reflects short-term debt continuouslyaccounting for a material part of our debt against a background of tight marketconditions for accessing liquidity and challenging economic conditions.

 
| **Rating Agency**             | ** ** | **Company’s rating** | ** ** | **Outlook/Watch** | ** ** |
|------------------------------------|------------|--------------------------------|------------|-------------------|------------|
| Moody’s(1)                    |       | Ba3                            |       | negative          |       |
| Standard & Poor’s(2) |       | BB-                            |       | stable            |       |

 

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(1) Rated on July 16, 2007, updated in November 2008.

 

(2) Rated on July 13, 2007, since that timethe rating did not change.

 

As of the date of thisannual report, none of our existing indebtedness had any triggers related toour 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.

 

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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 we willnot be able to collect the amounts due according to original contractual termsand it reduces receivables to amounts expected to be collected. In estimatinguncollectible amounts, we consider factors such as current overall economicconditions, 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 $5.8 million andrepresented 4.4% of trade receivables as of December 31, 2008 and $3.7million and 2.3% of trade receivables of December 31, 2007. The percentagefor 2008 increased by 2.1 percentage points due to more pessimistic estimationof receivables recoverability in terms of general economic slowdown andinstability. We recognized $8.2 million bad debt expense, representing 0.3% ofour sales and $1.7 million bad debt expense, representing less than 0.1% of oursales as part of our selling and distribution expenses in 2008 and 2007,respectively.

 

**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 SFAS No. 109, *Accounting for Income Taxes* (“SFAS No. 109”), andrelated interpretations. We account for income taxes using an asset andliability 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.These differences arise between the years in which transactions affect taxableincome and the years in which they enter into the determination of pretaxfinancial income. Temporary differences ordinarily become taxable or deductiblewhen the related asset is recovered or the related liability is settled. A deferredtax liability or asset represents the increase or decrease in taxes payable orrefundable in future years as a result of temporary differences andcarryforwards 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 $13.3 million and $20.4 million as of December 31,2008 and 2007, 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. Tax losses recognized in 

 

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our financial statementswere $4.1 million and $4.5 million as of December 31, 2008 and 2007,respectively. If it was determined it is not more likely than not that tax losscarryforwards will be utilized in the future, losses were provided as part ofthe deferred tax asset valuation allowance. Losses that were provided as a partof the deferred tax asset valuation allowance were $2.0 million and $3.2million as of December 31, 2008 and 2007, respectively. Additionally, wereduced deferred tax assets by $0.8 million and $1.2 million as of December 31,2008 and 2007, respectively as we believe that the deferred tax assets will notbe utilized due to either that certain subsidiaries will not generate enoughtaxable profits or it is not more likely than not that these assets will beutilized in the future.

 

Thedeferred tax assets utilization is dependent upon the generation of future taxableincome 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 31,2008, 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, or rulingsby the tax authorities are unfavorable. Estimates are therefore subject tochange due to both market-related and government related uncertainties, as wellas 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 SFAS No. 109 and Financial Accounting Standards Board (“FASB”)Interpretation 48, *Accounting for Uncertaintyin Income Taxes**— an interpretation of SFAS109* (“FIN 48”) 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 sharereported in future years’ consolidated income statements. Several prior years’tax statements are still open for tax audit for most of our subsidiaries at thebalance sheet date. Our estimates of income tax expense and liabilities at eachyear end include significant management judgments about the eventual outcome ofthe tax audits of all open years based on the latest information availableabout the positions taken by each tax authority. We accrued $0.5 million and$0.6 million, including tax fines and penalties of $0.1 million and $0.1million as a component of accrued liabilities as of December 31, 2008 and2007, 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.

 

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**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. Obsolete items are provided forwritten off. If our actual results differ from our expectations with respect tothe selling of our inventories at amounts equal to or greater than theircarrying amounts, we would be required to adjust our inventories accordingly.Our inventory valuation allowance was $2.8 million, representing 1.0% of grossinventories and $2.3 million, representing 0.7% of gross inventories as of December 31,2008 and 2007, 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 in determiningthe appropriate estimated useful life over which the related assets will beutilized. In estimating useful life, we consider factors such as our historicalexperience and the industry, manufacturers’ estimates, anticipated use and ourmaintenance policies. As these factors change, management estimates may changeand we could be required to reassess depreciation periods for property, plantand equipment and consider impairment. Generally we estimate useful lives forproperty, plant and equipment as follows:

 
| Buildings                |   | 10-50 years |   |
|--------------------------|--------|-------------|--------|
| Machinery  and equipment |   | 3-25  years |   |
| Computer  hardware       |   | 3-12  years |   |
| Other                    |   | 2-15  years |   |

 

Assets acquired under capital leases areincluded in property, plant, and equipment and relate to machinery andequipment. Depreciation of capital lease assets is included in depreciationexpense. Assets recorded under capital leases are included in machinery andequipment at the gross book value of $11.9 million with respective accumulateddepreciation of $7.1 million as of December 31, 2008. The net presentvalues of amounts due under capital leases are recorded as liabilities andincluded in other 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.

 

**StockOption Plans**

 

Wefollow the provisions of SFAS No. 123 (revised), Share-Based Payment (“SFASNo. 123(R)”), to account for our share-based awards. In accordance withthe SFAS No. 123(R), the Company’s shared-based awards have been accountedfor as a liability and, as such, the awards’ fair value is remeasured at eachreporting date until the date of settlement.

 

Asrecommended by SFAS No. 123(R), we use closed-form model Black-Sholes toestimate fair value 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 theCompany’s stock price as well as assumptions regarding a number of complex andsubjective variables. These variables include,

 

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but are not limited to,the expected stock price volatility over the term of the awards and projectedemployee exercise behaviors.

 

Asummary of the assumptions used in the application of the Black-Sholes optionvaluation model as of the grant dates in each of the twelve month periods endedDecember 31, were as follows:

 
| ** **                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**     | ** ** |
|------------------------------|------------|----------|------------|----------|------------|--------------|------------|
| Volatility (1)               |       | 66.22%   |       | 44.46%   |       | 32.28-36.55% |       |
| Risk-free interest rate  (2) |       | 8.39%    |       | 6.08%    |       | 6.10-6.18    |       |
| Dividend yield (3)           |       | 0%       |       | 0.41%    |       | 0.77-1.53%   |       |
| Expected life (years) (4)    |       | 3 years  |       | 3 years  |       | 3 years      |       |

 

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(1)           Thevolatility is based on historical volatility of the Company’s common stock overthe same term as the expected term of the award. SFAS No. 123(R) requiresthe use of expected rather then historical volatility. Volatility affects theexpected term because although option pricing theory contends that the optimaltime to exercise an option is at the end of its term, the option holder mayexercise the option early if the price of the stock price reaches a certainlevel. Employee exercise behavior is described as a suboptimal exercise factor.SFAS No. 123(R) does not specify a method for estimating expectedshare price volatility, but it does require a process for making such estimatesand for evaluating factors incorporated in that process. As WBD is required tomake its best estimate of the variables used to estimate values, the bestestimate for WBD Foods stock volatility is based on the historical 3-yearvolatility.

(2)           Therisk-free rate is based on the Russian Federation Government Bond with expectedterm similar to the expected term of the award. The basis for it is theassumption that participants will exercise their awards as soon as they mature.The market situation in 2009 implies that no participant will exercise theirawards this year as current share price is lower than the strike price.Therefore, as the Long Term Top Management Incentive Plan stipulates thepossibility to exercise their awards during a further 2 years after theirmaturity, we assume that participants will exercise their awards in 3 yearswhen the market recovers.

(3)           The dividendyield is based on expected annual dividends per share and the share price as ofthe grant date.

(4)           The expected lifeis based on the contractual term of the share based awards and assumption thatthe share based awards will be exercised after the vesting period but beforeend of contractual term.

 

**Impairmentof Goodwill and Long-Lived Assets**

** **

Wefollow the requirements of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“SFAS No. 144”),which addresses financial accounting and reporting for the impairment anddisposal of long-lived assets, and SFAS No. 142, *Goodwill andOther Intangible Assets* (“SFAS No. 142”) in respect toimpairment of goodwill and other intangible assets.

 

Inaccordance with SFAS No. 142, we classify intangible assets into threecategories: (1) intangible assets with definite lives subject toamortization; (2) intangible assets with indefinite lives not subject toamortization; 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.

 

Weuse a relief-from-royalty methodology in conducting impairment assessments oftrademarks, which are our indefinite-lived intangible assets. Forindefinite-lived intangible assets,

 

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if the fair value isless than the carrying amount, an impairment charge is recognized in an amountequal to that excess.

 

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 $108.7 million and $129.4 million as of December 31, 2008 and 2007,respectively, of which $100.8 million was allocated to dairy segment and $7.9million was allocated to beverages segment as of December 31, 2008 and$121.7 million and $7.7 million as of December 31, 2007, respectively.Other intangible assets with indefinite useful lives were $18.2 and $22.1million as of December 31, 2008 and 2007, 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 $100.8 million goodwill allocated to dairyreporting unit and $7.9 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 for the dairyreporting unit was assessed at 8.5% and 8.4 for beverages. The terminal valueof the reporting units at the end of year 5 assumes a 3.0% long-term annualgrowth rate, which is in line with our management’s view on the long-termgrowth rate for each reporting unit. The discount rates used for the estimatedfuture cash flows included in the value in use calculations are based on ourestimated weighted average cost of capital (WACC). The discount rate wasestimated at 17%.

 

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 discounted cash flow models, which are consistent with the assumptionswe believe hypothetical marketplace participants would use.

 

Weperform impairment testing of long-lived assets in accordance with SFAS No. 144.If the undiscounted cash flows are less than long-lived asset (group) carryingamount, we determine the

 

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fair value of the asset(group) and recognize the impairment loss, if the carrying value exceeds thefair value of the asset (group).

 

Asof December 31, 2008, we believe our intangible assets with definiteuseful lives and long-lived assets will generate enough cash flows to recovertheir carrying value.

 

Impairmentcharges, if identified, are generally recorded in the line item other operatingexpenses, net in the consolidated statements of income. We did not recognizeimpairment loss as of December 31, 2008 and 2007 and recognized impairmentloss of $18.2 million in 2006, including impairment of goodwill in the amountof $2.5 million.

** **

**New andRecently Adopted Accounting Pronouncements**

** **

On December 4, 2007, the FASB issued SFAS No. 141(R),*Business Combinations* (“SFAS No. 141(R)”) and SFAS No. 160,*Accounting and Reporting of Noncontrollinginterest in Consolidated Financial Statements, an amendment of ARB No. 51* (“SFAS No. 160”). These newstandards will significantly change the financial accounting and reporting ofbusiness combination transactions and noncontrolling (or minority) interests inconsolidated financial statements. We will be required to adopt SFAS No. 141(R) andSFAS No. 160 on January 1, 2009, and early adoption and retroactiveapplication are prohibited. Under SFAS No. 141(R) acquisition relatedcosts should not be capitalized any longer but expensed as incurred. We do notexpect SFAS No. 141(R) and SFAS No. 160 to have a materialimpact on our consolidated financial position and results of operations.

 

In April 2008,the FASB issued FASB Staff Position (“FSP”) FSP FAS 142-3, *Determinationof the Useful Life of Intangible Assets* (“FSP FAS 142-3”) with theobjective of improving the consistency between the useful life of a recognizedintangible asset under SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS No. 142”) and the period of expectedcash flows used to measure the fair value of the asset under SFAS No. 141(R) andother U.S. GAAP standards. FSP FAS 142-3 establishes additional factors to beconsidered by an entity in developing assumptions about renewal or extensionused to determine the useful life of an intangible asset recognized under SFAS No. 142.FSP FAS 142-3 is effective for financial statements issued for fiscal years beginningafter December 15, 2008. We will adopt FSP FAS 142-3 effective January 1,2009. We do not expect FSP FAS 142-3 to have a material impact on ourconsolidated financial position and results of operations.

 

In October 2008,the FASB issued FSP FAS 157-3, *Determining the Fair Valueof a Financial Asset when the Market for That Asset Is Not Active* (“FSPFAS 157-3”) that applies to financial assets within the scope of accountingpronouncements that require or permit fair value measurements in accordancewith SFAS No. 157, *Fair Value Measurements*(“SFAS No. 157”). FSP FAS 157-3 clarifies the application of SFAS No. 157in a market that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. FSP FAS 157-3 was effective uponissuance, including prior periods for which financial statements have not beenissued. Revisions resulting from a change in the valuation technique or itsapplication shall be accounted for as a change in accounting estimate (SFAS No. 154,*Accounting Changes and Error Corrections*,(“SFAS No. 154”)). The disclosure provisions of SFAS No. 154 for achange in accounting estimate are not required for revisions resulting from achange in valuation technique or its application. Application of FSP FAS 157-3did not have a material impact on our consolidated financial statements.

 

**C.Research and Development, Patents and Licenses, etc.**

** **

We continue to investfinancial and human resources in new product development, focusing on long-termstrategic projects aimed at creating innovative products and technologies andnew food categories. Our research and development department focuses on newproject development for all

 

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threeof our business segments. It is located at Lianozovsky Dairy Plant and has 20employees. However, we did not incur significant research and developmentcosts, which are normally reported as part of our cost of sales. For a more detaileddiscussion of 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,the growth of gross domestic product (GDP) in Russia slowed to 5.6% in 2008,following growth of 8.1% and 7.4% in 2007 and 2006, respectively. Disposableincome levels continued to increase in 2008, although disposable income levelsin the regions will continue to lag behind those in Moscow. There arecontradictory forecasts regarding Russia’s economic outlook in 2009, butvirtually all concur that the GDP in Russia will contract. Over the lastdecade, improvements in Russia’s macroeconomic situation generally supportedfavorable trends in our key market segments. Dairy consumption has beenshifting towards packaged products whereas the share of unpackaged dairyproducts has been steadily decreasing. In addition, consumers in Russia have,in recent years, consumed more fruit-containing, dessert and enriched products.We have seen an increasing preference for juice over fresh fruit, whichgenerally accompanies increases in income. This has resulted in the growth inconsumption of vitamin-rich products with varying tastes and nutritionalcharacteristics, including increased demand for juice-containing beverages.Price inflation and the economic downturn which began in 2008 have already hada negative affect on these trends. We believe that, for the duration of the economicdownturn, these positive tendencies in consumption will stagnate but notnecessarily reverse and will continue to develop once the economic situationhas stabilized and the economy as a whole begins to grow again. At the sametime, both the dairy and juice markets will continue to become morecompetitive, with producers engaging in aggressive advertising and marketingstrategies. We believe the current economic downturn will lead to a slowing ofor freeze in substantial investments in modernizing packaging and manufacturingequipment. Instead, the pressures exerted by the crisis will encourage playersto accelerate the development and launch of lower-cost products positioned asvalue-for-money alternatives rather than higher margin items. The dairy industryis also seeing some resurgence in the activity of smaller regional producers.

 

Consumptionof babyfood continued to rise in 2008. We estimate that the Russian babyfoodmarket grew by 17% in value terms in 2008 and will grow in 2009. The activepromotion of babyfood and education efforts sponsored by the government andproducers of specialized babyfood has also had a role in increasing productawareness and consumption.

** **

**DairySegment**

** **

Inrecent years, raw milk volumes have decreased in Russia due primarily to a fallin livestock numbers. However, in 2006, the raw milk supply increased by 0.6%compared to 2005, in 2007 the raw milk supply increased by 2.3% and in 2008supply increased by 1.1% due to significant investments into farm developmentby major dairy producers, enhanced effectiveness of cattle-breeding methods,the application of modern technologies by Russian farms and the NationalProgram of Agro-Industrial Development, a government sponsored initiativeoffering interest free loans for the development of agriculture and thecreation of large farming enterprises and regional milk collection centers.

 

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. Industry experts estimate thatthe Russian dairy market decreased in terms of volume in 2008 as a combinedresult of market price

 

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inflation caused by rawmilk price increase in 2007 and the adverse change in the economic situation.

 

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. With the onset of thepresent economic downturn, we face another market reality characterized bydecreasing personal incomes and reduced demand for consumer goods. Followingthese adverse factors combination, we expect the dairy market will decrease interms of volume in 2009.

 

Atthe end of 2008, a new dairy technical regulation was applied which limits theusage of powdered milk in dairy products, specifically in the white-milkcategory. Products that are produced from a powdered milk base cannot belabeled “milk” but rather must be labeled “milk drink”. We prepared for thischange in advance and believe we were able to achieve 100% compliance with thenew regulation. Our core brands are produced from natural milk and we do notexpect any negative impact on our sales. At the same time, the new technicalregulation will led to increased demand for domestic raw milk and may causefurther price volatility for domestic raw milk supply.

 

Ourfocus on core dairy brands is essential going forward and especially now. Wewere the ninth largest television advertiser in Russia in 2008. We intend thatour marketing efforts to be more effective and targeted, conveying our keyvalues of health and wellness as strategic pillars. In light of the currenteconomic situation, our marketing approach will be tactically adjusted in favorof value-for-money propositions. We intend to achieve growth in 2009 bystrengthening our current market position, increasing the competitiveness ofthe brands in our core portfolio and further expanding our distributionnetwork.

 

**BeveragesSegment**

** **

Atthe end of 2006, we witnessed price increases in juice concentrate and otheringredients resulting, in part, from bad harvests and poor weather conditionsin juice-concentrate producing regions. We had substantial price increases forjuice concentrate and other materials during the latter half of 2007 (e.g.apple juice concentrate which is included in the majority of our recipes) andthe average selling price in ruble terms increased by 16.4% in 2007. Thisallowed us to offset input costs and improve gross margins. However, pricegrowth in the industry resulted in a flat market performance in 2008 compared to2007.

 

Inrecent years, we have observed growing price awareness among consumers and thishas led us to be more active in the lower-middle price segment. We expectfurther growth in juice sales in the lower-middle segment. 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. As a result, as we increase our sales in the regionsand of lower-middle price segment products our gross margin is negativelyaffected. In the Central region of Russia, where incomes are higher, we arefocusing our efforts on providing beverage products in the upper-middle andpremium segments. Thus, in 2007, our sales of “J7”, our flagship upper-middlebrand, increased by more than 30%. We entered the mineral-water market in 2003.

 

Weestimate that the mineral water market in Russia is growing annually byapproximately 10% in volume terms. Our water offerings include the premium “Essentuki”brand, which is traditionally known for its use for medicinal purposes and anew mid-price “Rodniki Rossii” brand. We believe that the water market willdemonstrate a positive long-term dynamic due to growing water-quality concernsamong consumers and we plan to grow our presence in this segment. In the shortterm, we expect that the present economic downturn may cause the water marketto shrink.

 

**BabyfoodSegment**

** **

Babyfoodconsumption in Russia is growing due to the active promotion of babyfood andeducation efforts sponsored by the government and producers of specializedbabyfood, which has increased health awareness and knowledge of the criticalimportance of proper nutrition in the

 

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earliest years for laterlife. Currently, higher and upper middle income groups are driving consumption,with income growth in recent years increasing the demand for healthy, specializedproducts for babies across Russia.

 

Witha fast-growing middle class, Russian per capita consumption of babyfood isexpected to rapidly catch up with Central and Eastern European levels. Inaddition, purchases by publicly owned institutions such as hospitals andchildren’s homes and targeted state-run programs aimed at childhood nutritioncontinue to play an important role, although the share of government purchasesof the overall market is expected to decline. However, we expect that babyfoodmarket will increase in 2009 and thereafter.

 

Thebabyfood market is already consolidated, with the top six players accountingfor approximately 73% of the total value in 2008, 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 options for expanding ourbabyfood production capacity in terms of volume and type of production as wellas 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, 2008, 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, 2008

 
| ** **                   | ** ** | **Payments due by periods** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | **At December 31, 2008**    | ** ** |
| **Contractual Obligations**  | ** ** | **Total**                                  | ** ** | **Less than********1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5********years** | ** ** |
| ** **                   | ** ** | **In thousands of U.S. Dollars**           | ** ** |
| Notes payable                |       | $                                          | 247,647    |   | $ | 159,153 |   | $ | 88,494 |   | — |   | — |   |
|                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Vendor financing obligations |       | 23,476                                     |       | 14,593 |   | 8,850 |   | 33 |   | — |   |
| Long-term loans              |       | 335,789                                    |       | 8,632 |   | 313,885 |   | 9,895 |   | 3,377 |   |
| Short-term loans             |       | 66,278                                     |       | 66,278 |   | — |   | — |   | — |   |
| Purchase obligations         |       | 32,222                                     |       | 32,222 |   | — |   | — |   | — |   |
| Estimated interest expense   |       | 70,554                                     |       | 35,495 |   | 32,615 |   | 2,033 |   | 410 |   |
| Total                        |       | $                                          | 775,966    |   | $ | 316,373 |   | $ | 443,845 |   | $ | 11,961 |   | $ | 3,787 |   |
|                              |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For additionalinformation, see “Item 11. Quantitative and Qualitative Disclosures aboutMarket Risk—Interest Rate Risk.”

 

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## ***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                              |
| Natalia K.  Turkulets    |   | 1966                        |   | Head of Human  Resources Department, 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  Department                                                                 |
| Timofei V.  Tarasov      |   | 1978                        |   | Director of  International Unit                                                           |

 

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(1) Party to the Amended and Restated Partnershipand Cooperation Agreement. See “Item 7. Major Shareholders and RelatedParty Transactions—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 also serves on the board of directors of anumber of businesses that he founded and developed into large agricultural,real estate, mining and entertainment holdings, namely RusAgroProject CJSC,Agrocomplex Gorki-2 CJSC, Mill Plant #4 OJSC, Coal mine Kolmogorovskaya-2 LLC,Managing Company Promuglesbyt LLC, Kolmogorovskoe shahtoupravlenie LLC andMetelitsa-Club CJSC. He also serves as the director of Airport FinancialServices Limited, a company that provides financial services. Mr. Iakobachvilialso serves on the board of directors of a number of our subsidiaries:Wimm-Bill-Dann OJSC, Wimm-Bill-Dann Ukraine OJSC, Bishkeksut OJSC,Wimm-Bill-Dann Beverages OJSC and Gulkevichi Creamery CJSC, Atamanskoe LLC,Zavety Ilicha OJSC, Niva CJSC, Trud OJSC. He is the Chairman of the Board ofdirectors of RusBrand non-profit partnership; the Chairman of Committee, memberof the Presidium Office and the Vice-President of the Russian Union ofIndustrialists and Entrepreneurs. In addition, he plays an active role in theRussian Chamber of Commerce and Industry, the National Corporate GovernanceCouncil, the Russian-American Business Council, the Russo-British Chamber ofCommerce, the Senate of Economic Advisers of the European Democracy Forum, theWorld Economic Forum and Monaco World Summit.

 

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**Sergei A.Plastinin** has served as a member of Wimm-Bill-Dann’s Board ofDirectors since May 2001. He served as the Chairman of the ManagementBoard, which is the 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, Taly Enterprises Limited and Lendero Limited. Mr. Plastininalso serves on the board of directors of a number of our subsidiaries:Wimm-Bill-Dann OJSC, Wimm-Bill-Dann Beverages OJSC, Wimm-Bill-Dann UkraineOJSC, Bishkekesut OJSC, Karasuk CJSC and Gulkevichi Creamery CJSC. Mr. Plastininhas also served as the Chairman of Council of the Russian Dairy Union since August 2000.

 

**Guy de Selliers** has served as anindependent member of Wimm-Bill-Dann’s Board of Directors since December 2001.Currently, Mr. de Selliers serves as a member of the board ofdirectors and a Chairman of the Audit Committee at Norilsk Nickel OJSC anda member of the board of directors of furniture manufacturer Shatura OJSCand Allied Resources Inc oil and gas company. He is also a director andmember of the Audit Committee of Solvay S.A., a global group ofpharmaceutical and chemical companies. Mr. de Selliers is also theChairman of Apprion Group Ltd, HB Advisers (UK) and Partners in Hope. During2004 and 2005, Mr. de Selliers was a member of the internationalsupervisory board at Fortis Group, an international financial servicesprovider and, from 2001 to 2003, he acted as Chairman of Leader Capitalequity fund. During 1998 to 2000, he headed up the European business ofFleming Investment Bank. Mr. de Selliers served as chief executiveofficer of MC BBL investment bank from 1997 to 1998. He was also a DeputyVice President of European Bank for Reconstruction and Development (theEBRD) from 1991 to 1997. He received a degree in engineering in 1975 andin economics in 1977 at the University of Lourain.

 

**Mikhail V. Dubinin** has served as a memberof Wimm-Bill-Dann’s 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, Cliff-Real Estate LLC, Non-commercial partnership BeneluxResidence, non-commercial organization International community council on “GoldenFalcon” 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 marketand Governance, as the general director of Almaz-Antey Thomson Broadcast,general director of Institute of World’s Economic and International Relations,member of board of directors of the International stock exchange St.Petersburg, member of ICGN, member of academic council of the Russian Academyof State’s Governance and member of international consulting report of ACPO.Since 2005, Mr. Kostikov has been a professor at the Moscow StateUniversity Business School, Doctor of Economics with a focus on world economyand finance and credit. From 2000 to 2004, Mr. Kostikov served as Chairmanof the Federal Commission of the Securities Market. He is one of the authors ofthe Russian Corporate Governance Code. Between 1999 and 2000, Mr. Kostikovwas Deputy Chairman of the Finance Committee in the St Petersburg CityAdministration. Between 1992 and 1993, he served as a managing director atUK-based Friends Providence Asset Management. He actively participates in thework of international organizations, including the OECD, EES, IBRD and EBRD,among others. Mr. Kostikov is a graduate of the economics department ofLeningrad State University.

 

**Michael A. O’Neill** has served as anindependent member of Wimm-Bill-Dann Foods’ Board of Directors since December 2001.Currently, Mr. O’Neil serves as chief executive officer of Coca-ColaIcecek in Turkey. He also served on the board of directors of Efes BreweriesInternational. From 1989 to 2000, Mr. O’Neill held various executivepositions within the Coca-Cola Company. He received a degree in IndustrialEngineering from the College of Commerce Rathmines in 1967.

 

**Alexander S. Orlov** has served as a memberof Wimm-Bill-Dann Foods’ Board of Directors since May 2001. Mr. Orlovserves on the board of directors of Non-commercial partnership

 

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Benelux Residence. Healso serves 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 a memberof our Board of Directors since June 2008. He also served as anindependent director for Rosinter Group, Cherkizovo Group and for a SouthAfrica-based real estate company. Mr. Rhodes has 20 years of professionalexperience in auditing work. He has held various auditing positions withwell-recognized financial services and consulting firms in different countries,including Poland and Russia. From 2002 to 2008, Mr. Rhodes acted as anaudit partner for Ernst & Young and, in this capacity, was the auditpartner in charge of the audit of Wimm-Bill-Dann Foods OJSC from 2002 to 2005. Mr. Rhodesearned degrees in accounting from Loughborough University in England in 1982,and from the Institute of Chartered Accountants in England & Wales in1986.

 

****Jacques Vincent****has served as amember of our Board of Directors since June 2007. Mr. Vincent alsoserves as a member of the Board of Directors of Syngenta (Switzerland),Cereplast, Inc. (USA) and Yakult Honsa Co. Ltd. (Japan), and as Chairmanof the Board of Directors of Ecole Normale Superieure (Lyon). Mr. Vincentwas appointed Vice Chairman and Chief Operating Officer of Groupe Danone in1998. Prior to this, he was Vice President of the Fresh Dairy Products divisionof Groupe Danone. Having spent most of his career with Groupe Danone, heoccupied various positions as general manager of certain of its subsidiaries inFrance, Germany, Italy and the United States in the water and dairy businesses.He holds an engineering degree from Ecole Centrale de Paris, as well as adegree in economics and a Master of Science 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 in a number of businesses,namely Sollers OJSC, Echo of Moscow CJSC. He also serves as the president ofnon-governmental fund Expert Institute. From 1994 to 1998, Mr. Yasinwas Russia’s Minister of the Economy. He graduated from the HydrotechnicalInstitute in 1957 with a degree in engineering and in 1963 from MoscowState University with a degree in economics.

 

**Gavril A. Yushvaev** has served as a memberof Wimm-Bill-Dann Foods’ Board of Directors since June 2005. He alsoserves as a member of the board of directors of a number of businessesthat he founded and developed into large agricultural and real estate holdings,namely RusAgroProject CJSC, Agrocomplex Gorki-2 CJSC, Mill Plant #4 OJSC, EiskPort Elevator OJSC, Coal mine Kolmogorovskaya-2 LLC, Managing CompanyPromuglesbyt LLC, Kolmogorovskoe shahtoupravlenie LLC and Cattle FarmNaroosanovsky OJSC. Mr. Yushvaev also serves as the president ofRusAgroProject CJSC.

 

**Tony D. Maher** hasserved as Wimm-Bill-Dann Foods’ Chief Executive Officer and Chairman of theManagement Board since April 2006. Prior to joining Wimm-Bill-Dann, heserved as chairman of the board of directors of Multon, a Russian juicecompany. He also held a variety of senior positions in Western, Central andEastern European markets within the Coca-Cola group of companies, includingRegion Managing Director for Coca-Cola HBC, one of the largest bottlers ofnon-alcoholic beverages in Europe.

 

**Dmitry V. Ivanov**has served as our Chief Financial Officer since May 2008. He is alsodirector of our subsidiary Wimm-Bill-Dann Finance LLC. Between 2003 and 2008, Mr. Ivanovserved as first vice president of finance at Sitronics, a publicly listedcompany within the AFK Sistema Group, where he was responsible for capitalmarket transactions and corporate financial strategy. Prior to this, he workedin a variety of senior finance posts within the AFK Sistema Group, Multon,Creditanstalt Investment Bank and Small Enterprise Assistance Funds, a U.S. 

 

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private equity fund. Mr. Ivanov graduated from the St.Petersburg Shipbuilding University in 1991 and in the same year received aCertificate in Accounting from the St Petersburg University of Economics. Heholds an MBA from Vlerick Leuven Gent Management School.

 

**Silviu Popovici** hasserved as our Head of Foods Business Unit (incorporating Dairy and Babyfood)since December 2008. Prior to this, Mr. Popovici was in charge of ourBeverages Business Unit, a post he held when 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 workedas country manager for Coca-Cola HBC Ukraine. He has a degree in physics from the University of Bucharest and an MBAfrom the London Business School.

 

**Gary Sobel** hasserved as our Head of Beverages Business Unit since December 2008. Priorto this, Mr. Sobel served in several top-level positions within thecompany.  He joined us as the head of ourBabyfood Business Unit in March 2007 and, later 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, and later graduated with Honors and on the Dean’s List from theUniversity of Western Ontario (Canada) with an M.B.A.

** **

**OlegE. Kuzmin** has served as Head ofAgricultural Business Unit since December 2008. Mr. Kuzmin is amember of our Management Board since 2005. Mr. Kuzmin served asWimm-Bill-Dann’s Head of Dairy Business Unit since August 2004. He alsoserves on the board of directors of a number of our subsidiaries:Wimm-Bill-Dann Ukraine OJSC, Tuimazy Dairy Plant OJSC, Bishkeksut OJSC, KarasukCJSC, Atamanskoe LLC, Zavety Ilicha OJSC, Niva CJSC, Trud OJSC. Mr. Kuzminhas been employed by Wimm-Bill-Dann since 1995. From September 2003 to August 2004,he was head of operations of the dairy business unit. Prior to that, he servedin various managerial positions, including head of the cheese project, directorof the Nizhny Novgorod Dairy Plant, strategy director of the Lianozovsky DairyPlant and marketing director of Wimm-Bill-Dann’s Trading Company. Mr. Kuzmingraduated from Moscow State Bauman Technical University and Moscow StateUniversity. He also received an MBA from the Academy of the National Economy ofthe Government of the Russian Federation.

 

**Natalia K. Turkulets** has served as our HR Director since May 2008. From 2003 to 2008, Ms. Turkuletsserved as the head of HR for Salym Petroleum Development N.V. (Shell JV), andfrom 1996 to 2003, she served in a variety of senior HR posts within at ConocoPhillips, a U.S.-based oilcompany. Ms. Turkulets graduated from People’s Friendship University in1990 with a degree in mathematics and interpreting. She subsequently received aPhD in Social Science at the Russian Academy of Sciences in Moscow in 2006.

 

**Marina G. Kagan** has served asWimm-Bill-Dann Foods’ Head of Public Affairs and a member of the ManagementBoard since May 2004. From 2001 to 2004 Ms. Kagan worked as a partnerat Shared Value, a London-based international financial public and investors’relation firm. Prior to this she joined Gavin Anderson & Co, aninternational investor and public relations consultancy in 1998, where sheserved on the Board of Directors until 2001. From 1991 to 1998, Ms. Kaganworked for BBC radio and TV, and served as a Moscow correspondent for the BBCWorld Service from 1995 to 1998. Ms. Kagan graduated from WestminsterUniversity in London, England.

 

**Gennady K. Krainov** has served asWimm-Bill-Dann Foods’ Head of Information, Analysis and Control Departmentsince December 2003 and as a member of the Management Board since

 

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June 2005. Mr. Krainovis also 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 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. Bolotovski**** has served as our Head of Legal Office since January 1993. Mr. Bolotovskyhas played a vital role in establishing best legal and corporate practicesthroughout the organization. He was also actively involved in preparing thecompany for its listing on the NYSE and the subsequent merging of its numerouslegal entities into the holding company, a process that is still ongoing.  He graduated from the Moscow State LegalAcademy in 1994, where he received a law degree.  Mr. Bolotovsky is currently a member ofthe Moscow 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. He held a number of key postsin sales and marketing at British American Tobacco and Honda Motors Co. Ltd.,where he worked both in Moscow and certain regions of the Russian Federation. Mr. Tarasovgraduated with distinction from Moscow State University of InternationalRelations (MGIMO) in 2002 with a degree in international economic affairs. Healso holds an MBA with distinction from INSEAD.

 

Allof our directors were elected on June 27, 2008 and, pursuant to Russianlaw, their terms will expire on the date of our next annual shareholders’meeting, which will take place in June, 2009.

 

**B.Compensation of Directors and Senior Management**

** **

In2008, 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 $28.2 million.

 

In2006 we entered into a share-based award agreement with some of our executives.Commencing April 2007 a Stock Appreciation Rights incentive program linkedto ADS has been approved for wider senior management. According to this programa certain number of senior management are rewarded with Stock AppreciationRights (“SAR”) linked to the price of the Company’s ADR. The exercise price ofSAR is determined as the average market value of ADR of the Company over theperiod January 1 to the date prior to the Board meeting at which the prioryear U.S. GAAP Statements are approved.Cash paid by usto settle SAR exercised in 2008, 2007 and 2006 amounted to $17.9 million, $0.6and $nil, respectively.

 

Nofunds were set aside for pension, retirement and other similar benefits for thesame directors and executive officers as of December 31, 2008, exceptthose required by Russian legislation.

 

Wecompensate each member of the board of directors $100,000 annually, starting July 2008,plus transportation and lodging expenses incurred in connection with theirattendance at board meetings, and up to $2,000 per year for other expensesincurred in connection with board-related activities. The Chairman of the Boardis compensated $388,000 annually plus transportation and lodging expensesincurred in connection with board meeting attendance, and up to $2,000 per yearfor other expenses incurred in connection with board-related activities. Wealso compensate each member of the Personnel and Compensation Committee $12,000and each member of the Investment and Strategic Planning Committee $10,000,each member of Corporate Governance Committee of $18,000 and each member of theAudit Committee $14,000 for participation in each planned and directly attendedCommittee meeting.

 

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**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 five 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.Additional Information—B. Charter and Certain Requirements of RussianLegislation—General Meetings of Shareholders” for more information regardingthe competence of our shareholders’ 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 eight members: Tony D.Maher, Marina G. Kagan, Oleg E. Kuzmin, Gary Sobel, Silviu Popovici, Dmitry V.Ivanov, Natalia K. Turkulets and Gennady K. Krainov. Members of the ManagementBoard are nominated by the Chairman of the Management Board and confirmed byour Board of Directors for a term of three years. The Management Board is thecollective executive body of the Company and, under the direction of theChairman of the Management Board, is responsible for our day-to-day management.We indemnify each member of our Management Board pursuant to agreements, underwhich we indemnify them against, among others, expenses and costs incurred bythem in connection with any claims, suits or proceedings arising out of or as aresult of their service as a Management Board member, subject to certainlimitations. The agreements also limit the liability of the Management Boardmembers to compensate us for any losses caused by them, as well as our abilityto take any action against them, subject to certain exclusions.

 

**Chairmanof the Management Board**

** **

Inaccordance with our current Charter, the Board of Directors appoints theChairman of our Management Board, our chief executive officer, for a term offive years. The rights, obligations and the times and amounts of payment forthe Chairman’s services are determined pursuant to our charter and by contract.The Chairman of the Management Board is responsible for day-to-day managementof our activities.

 

**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, Marcus J. Rhodes, Evgeny G. Yasin and 

 

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Igor V. Kostikov. OurBoard of Directors has determined that Marcus J. Rhodes is an “audit committeefinancial expert” as defined 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 Committee is tasked with assisting inthe selection of Board of Directors candidates. Its members also assist theManagement 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.

 

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** **

**CorporateGovernance Committee**

** **

The Corporate GovernanceCommittee of our Board of Directors was formed on June 1, 2007 by adecision of our Board of Directors and functions pursuant to bylaws approved bythe Board. It is composed of G. de Selliers, who serves as Committee Chairman,D. Iakobachvili and M. O’Neill. According to the bylaws, the CorporateGovernance Committee is tasked to assist to the Board of Directors inimplementing its functions in the following areas:

 

·                  compliance with theprinciples of corporate governance;

·                  development of theprinciples of corporate governance;

·                  evaluation of theindependence of the members of the Board of Directors;

·                  anticipating, avoidingand solving in case of necessity the conflicts of interests between the Companyand the Management Board, the Board of Directors and shareholders;

·                  determination of thebest ways of interaction of the Board of Directors and /or its members withofficials and employees;

·                  organizing annualself-assessment of Board of Directors members.

 

According to the bylaws,the Corporate Governance Committee shall meet not less than once during eachfiscal quarter.

 

**Company Committees**

 

**DisclosureCommittee**

 

Our Disclosure Committeewas formed on March 24, 2003 by the order of the Chairman of ourManagement Board. It is currently composed of our Chief Financial Officer, Headof PR, Head of the Legal Office, Head of the Treasury, Financial Comptroller,Heads of our Business Units, Financial and Head of the Reporting, Budgeting andAnalysis Department. The Committee’s activities are coordinated by the seniorinvestor relations manager.

 

The Disclosure Committeefunctions pursuant to bylaws and meets as determined by the Committee. It isdirectly supervised by and reports to the Chairman of the Management Board andChief Financial Officer.

 

According to its bylaws,the Disclosure Committee is tasked with:

 

·                  overseeing thecollecting, evaluating and reporting of information relating to our disclosureobligations;

 

·                  evaluating our system ofdisclosure controls and procedures; and

 

·                  preparing writtenconfirmations relating to our observance of the information disclosure rules andprinciples.

 

As set forth in thebylaws, the Disclosure Committee is also responsible for all aspects of informationdisclosure, including ensuring proper documentary execution, transmission,implementation and performance of our rules and principles of informationdisclosure, as well as for coordinating the work of our legal department,external and internal auditors and our other departments for the purpose ofpreparation of our annual reports and other disclosure documents in accordancewith applicable law.

 

**AuditCommission (for financial reporting under Russian law)**

 

The Audit Commissionverifies the accuracy of our financial reporting under Russian law andgenerally 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: 

 

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I.N. Ieshkina, L.M. Gavrilenko, V.V. Dzhemelinskaya,A.A. Davidyuk, T.A. Nazarova, A.D. Popov and E.A. Kozlova. Our Audit Commissionoperates in accordance with terms set forth in specific guidelines. The termsof all of our Audit Commission members expire on the date of our next annualshareholders’ meeting, which will take place in June 2009.

 

**CorporateGovernance**

 

We are required underthe listing rules of New York Stock Exchange to disclose any significantdifferences between the corporate governance practices that we follow underRussian law and applicable listing standards and those followed by U.S.domestic companies under New York Stock Exchange listing standards. Thisdisclosure is posted on our website http://www.wbd.com/profile/governance/ andappears in section 16G in this report.

 

**D.Employees**

* *

In 2008, we had anaverage of 18,485 employees within Russia and the other countries of the CIS,including 9,822 production employees, 6,005 marketing, sales and distributionemployees and 2,658 general and administrative employees. We do not employ asignificant number of part-time employees. In 2007 and 2008, we experienced ahigher level of departures due to reduction in employee numbers. We have notexperienced any work stoppages, and we consider our relations with employees tobe strong. Some of our employees are unionized and are employed pursuant tocollective labor agreements.

 
| **Average for the year ended********December 31,** | ** ** | **Production** | ** ** | **Marketing Sales********and Distribution** | ** ** | **General and********Administrative** | ** ** | **Percent Change********over Prior Year** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| 2008                                                                        |       | 9,822          |       | 6,005                                       |       | 2,658                                      |       | -7                                        | %          |
| 2007                                                                        |       | 11,076         |       | 5,712                                       |       | 3,008                                      |       | 2                                         | %          |
| 2006 (1)                                                                    |       | 10,811         |       | 5,355                                       |       | 3,159                                      |       | 2                                         | %(2)       |

 

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(1)          Excluding employees of businesses we acquired in 2006(Surgut, Ochakovo, Manros and MOLKA).

 

(2)          Despite a workforce reduction of over 900 people inthe period from June to December 2006, we still had a 2% increase inthe average number of personnel in 2006 vs. 2005. This growth was due to anincrease in production personnel caused by increasingutilization of manufacturing facilities in 2006, growing Agrobusiness, and re-launching the plants acquired in 2005 (Obninsk, Pervouralskand Nazarovo dairy plants).

 

Our personnel enjoy arelatively high level of social benefits. We provide subsidies for meals,medical care and summer vacations for employees and their children. Ouremployees have opportunities to upgrade their qualifications by participatingin professional and management education programs. Starting in 1998, leadingmanagers of our subsidiaries have been involved in programs to upgrade theirprofessional skills through a program of the Russian government. We seek tomaintain effective management teams at our plants by recruiting qualified newemployees, as well as through customized retraining programs and on-sitetraining in our leading plants. Programs for training personnel have beendeveloped and implemented at all our regional plants as well as sales officesand managing company. In addition, in 2005, we created a corporate universityto educate and train our personnel, create an internal management pool andprovide an opportunity for employees to share their knowledge and experience aswell as an opportunity to advance their careers. In 2006, we also initiatedvarious HR projects in the Compensation & Benefits domain. In 2006, wecommenced implementation of a Key Performance Indicators (KPI) system acrossall business units and introduced individual development plans for the top 500employees. The majority of our employees now have variable salaries linked toperformance. In 2007 we introduced a long-term incentive program for our topexecutives based on Stock Appreciation Rights. For additional information, seeNote 22 to our Consolidated Financial Statements.

 

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**E. Share Ownership**

** **

Each ADS (GDS) is theeconomic equivalent of one share of our common stock.

 

The aggregate beneficialinterest of our directors, senior management and employees as of June 16,2009 was as follows:

 
| **Number of Shares of********Common Stock** | ** ** | **Number of GDSs** | ** ** | **% Capital Stock Outstanding** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|
| 16,913,299                                                      |       | 2,536,182                    |       | 44.20                                          |       |

 

For further description of the individual interest ofour directors and senior management, see “Item 7. Major Shareholders andRelated Party Transactions—A. Major Shareholders.”

 

## ***Item 7.  Major Shareholders and Related PartyTransactions***

## *** ***

**A. Major Shareholders**

** **

The following table sets forth information regardingthe beneficial ownership of our common stock as of June 16, 2009.

 
| **Name of Beneficial Owner**  | ** ** | **Number of  Shares  Owned** | ** ** | **Percentage  of Shares  Outstanding** | ** ** | **Number of  ADSs/GDSs  Owned** | ** ** | **Percentage  of Shares  Outstanding** | ** ** | **Total Number of  Shares Owned  (Shares+  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)                   |       | 2,113,604                         |       | 4.8                                         | %          | 134,809                              |       | 0.3                                         | %          | 2,248,413                                                              |       | 5.1                                                                          | %          |
| 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                         |       | 4.11                                        | %          | 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)                      |       | 0.00                              |       | 0.0                                         | %          | 22,178                               |       | 0.1                                         | %          | 22,178                                                                 |       | 0.1                                                                          | %          |
| Wimm-Bill-Dann Finance LLC (treasury stocks) |       | 1,561,473                         |       | 3,6                                         | %          | —                               |       | —                                      |       | 1,561,473                                                              |       | 3,6                                                                          | %%         |
| Other holders of ordinary shares             |       | 7,930,328                         |       | 18,0                                        | %          | —                               |       | —                                      |       | 7,930,328                                                              |       | 18,0                                                                         | %          |
| Holders  of American Shares(3)               |       | —                            |       | —                                      |       | 15,058,718                           |       | 34,2                                        | %          | 15,058,718                                                             |       | 34,2                                                                         | %          |
| Total                                        |       | 26,405,100                        |       | 60.01                                       | %          | 17,594,900                           |       | 39.99                                       | %          | 44,000,000                                                             |       | 100.0                                                                        | %          |

 

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(1) Memberof our Board of Directors.

 

(2) Partyto the Amended and Restated Partnership and Cooperation Agreement.

 

(3) Bestto our knowledge, Groupe Danone, together with its subsidiaries, holds an 18.4%stake in Wimm-Bill- Dann Foods OJSC.

 

As of June 16,2009, we had 44,000,000 shares of authorized and issued common stock, and42,438,527 outstanding shares. The total number of ADSs outstanding was16,126,613 representing underlying ownership of 16,126,613 shares, or 36.65% ofour outstanding shares. The total number of GDSs outstanding was 1,468,287representing underlying ownership of 1,468,287 shares, or 3.34% of ouroutstanding shares. The shares underlying the ADSs and GDSs are deposited withDeutsche Bank Trust Company Americas and the local custodian is OOO DeutscheBank. All shares of common stock have the same voting rights. According toCapital Bridge Analytics we have 64 record holders in the U.S., holding ADSsand/or shares comprising at least 10.70% of our total outstanding sharecapital.

 

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Based on our shareregister, we believe we are not directly or indirectly owned or controlled byanother corporation or government, and that there are no arrangements theoperation of which may result in a change of control.

 

In 2006 through 2008,our shareholders entered into several transactions thus changing theirshareholdings as follows: Gavril A. Yushvaev increased his shareholding from19.45% in 2006 to 19.61% in 2008, Sergei A. Plastinin decreased hisshareholding from 8.58% in 2006 to 5.95% in 2007 and 5.11% in 2008, 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, Mikhail I. Vishnyakov decreased his shareholding from1.00% in 2006 to 0.68% in 2007.

 

In the period December 2008through June 16, 2009 our 100% subsidiary Wimm-Bill-Dann Finance LLCacquired 1,561,473ordinary shares that amounts 3.55% of shares outstanding, formore information see “Item 16E.    Purchases of EquitySecurities by the Issuer and Affiliated Purchasers”.

 

**B.Related Party Transactions**

** **

We had a number oftransactions with companies that were directly or indirectly through one ormore intermediaries controlled by us or directors and key shareholders owningdirectly or indirectly an interest in the voting power of these companies. Thedetails of these transactions are stated below.

 

Milk Suppliers: During2008, 2007 and 2006, we purchased milk from certain milk supplying companies,which are controlled by members of our control group of shareholders, amountingto $15,289, $17,473 and $12,175, respectively. As of December 31, 2008 and2007 accounts payable to these milk-supplying companies in respect of milkreceived amounted to $475 and $410, respectively. The prices for milk supplyfrom certain enterprises are determined as in the normal course of thebusiness. We do not expect any risks or contingencies, associated with theseoperations. The transactions incurred on a market basis and do not differ fromthose that would likely be negotiated with other unrelated suppliers.

 

AlfaStrahovanie: During2007 and 2006 one of the members of our Board of Directors was also a member ofthe Board of Directors of insurance company OAO AlfaStrahovanie. Insuranceservices received from AlfaStrahovanie in 2007 and 2006 amounted toapproximately $1,048 and $660, respectively. As of December 31, 2007,accounts payable to AlfaStrahovanie in respect to these services amounted to$119. In 2008 the WBD Foods’ Director disposed of his interest inAlfaStrahovanie.

 

**C.Interests of Experts and Counsel**

** **

Not applicable.

 

## ***Item 8. FinancialInformation***

## *** ***

**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**

 

We began exporting ourjuice products, in particular our “Wonder Berry” traditional berry-juicedrinks, to western markets in 1999, mainly focusing on Russian communitiesabroad. We selected this product because of its distinctiveness and theopportunity it presented to take advantage of the expansion of the red-berryjuice market in Europe.

 

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We currently export ourjuice products to the United States, Canada, some CIS countries,France, Israel, Latvia, Estonia, Lithuania, Mongolia and China. Our juiceproducts are distributed in these countries throughindependent 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 Kazakhstan, Georgia, Armenia and Moldova, andwe further developed our distribution channels, marketing efforts and sales inBelarus during 2008. We also export our “Essentuki” mineral water, principallyto the United States, Canada and Moldova. Our production facilities werecertified in 2007 to export “Essentuki” to Ukraine.

 

The Lianozovsky DairyPlan (2004), Tsaritsino Dairy Plant (2005) and the Rubtsovsk dairy plant (2007)have received licenses to export dairy products to the European Union (EU).During the licensing process, all of the equipment and production,technological and control processes at the plants were inspected to ensurecompliance with international norms and standards based on the principles of Hazard Analysis and Critical Control Points(HACCP). The EU license is acceptedby a majority of CIS countries as an indicator of high quality and safety.

 

We routinely participatein trade shows in foreign countries and work with foreign distributors onpromotional campaigns and product tastings (e.g., “Green Week”, “ANUGA” and “SIA”).We also engage in market testing and market research in, as well as one-offdeliveries to, foreign countries in order to determine the attractiveness ofpotential future markets. We are a five-time recipient, most recently in 2008,of “The Best Industry Sector Exporter” award from the Trade and EconomicCouncil of the Russian Ministry of Economic Development and Trade.

 

When we export ourproducts to any other country, we ensure that we are compliance with theapplicable legislation governing the import of food products into that country.Independent distributors have, in a few cases, attempted to export products toother countries that did not meet applicable legislation.

 

**8.A.7 Litigation**

 

Other than the legalclaims and proceedings described below, we are not involved in any claims orlegal proceedings that we believe to be material.

 

FASClaims

 

In St. Petersburg FAS conducted investigation thatresulted in a number of antimonopoly proceedings and administrative proceedingsin which the St. Petersburg regional FAS alleged that we were engaging inunwarranted price increases for our finished products, as well as purchasingraw milk at below-market levels and assessed fines against us totaling $1.02million. The investigation in St. Petersburg resulted in 4 antimonopolylitigations and 4 administrative litigations based on two of the abovementionedantimonopoly litigations. One of the antimonopoly proceedings was ceased by St.Petersburg regional FAS. The other antimonopoly proceeding was successfullyappealed by us and was found invalid as well as one administrative proceedingbased on it and we are waiting that the other administrative proceeding basedon this antimonopoly proceeding will also be found invalid. We appealed theother two antimonopoly proceedings which are currently pending as well asadministrative proceeding based on one of them.

 

TaxClaims

 

Failures or alleged failures by our suppliers tocomply with their tax obligations may lead to claims against us from the taxauthorities. For example, in 2007, Trading Company Wimm-Bill-Dann received ademand from the tax authorities to pay taxes that were reimbursed to us in theaggregate amount of $0.5 million based on the decision by the tax authoritiesthat our supplier was negligent in paying its tax obligations. We filed a courtclaim seeking to invalidate this claim. Although the court ruled against us inthe first two instances, the court of the third instance ruled in our favor andremanded the case back to the court of first instance for consideration. Afterbeing

 

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reconsideredin the court of first instance, we appealed the decisions of the courts thatpartially upheld our claims to the Constitutional Court of the RussianFederation, claiming that the existing tax practice is inconsistent with theRussian Constitution. The case is currently pending.

 

In addition, in 2008 the Russian tax authoritiescarried out an audit of Wimm-Bill-Dann for fiscal years 2004 through 2006 andfound some of our suppliers negligent in paying or complying with their taxobligations and demanded that we reimburse VAT and income tax in the aggregateamount of approximately $7.8 million. In November 2008, we appealed thisdecision to higher tax authorities and in the court of first instance. Thehigher tax authorities partially invalidated these claims and reduced the totalclaims to approximately $2.0 million. The court proceeding is still pending.

 

To the best of our knowledge, in December 2008,the Moscow Regional service of the Russian Interior Ministry launched aninvestigation against us for alleged tax code violations. We believe that thisinvestigation is based on an assessment by the Russian tax authorities for thefiscal years 2004 through 2006. We believe that there is no legal basis forthis investigation, and we have lodged an appeal with the Moscow CityProsecutor’s Office. The investigation is currently pending. Although wecontinue to provide the results of due diligence carried out on our suppliersto the relevant Russian authorities, we cannot exclude the possibility thatsome of these suppliers will be found to have been negligent by the taxauthorities.

 

**8.A.8 Dividend Distribution Policy**

** **

We do not have a formaldividend policy, and annual dividend payments, if any, must be recommended byour board of directors and approved by our shareholders. In particular,dividends may be paid only out of net profits for the current year calculatedunder Russian accounting principles and as long as the following conditionshave been met:

 

·                  our charter capital hasbeen paid in full;

·                  the value of our netassets, minus the proposed dividend payment, is greater than the total of ourcharter capital and our reserve fund;

·                  we have repurchased allshares from shareholders having the right to demand repurchase; and

·                  we are not, and wouldnot become as the result of payment of dividends, insolvent.

 

In June 2006 theGeneral Meeting of Shareholders approved payments of  dividends, recommendedby the board, for the financial years 2002, 2003 and 2004 in the amount of RUR4.60 (approximately $0.17) per share, as well as for the first quarter of 2006in the amount of RUR 2.27 (approximately $0.08) per share.

 

In December 2006,the General Meeting of Shareholders approved payment of dividends, recommendedby the board, for the 9 months of 2006 in the amount of RUR 7.86 (approximately$0.30) per share. We have paid to the shareholders all the dividends approvedby the General Meeting of Shareholders.

 

In June 2007, theAnnual General Meeting of Shareholders approved payment of dividends,recommended by the board, for the full year 2006 in the amount of RUR 3.18(approximately $0.12) per share. The preceding dividends have, in each case,been paid to shareholders.

 

**B.Significant Changes**

** **

In January through June 16, 2009, weacquired from the open market 1,287,008 shares into treasury, whichconstitute 2.93% of the Company’s share capital, for total consideration of$27.6 million.

 

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In 2009, we experiencedsignificant adverse currency fluctuations. The U.S. dollar and euro exchangerates increased from 29.38 and 41.44 as at December 31, 2008 to 31.15 and 43.30as at June 16, 2009, respectively. The Company has the following payablesdenominated in U.S. dollars and euros as at December 31, 2008:

 

·                  Vendor finance payables in the amount of $6.0million and 12.1 million euro;

·                  Euro denominated loans in the amount of $3.6million;

·                  Syndicated loan in the amount of $250.0million;

·                  Trade payables for concentrates and packagingmaterials in the amount of $11.0 million and 10.4 million euro.

 

The effect of this change in exchange rate on theamounts outstanding as of December 31, 2008 would have resulted in aforeign currency loss of approximately $15.7 million for the period from January 1,2009 through June 16, 2009.

 

On Marh 6, 2009 we carried out the repayment of ourruble-denominated bonds in the amount of 4,660.3 million rubles ($129.9 millionat the exchange rate as of March 6, 2009) from operational cash flows. Thebalance outstanding as of March 6, 2009 was 15.7 million rubles, which isequivalent of $0.4 million at the exchange rate as of March 6, 2009. Therates for the three subsequent coupons for the next 1.5 years were set at 15%annually.

 

In May and June 2009, the Company issuedbonds on MICEX raising cash of 3 billion rubles, ($96.9 million at the exchangerates at the dates of transactions). The bonds are due in February 2013,and bondholders 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.

 

In May 2009 the Company repaid ruble loan toAlfabank in the amount of 1.3 billion rubles, which is the equivalent of $44.2million and $40.0 million at the exchange rates at December 31, 2008 andat dates of repayment, respectively.

 

On June 3, 2009 the Company repaid ruble loans toSberbank in the amount of 1.3 billion rubles, which is the equivalent of $42.5million and $40.7 million at the exchange rates at December 31, 2008 and June 03,2009, respectively.

 

## ***Item 9. Offer andListing Details***

## *** ***

(Only items 9.A.4 and9.C are applicable.)

 

**A. Market Price Information**

** **

The following table setsforth the monthly high and low market closing prices per ADS on the New YorkStock Exchange for each of the most recent six months; the quarterly high andlow market closing prices per ADS for each quarter of 2007 and 2008 and thefirst quarter of 2009; and the annual high and low market closing prices perADS during 2004, 2005, 2006, 2007 and 2008. Also set forth are the high and lowmarket closing prices for shares of our common stock on the RTS.

 

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| ** **           | ** ** | **Shares of Common Stock** | ** ** | **ADS** | ** ** |
|----------------------|------------|----------------------------|------------|---------|------------|
| ** **           | ** ** | **High**                   | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| May 2009        |       | $                          | 28.26      |    | $          | 22.87 |   | $ | 53.86 |   | $ | 42.83 |   |
| April 2009      |       | $                          | 20.52      |    | $          | 16.79 |   | $ | 44.67 |   | $ | 32.81 |   |
| March 2009      |       | $                          | 17.50      |    | $          | 13.95 |   | $ | 33.84 |   | $ | 25.44 |   |
| February 2009   |       | $                          | 15.14      |    | $          | 12.78 |   | $ | 34.67 |   | $ | 24.13 |   |
| January 2009    |       | $                          | 14.00      |    | $          | 11.47 |   | $ | 34.62 |   | $ | 22.15 |   |
| December 2008   |       | $                          | 13.88      |    | $          | 11.44 |   | $ | 31.50 |   | $ | 20.50 |   |
| November 2008   |       | $                          | 19.56      |    | $          | 11.02 |   | $ | 46.51 |   | $ | 13.68 |   |
| First  Quarter 2009  |       | $                          | 17.50      |    | $          | 11.47 |   | $ | 34.67 |   | $ | 22.15 |   |
| 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 |   |
| Fourth  Quarter 2007 |       | $                          | 85.89      |    | $          | 77.34 |   | $ | 134.93 |   | $ | 102.50 |   |
| Third  Quarter 2007  |       | $                          | 88.28      |    | $          | 66.98 |   | $ | 117.31 |   | $ | 84.83 |   |
| Second  Quarter 2007 |       | $                          | 69.16      |    | $          | 60.08 |   | $ | 104.01 |   | $ | 76.70 |   |
| First  Quarter 2007  |       | $                          | 67.02      |    | $          | 49.13 |   | $ | 79.86 |   | $ | 56.49 |   |
| 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 |   |
| 2004                 |       | $                          | 18.28      |    | $          | 12.85 |   | $ | 19.98 |   | $ | 12.49 |   |

** **

**C.Markets**

** **

In Russia, our commonstock is listed on the RTS under the symbol “WBDF,” and is admitted for tradingon the Moscow Interbank Currency Exchange (MICEX). American Depositary Receipts,each representing one share of our common stock, have been listed on the NewYork Stock Exchange under the symbol “WBD” since February 8, 2002. OurAmerican Depositary Receipts are also traded on the Frankfurt Stock Exchangepursuant to a broker-established unsponsored facility.

 

## ***Item 10.Additional Information***

## *** ***

**A.Share Capital**

** **

Not applicable.

 

**B.Charter and Certain Requirements of Russian Legislation**

** **

We describe belowmaterial provisions of our charter in effect on the date of this document andcertain requirements of Russian legislation. In addition to this description,we urge you to review our charter to learn its complete terms.

 

**OurPurpose**

** **

Article 4.1 of ourcharter 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.

 

We are registered withthe Moscow Inter-District Inspectorate No. 39 of the Russian Ministry ofTaxes and Duties under the state registration number 1037700236738.

 

**GeneralMatters**

** **

Pursuant to our charter,we have the right to issue registered shares of common stock, shares ofpreferred stock and other securities provided for by legal acts of the RussianFederation with respect to securities. Our capital stock currently consists of44,000,000 common shares, each with a nominal value of 20 rubles, all of whichare fully paid and issued. Our outstanding stock currently consists of42,438,527 shares. Under Russian legislation, charter capital refers to theaggregate nominal value of the issued and outstanding shares. We are alsoauthorized to issue 44,000,000

 

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common shares with a nominal value of 20 rubles each.No preferred shares are authorized or outstanding. Preferred shares may only beissued if corresponding amendments have been made to our charter pursuant to aresolution of the general meeting of shareholders. We have issued only sharesof common stock. The Federal Law on Joint Stock Companies requires us todispose of any of our shares that we acquire within one year of theiracquisition or, failing that, reduce our charter capital. We refer to suchshares as treasury shares for the purposes hereof. Russian legislation does notallow for the voting of such treasury shares.

 

**RightsAttaching to Shares**

** **

Holders of our commonstock have the right to vote at all shareholders’ meetings. As required by theFederal Law on Joint-Stock Companies and our charter, all shares of our commonstock have the same nominal value and grant identical rights to their holders.Each fully paid share of common stock, except for treasury shares, gives itsholder the right to:

 

·               freely transfer theshares without consent of other shareholders;

 

·               receive dividends;

 

·               participate inshareholders’ meetings and vote on all matters within shareholders’ competence;

 

·               transfer voting rightsto its representative on the basis of a power of attorney;

 

·               participate in theelection and dismissal of members for the board of directors and reviewcommission;

 

·               if holding, alone orwith 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, alone orwith other holders, 10% or more of the voting stock, demand from the board ofdirectors 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 amajor transaction, 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 to certaincompany documents, receive copies for a reasonable fee and, if holding alone orwith other holders, 25% or more of the voting stock, have free access toaccounting documents and minutes of the company’s management board meetings;and

 

·               exercise other rights ofa shareholder provided by our charter, Russian legislation and decisions ofshareholders’ meeting approved in accordance with its competence.

 

**PreemptiveRights**

** **

The Federal Law on JointStock Companies and our charter provide existing shareholders with a preemptiveright to purchase shares or securities convertible into shares during an opensubscription in the amount proportionate to their existing shareholdings. Inaddition, the Federal

 

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Law on Joint Stock Companies provides shareholderswith a preemptive right to purchase shares or securities convertible intoshares, in an amount proportionate to their existing shareholdings, during aclosed subscription if the shareholders voted against or did not participate inthe 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**

** **

The Federal Law on JointStock Companies and our charter set forth the procedure for determining theinterim and annual dividends that we may distribute to our shareholders. We maydeclare dividends based on our first quarter, six month, nine month or annualresults. Dividends are recommended to a shareholders’ meeting by a majorityvote of the board of directors, and approved by the shareholders’ meeting by amajority vote. A decision on quarterly, six month and nine month dividends mustbe taken within three months of the end of the respective period at theshareholders’ meeting; and a decision on annual dividends must be taken at theannual general shareholders’ meeting. The dividend approved at the shareholders’meeting may not be more than the amount recommended by the board of directors.Dividends are distributed to holders of our shares as of the record date forthe shareholders’ meeting approving the dividends. See “—General Meetings ofShareholders—Notice and Participation.” Dividends are not paid on treasuryshares.

 

The Federal Law on JointStock Companies allows dividends to be declared only out of net profitscalculated under Russian accounting standards and as long as the followingconditions have been met:

 

·               the charter capital ofthe company has been paid in full;

 

·               the value of the company’snet assets on the date of adoption of a decision to pay dividends is not less(and would not become less as a result of the proposed dividend payment) thanthe sum of the company’s charter capital, the company’s reserve fund and thedifference between the liquidation value and the par value of the issued andoutstanding preferred shares of the company;

 

·               the company hasrepurchased all shares from shareholders having the right to demand repurchase;and

 

·               the company is not, andwould not become, insolvent as the result of the proposed dividend payment.

 

**Distributionsto Shareholders on Liquidation**

** **

Under Russianlegislation, liquidation of a company results in its termination without thetransfer of rights and obligations to other persons as legal successors. TheFederal Law on Joint-Stock Companies and our charter allow us to be liquidated:

 

·               by a three-quartersmajority vote of a shareholders’ meeting; or

 

·               by a court order.

 

Following a decision toliquidate us, the right to manage our affairs would pass to a liquidationcommission appointed by a shareholders’ meeting. In the event of an involuntaryliquidation, the court may vest the duty to liquidate the company to itsshareholders. Creditors may file claims within a period to be determined by theliquidation commission, but such period must not be less than two months fromthe date of publication of notice of liquidation by the liquidation commission.

 

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The Civil Code of theRussian Federation gives creditors the following order of priority duringliquidation:

 

·               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 creditors inaccordance with Russian legislation.

 

Claims of creditors inobligations secured by a pledge of the company’s property (“secured claims”)are satisfied out of the proceeds of sale of the pledged property prior toclaims of any other creditors except for the creditors of the first and secondpriorities described above, provided that claims of such creditors arose beforethe pledge agreements in respect of the company’s property were made. To theextent that the proceeds of sale of the pledged property are not sufficient tosatisfy secured claims, the latter are satisfied simultaneously with claims ofthe fourth priority creditors as described above.

 

The Federal Law onInsolvency (Bankruptcy), however, provides for a different order of priorityfor creditors’ claims in the event of bankruptcy.

 

The remaining assets ofa company are distributed among shareholders in the following order ofpriority:

 

·               payments to repurchaseshares from shareholders having the right to demand repurchase;

 

·               payments of declared butunpaid dividends on preferred shares and the liquidation value of the preferredshares determined by the company’s charter, if any; and

 

·               payments to holders ofcommon and preferred shares.

 

**Liabilityof Shareholders**

** **

The Civil Code of theRussian Federation and the Federal Law on Joint Stock Companies generallyprovide that shareholders in a Russian joint stock company are not liable forthe obligations of a joint stock company and bear only the risk of loss oftheir investments. This may not be the case, however, when one person or entityis capable of determining decisions made by another person or entity. Theperson or entity capable of determining such decisions is called an “effectiveparent.” The person or entity whose decisions are capable of being sodetermined is called an “effective subsidiary.” The effective parent bearsjoint and several responsibility for transactions concluded by the effectivesubsidiary in carrying out these decisions if:

 

·               this decision-makingcapability is provided for in the charter of the effective subsidiary or in acontract between such persons; and

 

·               the effective parentgives binding instructions to the effective subsidiary.

 

Thus, a shareholder ofan effective parent is not itself liable for the debts of the effective parent’seffective subsidiary, unless that shareholder is itself an effective parent ofthe effective parent. Accordingly, a shareholder will not be personally liablefor our debts or those of our effective subsidiaries unless such shareholdercontrols our business and the conditions set forth above are met.

 

In addition, aneffective parent is secondarily liable for an effective subsidiary’s debts ifan effective subsidiary becomes insolvent or bankrupt resulting from the actionor omission of an effective parent only when the effective parent has used theright to give binding instructions knowing that they would result in insolvencyof the effective subsidiary. This is the case no matter how the effectiveparent’s capability to determine decisions of the effective subsidiary arises,such as through ownership of voting securities or by contract. In theseinstances, other shareholders of the effective subsidiary may claimcompensation for the effective subsidiary’s losses from the

 

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effective parent that caused the effective subsidiaryto take any action or fail to take any action knowing that such action orfailure to take action would result in losses.

 

**Alterationof Capital**

** **

**CharterCapital Increase**

** **

We may increase ourcharter capital by:

 

·               issuing new shares, or

 

·               increasing the nominalvalue of previously issued shares.

 

A decision on anyissuance of shares or securities convertible into shares by closed subscription,or an issuance by open subscription of common shares or securities convertibleinto common shares constituting 25% or more of the number of issued commonshares, requires a three-quarters majority vote of a shareholders’ meeting. Inaddition, a decision to increase the charter capital by increasing the nominalvalue of issued shares requires a majority vote of a shareholders’ meeting. Inaddition, the issuance of shares above the number of authorized and non-issuedshares provided in our charter necessitates a charter amendment, which requiresa three-quarters majority vote of a shareholders’ meeting.

 

The Federal Law on JointStock Companies requires that the value of newly issued shares be determined bythe board of directors based on their market value but not less than theirnominal value. The price of newly issued shares for existing shareholdersexercising their preemptive right to purchase shares could be less than theprice paid by third parties, but not less than 90% of the price paid by thirdparties. Fees paid to intermediaries may not exceed 10% of the shares placementprice. The board of directors shall value any in-kind contributions for newshares, based on the appraisal report of an independent appraiser.

 

Russian securitiesregulations set out detailed procedures for the issuance and registration ofshares of a Joint-Stock company. These procedures require:

 

·               prior registration of ashare issuance with the FSFM;

 

·               public disclosure ofinformation relating to the share issuance; and

 

·               following the placementof the shares, registration and public disclosure of the results of theplacement of shares.

 

**CharterCapital Decrease; Share Buy-Backs**

** **

The Federal Law onJoint-Stock Companies does not allow a company to reduce its charter capitalbelow the minimum charter capital required by law, which is 100,000 rubles foran open Joint-Stock company. The Federal Law on Joint Stock Companies requiresthat any decision to reduce our charter capital, whether through the repurchaseand cancellation of shares or a reduction in the nominal value 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 charter capital,we must issue a written notice to our creditors and publish this decision. Ourcreditors would then have the right to demand, within 30 days ofpublication or receipt of our notice, early termination or discharge ofrelevant obligations by us, as well as compensation for damages.

 

The Federal Law onJoint-Stock Companies and our charter allow our shareholders or our board ofdirectors to authorize the repurchase of up to 10% of our shares in exchangefor cash. The repurchased shares must be resold at market value within one yearof their repurchase or, failing that, the shareholders must decide to cancelsuch shares and decrease the charter capital. The shares repurchased pursuantto a decision of our shareholders’ meeting to decrease the overall number ofshares, are canceled at their redemption. Repurchased shares do not bear votingrights.

 

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The Federal Law onJoint-Stock Companies allows us to repurchase our shares only if, at the timeof repurchase:

 

·               our charter capital ispaid in full;

 

·               we are not and would notbecome, as a result of the repurchase, insolvent;

 

·               the value of our netassets 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 have repurchased allshares from shareholders having the right to demand repurchase of their sharesin accordance with Russian law, as described immediately below.

 

The Federal Law onJoint-Stock Companies and our charter provide that our shareholders may demandrepurchase of all or some of their shares so long as the shareholder demandingrepurchase voted against or did not participate in the voting on the decisionapproving any of the following actions:

 

·               reorganization;

 

·               conclusion of a majortransaction, as defined under Russian law; or

 

·               amendment of our charteror approval of a restated version of our charter in a manner which restrictsshareholders’ rights.

 

We may spend up to 10%of our net assets calculated under Russian Accounting Standards on the date ofthe adoption of the decision which gives rise to a share redemption demanded bythe shareholders. If the value of the shares in respect of which shareholdershave exercised their right to demand repurchase exceeds 10% of our net assets,we will repurchase shares from each such shareholder on a pro-rata basis.

 

**Registrationand Transfer of Shares**

** **

Russian legislationrequires that a Joint-Stock company maintain a register of its shareholders.Ownership of our registered shares is evidenced solely by entries made in suchregister. Any of our shareholders may obtain an extract from our registercertifying the number of shares that such shareholders hold. Since July 14,2001, Central Moscow Depository OJSC has maintained our register ofshareholders.

 

The purchase, sale orother transfer of shares is accomplished through the registration of thetransfer in the shareholder register, or the registration of the transfer witha depositary if shares are held by a depositary. The registrar or depositarymay not require any documents in addition to those required by Russianlegislation in order to transfer shares in the register. Refusal to registerthe shares in the name of the transferee or, upon request of the beneficialholder, in the name of a nominee holder, is not allowed except in certaininstances provided for by Russian legislation, and may be challenged in court.

 

**ReserveFund**

** **

Russian legislationrequires that each Joint-Stock company establish a reserve fund to be used onlyto cover the company’s losses, redeem the company’s bonds and repurchase the company’sshares in cases when other funds are not available. Our charter provides for areserve fund of 5% of our charter capital, the reserve fund is fully paid.

 

**Disclosureof Information**

** **

Russian securitiesregulations require us to make the following periodic public disclosures andfilings:

 

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·               filing quarterly reportswith the Federal Financial Market Service (FSFM) and posting on our websitequarterly 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 the FSFM andpublishing any information concerning material facts and changes in ourfinancial and business activity, including our reorganization, certain changesin the amount of our assets, decisions on share issuances, certain changes inownership and shareholding, as well as shareholder and certain board ofdirector resolutions;

 

·               disclosing our charterand internal corporate governance documents on our website;

 

·               disclosing informationon various stages of share placement, issuance and registration throughpublication of certain data as required by the securities regulations;

 

·               disclosing our annualreport and annual financial statements prepared in accordance with Russianaccounting standards;

 

·               filing with the FSFM ona quarterly basis a list of our affiliated persons and disclosing the same onour website, on the same basis; and

 

·               other information asrequired by applicable Russian securities legislation.

 

**GeneralMeetings of Shareholders**

** **

***Procedure***

*** ***

The powers of ashareholders’ meeting are set forth in the Federal Law on Joint-Stock Companiesand in our charter. A shareholders’ meeting may not decide on issues that arenot included in the list of its competence by the Federal Law on Joint-StockCompanies and our charter. Among the issues which the shareholders have thepower to decide are:

 

·               charter amendments;

 

·               reorganization orliquidation;

 

·               election and removal ofthe members of the board of directors;

 

·               determination of thenumber, nominal value, category/type of authorized shares and rights granted bysuch shares;

 

·               changes in our chartercapital;

 

·               appointment and removalof the members of our review commission and counting commission;

 

·               approval of our externalauditor;

 

·               approval of certaininterested party transactions and major transactions;

 

·               distribution of profitsand 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 of certaininternal documents and corporate records; and

 

·               other issues, asprovided for by the Federal Law on Joint-Stock Companies and our charter.

 

Voting at a shareholders’meeting is generally based on the principle of one vote per share of commonstock, with the exception of the election of the board of directors, which isdone through

 

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cumulative voting. Decisions are generally passed by amajority vote of the voting shares present at a shareholders’ meeting. However,Russian law requires a three-quarters majority vote of the voting sharespresent at a shareholders’ meeting to approve the following:

 

·               charter amendments;

 

·               reorganization orliquidation;

 

·               major transactionsinvolving assets in excess of 50% of the balance sheet value of the company’sassets;

 

·               determination of thenumber, nominal value and category (type) of authorized shares and the rightsgranted by such shares;

 

·               repurchase by thecompany of its issued shares;

 

·               any issuance of sharesor securities convertible into shares of common stock by closed subscription;

 

·               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 the chartercapital through reduction of the nominal value of shares.

 

The quorum requirement forour shareholders’ meetings is met if shareholders (or their representatives)accounting for more than 50% of the issued voting shares are present. If the50% quorum requirement is not met, another shareholders’ meeting with the sameagenda may (and, in the case of an annual shareholders’ meeting, must) bescheduled and the quorum requirement is satisfied if shareholders (or theirrepresentatives) accounting for at least 30% of the issued voting shares arepresent at that meeting.

 

The annual shareholders’meeting must be convened by the board of directors between March 1 and June 30of each year, and the agenda must include the following items:

 

·               election of members ofthe board of directors;

 

·               approval of the annualreport and the annual financial statements, including the balance sheet andprofit and loss statement;

 

·               approval of distributionof profits, including approval of annual dividends and losses, if any;

 

·               appointment of anindependent auditor; and

 

·               appointment of themember of the review commission.

 

A shareholder or groupof shareholders owning in the aggregate at least 2% of the issued voting sharesmay introduce proposals for the agenda of the annual shareholders’ meeting andmay nominate candidates to the board of directors, management board, countingcommission, review commission and for the general director. Any agendaproposals or nominations must be provided to the company no later than 30calendar 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.

 

A general meeting ofshareholders may be held in the form of a meeting or by absentee ballot. Theform of a meeting contemplates the adoption of resolutions by the generalmeeting of shareholders through the attendance of the shareholders or theirauthorized representatives for the purpose of discussing and voting on issuesof the agenda, provided that if a ballot is mailed to shareholders forparticipation at a meeting convened in such form, the shareholders may completeand mail the ballot back to the company without personally attending themeeting. A general

 

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meeting of the shareholders by absentee ballotcontemplates the determination of shareholders’ opinions on issues on theagenda by means of a written poll.

 

The following issuescannot be decided by a shareholders’ meeting by absentee ballot:

 

·               election of the membersof the board of directors;

 

·               election of the reviewcommission;

 

·               approval of a company’sindependent auditor; and

 

·               approval of the annualreport, the annual financial statements, including balance sheet, profit andloss statement and any distribution of profits and losses, including approvalof annual dividends, if any.

 

***Notice and Participation***

*** ***

All shareholdersentitled to participate in a general shareholders’ meeting must be notified ofthe meeting, whether the meeting is to be held in the form of a meeting or byabsentee ballot, no less than 30 days prior to the date of the meeting,and such notification shall specify the agenda for the meeting. However, if itis an extraordinary shareholders’ meeting to elect the board of directors,shareholders must be notified at least 70 days prior to the date of themeeting. Only those items that were set out in the agenda to shareholders maybe voted upon at a general shareholders’ meeting.

 

The list of shareholdersentitled to participate in a general shareholders’ meeting is to be compiled onthe basis of data in our shareholders register on the date established by theboard of directors, which date may neither be earlier than the date of adoptionof the board resolution to hold a general shareholders’ meeting nor more than50 days before the date of the meeting (or, in the case of anextraordinary shareholders’ meeting to elect the board of directors, not laterthan 85 days before the date of the meeting).

 

The right to participatein a general meeting of shareholders may be exercised by a shareholder asfollows:

 

·                       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**

** **

The Federal Law onJoint-Stock Companies and our charter provide that our entire board ofdirectors is up for election at each annual general shareholders’ meeting andthat our board of directors is elected through cumulative voting. Undercumulative voting, each shareholder may cast an aggregate number of votes equalto 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.

 

The Federal Law onJoint-Stock Companies requires at least a five-member board of directors forall Joint-Stock companies, at least a seven-member board of directors for aJoint-Stock company with more than 1,000 holders of voting shares, and at leasta nine-member board of directors for a joint stock company with more than10,000 holders of voting shares. Only natural persons (as opposed to legalentities) are entitled to sit on the board. Members of the board of directorsare not required to be shareholders of the company. The actual number ofdirectors 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.

 

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The Federal Law on JointStock Companies generally prohibits a board of directors from acting on issuesthat fall within the competence of the general shareholders’ meeting. Our boardof directors has the power to perform the general management of the company,and decide, among others, the following issues:

 

·                       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.

 

Our charter generallyrequires a majority vote of the directors present for an action to pass, withthe exception of actions for which Russian legislation requires a unanimousvote or a majority vote of the disinterested and independent directors, asdescribed herein. A board meeting is considered duly assembled and legallycompetent to act when at least six directors are present.

 

**InterestedParty Transactions**

** **

Under the Federal Law onJoint-Stock Companies, certain transactions defined as “interested partytransactions” require approval by disinterested directors or shareholders ofthe company. “Interested party transactions” include transactions involving amember of the board of directors or a member of any executive body of thecompany (including the company’s chief executive officer and/or the company’smanaging organization), any person that owns, together with any affiliates, atleast 20% of a company’s issued voting shares or any person who is able todirect the actions of the company, if that person and/or that person’s spouse,parents, children, adoptive parents or children, brothers or sisters oraffiliates, is/are:

 

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·                       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.

 

The Federal Law onJoint-Stock Companies requires that an interested party transaction by acompany with more than 1,000 shareholders be approved by a majority vote of theindependent directors of the company who are do not have an interest in thetransaction. For the purposes of this rule, “an independent director” is aperson who is not, and within the year preceding the decision to approve thetransaction was not, the general director, a member of any executive body or anaffiliate of the company, or a member of the board of directors or anymanagement body of the company’s management organization. Additionally, suchperson’s spouse, parents, children, adoptive parents or children, brothers orsisters may not, and within the year preceding the date of the decision toapprove the transaction, did not, occupy positions in the executive bodies ofthe company or positions on the board of directors or of any management body ofthe company’s management organization. For companies with 1,000 or fewershareholders, an interested party transaction must be approved by a majorityvote of the directors who are not interested in the transaction if the numberof these directors is sufficient to constitute a quorum.

 

Approval by a majorityof shareholders who are not interested in the transaction is required 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.

 

Approval by a majorityof shareholders who do not have an interest in the transaction may not berequired, until the next annual shareholders’ meeting, for an interested partytransaction if such transaction is substantially similar to transactionsconcluded by the company and the interested party in the ordinary course ofbusiness before such party became an interested party with respect to thetransaction.

 

The approval ofinterested party transactions is not required in the following instances:

 

·                       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;

 

·                       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;

 

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·                       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.

 

**Major Transactions**

** **

The Federal Law onJoint-Stock Companies defines a “major transaction” as a transaction, or anumber of interrelated transactions, involving the acquisition or disposal, ora possibility of disposal (whether directly or indirectly) of property having avalue of 25% or more of the balance sheet value of the assets of a companydetermined under Russian accounting standards, with the exception oftransactions conducted in the ordinary course of business or transactionsinvolving the placement of shares of common stock, or securities convertibleinto shares of common stock. Major transactions involving assets having a valueranging from 25% to 50% of the balance sheet value of the assets of a companyrequire unanimous approval by all members of the board of directors or, failingto receive such approval, a simple majority votes of a shareholders’ meeting.Major transactions involving assets having a value in excess of 50% of thebalance sheet value of the assets of a company require a three-quarters vote bya shareholders’ meeting.

 

**Changein Control**

** **

***Anti-takeover Protection***

*** ***

Russian legislation provides 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 offeror 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 othersecurities, at the price determined in the manner described in the precedingparagraph but not less than the highest price of the preceding acquisitions bythe offeror.

 

·               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

 

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notice of the offer must be filed with the FSFM;otherwise, notice must be filed with the FSFM no later than the date of theoffer. The FSFM may order amendments to the terms of the offer (includingprice) in order to bring them into 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.

 

The above rules maybe supplemented through FSFM rulemaking, which may result in a wider, narroweror more specific interpretation of these rules by the government andjudicial authorities, as well as by market participants.

 

***Approval of the Federal Antimonopoly Service***

*** ***

Pursuant to the FederalLaw on Competition, acquisitions of voting stock capital of a joint-stockcompany, involving companies with a combined value of assets or annualrevenues, exceeding a certain threshold under Russian Accounting Standards, orcompanies registered as having more than a 35% share of a certain commoditymarket, and which would result in a shareholder (or a group of affiliatedshareholders) holding more than 25%, 50% or 75% of the voting capital stock ofsuch company, or in a transfer between such companies of assets or rights toassets, the value of which exceeds a certain amount, must be approved inadvance by the Federal Antimonopoly Service.

 

**Disclosureof Ownership**

** **

Under Russian law, aholder of our common shares is required to publicly disclose an acquisition of5% or more of the outstanding common shares of the company, as well any changein the amount of common shares held by such holder, if as a result of suchchange the percentage of common shares held by the holder becomes greater orlesser than 5, 10, 15, 20, 25, 30, 50 or 75% of the outstanding common sharesof the company.

 

**Notificationof Foreign Ownership**

** **

Foreign personsregistered as individual entrepreneurs in Russia who acquire shares in a Russianjoint-stock company and foreign companies that acquire shares in a Russianjoint-stock company may need to notify the Russian tax authorities within onemonth following such acquisition. However, the procedure of notifying theRussian tax authorities by foreign companies that are not registered with suchtax authorities at the time of their share acquisition remains unclear.

 

**C.Material Contracts**

** **

The following is adescription of contracts that have been entered into by us and/or our subsidiariesor shareholders that may be material to our business.

 

#### **Loan Agreementrelating to the Loan Participation Notes and Guarantees**

#### ** **

On April 25, 2008, we entered into asyndicated loan agreement with ING Bank N.V., ABN Amro N.V. and CALYON asmandated lead arrangers, pursuant to which mandated lead arrangers andsyndicate lent to us a principal amount of $250 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%.

 

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The above-mentioned 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.

 

Both the loan agreement and the guarantees are governedby English law. In the loan agreement, we agreed to certain covenants inrespect of, among other things, liens, asset sales, transactions withaffiliates and related persons, change of control, mergers and similartransactions, limitation on dividends or other payments affecting oursubsidiaries and maintenance of certain ratios. Wimm-Bill-Dann andWimm-Bill-Dann Beverages agreed to similar covenants in the guarantees.

 

**RubleBonds**

** **

On December 21, 2005, we issued five-year,3.0 million non-convertible ruble-denominated notes at a face value of 1,000rubles each. The issue raised a total of approximately $104.2 million at theexchange rate as of December 31, 2005. The notes are redeemable by us on December 15,2010. The issue was priced at par with a coupon of 9% payable semi-annually.

 

In March and April 2008, we placed athird series of bonds in the amount of RUR 5 billion (approximately $170.2million at the exchange rate as of December 31, 2008 of which $11.0million has been repaid as of December 31, 2008) on the Moscow Inter-bankCurrency Exchange (MICEX).  The bondshave a maturity of five years and coupons are paid on a half-yearly basis. Theinterest rates for both coupons in the first year are equal and amount to 9.30%annually. The bonds are due in March 2013, and bondholders had anopportunity to exercise them on March 6, 2009, at 100% of nominal valueplus accrued interest. The bonds were classified as current debt until the putoption expired in March 2009.

 

OnMarch 6, 2009, we repaid a portion of our ruble-denominated bonds in theamount of 4,660.3 million rubles ($129.9 at the exchange rates as of March 6,2009) from our operating cash flow. The balance outstanding as of March 6,2009 was 15.7 million rubles ($0.4 million at the exchange rate as of March 6,2009). The interest rates for the three subsequent coupons over the next 18months are 15% annually.

 

In May and June 2009, the Company issuedbonds on MICEX raising cash of 3 billion rubles, ($96.9 million at the exchangerates at the dates of transactions). The bonds are due in February 2013,and bondholders have a put option exercisable in September, 2010, at 100% ofnominal value plus accrued interest. The annual interest rate of the coupon is15.0% for the next one and half years. The interest is payable semi-annually,commencing in September, 2009.

 

**Tetra PakAgreements**

** **

Each of Wimm-Bill-Dann (formerly LianozovskyDairy Plant) and Wimm-Bill-Dann Beverages entered into a supply agreement datedMarch 1, 2008 to purchase packages for our products from JSC Tetra Pak AOof Moscow. The contracts were originally to terminate on December 31, 2008but were extended through December 31, 2009. Total combined expendituresunder these two contracts in 2008 amounted to €140 million ($197.5 million atexchange rate as of December 31, 2008), excluding VAT. The total combinedamount of our purchases in 2009 is estimated under the contracts atapproximately €140 million, excluding VAT. We purchase a vast majority of ourpackaging materials from Tetra Pak, and in 2008, we purchased approximately 65%of our total packaging materials (including carton, plastic, foil and othermaterials) from Tetra Pak.

 

**Amendedand Restated Partnership and Cooperation Agreement**

** **

Our current shareholders Gavril Yushvaev,Mikhail Dubinin, Sergei Plastinin, Alexander Orlov, David Iakobachvili, MikhailVishnyakov, Viktor Evdokimov and I.M. Arteks Holdings Limited are parties to anAmended and Restated Partnership and Cooperation Agreement which requires theparties to vote the same way, as well as:

 

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*IndependentDirectors.*The parties to the agreement undertake to use theirbest efforts to ensure that a majority of our directors are “independent.” Adirector is considered “independent” if that person is not:

 

·                       our employee or anemployee or director of any of our subsidiaries;

 

·                       a party to theagreement;

 

·                       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 all of our shares thatthey own in the same way. In order to determine how the parties will vote, theagreement requires them to attempt to agree unanimously on a single votingposition on each item on the agenda for a shareholders’ meeting. If they areunable to do so, then the following procedures are followed:

 

·                       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-PartyBeneficiaries.*Beneficial owners of our ADSs are third-partybeneficiaries of the agreement and are entitled to enforce and bring actions inrespect of the agreement. An action may only be brought, however, if beneficialowners of ADSs constituting more than 50% of our outstanding ADSs, excludingany ADSs held by the parties to the agreement, are parties to such action.

 

*DisputeResolution.*The governing law of the agreement is the law of the Stateof New York. Any dispute, controversy or cause of action brought arising underthe agreement will be settled by arbitration under the Commercial Arbitration Rules ofthe American Arbitration Association. Any cause of action brought by beneficialowners of more than 50% of the outstanding ADSs, excluding any ADSs held byparties to the agreement, at the option of these owners, may be brought inarbitration under the Commercial Arbitration Rules of the AmericanArbitration Association or may be litigated in the federal or state courts inthe Borough of Manhattan. The parties to the agreement expect to appoint CTCorporation System, 111 Eighth Avenue, New York, New York 10011, as agent forservice of process in New York.

 

*Term.*The agreement maynot be terminated until the earlier to 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 written notice).

 

Upon the occurrence ofthe first two events described above, the agreement automatically terminates.Otherwise, the agreement continues in full force and effect until terminated byany party to the agreement by giving 30 days’ prior written notice to allother parties to the agreement and to us. See “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business and Industry—We are controlled by agroup of shareholders whose interests could conflict with those of the holdersof our securities.”

 

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**D.Exchange Controls**

** **

The Federal Law on CurrencyRegulation and Currency Control which came into effect as of June 18, 2004,sets forth certain restrictions on settlements between residents of Russia withrespect to transactions involving foreign securities (including ADSs),including requirements for settlement in Russian rubles.

** **

**Repatriationof Export Proceeds**

** **

Russiancompanies must repatriate 100% of their receivables from the export of goodsand services (with a limited number of exceptions concerning, in particular,certain types of secured financing).

 

**Restrictionson the remittance of dividends, interest or other payments to non-residents**

** **

The Federal Law onForeign Investments in the Russian Federation of July 9, 1999, specificallyguarantees foreign investors the right to repatriate their earnings fromRussian investments. However, the evolving Russian exchange control regime mayaffect your ability to do so. Ruble dividends on common shares may be paid tothe depositary or its nominee and converted into U.S. dollars by the depositaryfor distribution to owners of ADSs without restriction. Also, ADSs may be soldby non-residents of Russia for U.S. dollars outside Russia without regard toRussian currency control laws as long as the buyer is not a Russian residentfor currency control purposes. However, the ability to convert rubles into U.S.dollars is also subject to the availability of U.S. dollars in Russia’scurrency markets. Although there is an existing market within Russia for theconversion of rubles into U.S. dollars, including the interbank currencyexchange and over-the-counter and currency futures markets, the furtherdevelopment of this market is uncertain. At present, there is no market for theconversion of rubles into foreign currencies outside of Russia and a limitedemerging market in which to hedge ruble and ruble-denominated investments.

 

**E.Taxation**

** **

**Certain Russian Tax Consequences**

** **

The following discussion describes the materialRussian corporate income tax and personal income tax consequences to you if youare a U.S. holder of ADSs and a resident of the United States for purposes ofthe United States—Russia income tax treaty and are fully eligible for benefitsunder the United States—Russia income tax treaty. Subject to certain provisionsof the United States—Russia income tax treaty relating to limitations onbenefits, a U.S. resident under the treaty is generally defined as a personliable, under the laws of the United States, to U.S. tax (other than taxes withrespect to only of income from sources in the United States or capital situatedtherein) by reason of your domicile, residence, citizenship, place ofincorporation, or any other similar criterion (and, for income derived by apartnership, trust or estate, residence is determined in accordance with theresidence of the person liable to tax with respect to such income). The treatyprovides for a procedure to resolve matters where a resident of the UnitedStates qualifies as a Russian tax resident under Russian domestic rules. Thetreaty also provides for the non-application of treaty benefits to certaintypes of entities.

 

Additionally, the benefits under the United States—Russiaincome tax treaty discussed in this document generally are not available toU.S. persons who hold ADSs in connection with the conduct of a business in theRussian Federation through a permanent establishment as defined in the UnitedStates— Russia income tax treaty. Subject to certain exceptions, a U.S. person’spermanent establishment under the United States-Russia income tax treaty is afixed place of business through which such person carries on businessactivities in the Russian Federation (generally including, but not limited to,a place of management, a branch, an office and a factory). Under certaincircumstances, a U.S. person may be deemed to have a permanent establishment inthe Russian Federation as a result of activities carried on in the RussianFederation through agents of the U.S. person. This summary does not address thetreatment of holders described in this paragraph.

 

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Treaty benefits may be potentially available to U.S.tax residents that are not subject to limitations on treaty benefits under thetreaty, do not operate through a permanent establishment in Russia and areforeign legal entities (*i.e.,* alegal entity or organization in each case not organized under Russian law) orindividuals not considered Russian tax residents under Russian law. Undercurrent Russian law, the Russian tax residency for individuals is generallydetermined based on the 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 (calendaryear) remains the same as under the previous legislation *i.e.,* to be considered a Russian taxresident, the taxpayer should spend at least 183 days in Russia in acalendar year.

 

The following discussion is based on:

 

·               Russiantax legislation; and

 

·               theUnited States—Russia income tax treaty (and judicial and administrativeinterpretations thereof by the Russian authorities);

 

allas in effect on the date of this document. All of the foregoing is subject tochange, possibly on a retroactive basis, after the date of this document. Thisdiscussion is also based, in part, on representations of the depositary, andassumes that each obligation in the deposit agreement and any relatedagreements will be performed in accordance with its terms. The discussion withrespect to Russian legislation is based on our understanding of current Russianlaw and Russian tax rules, which are subject to frequent change and varyinginterpretations.

 

The following discussion is not intended as tax adviceto any particular investor. It is also not a complete analysis or listing ofall potential Russian corporate income and personal income tax consequences toyou of ownership of ADSs. We urge you to consult your own tax adviser regardingthe specific Russian tax consequences of the ownership and disposition of ADSsunder your own particular factual circumstances.

 

***Specificuncertainties associated with the tax treatment of ADS holders***

*** ***

The Russian tax rules in relation to ADS holders(that would affect U.S. holders) are characterized by significant uncertaintiesand limited interpretive guidance. Russian tax authorities have providedlimited guidance regarding the treatment of ADS arrangements, and there can beno certainty as to how the Russian tax authorities will ultimately treat thosearrangements. In a number of clarifications, the Russian Ministry of Financestated that ADS holders must be treated as the beneficial owners of income fromthe underlying shares for purposes of the double tax treaty provisionsapplicable to taxation of dividend income from the underlying shares. However,double tax treaty relief is available only if the tax treaty residence of theholder is duly confirmed. It is currently unclear whether depositories will bewilling or able to provide residency certificates for ADS holders or implementprocedures for holders to benefit from applicable tax treaties. Thus, while aU.S. holder may technically be entitled to benefit from the provisions of theUnited States—Russia income tax treaty, in practice such relief may bedifficult or impossible to obtain.

 

If the Russian tax authorities were not to treat U.S.holders as the beneficial owners of income from the underlying shares, then thebenefits discussed below regarding the United States—Russia income tax treatywould not be available to U.S. holders. Russian tax law and procedures are alsonot well developed, and local tax inspectors have considerable autonomy andoften interpret tax

 

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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.

 

***Taxation ofDividends***

*** ***

Dividends paid to U.S. holders generally will besubject to Russian withholding tax at a 15% rate. The tax burden may be reducedto 5% or 10% under the United States—Russia income tax treaty for eligible U.S.holders; a 5% rate may potentially apply for U.S. holders who are legalentities owning 10% or more of the company’s voting shares, and a 10% rateapplies to dividends paid to eligible U.S. holders in other cases, includingdividend payments to individuals and legal entities owning less than 10% of thecompany’s voting shares. See also “—United States—Russia Income Tax TreatyProcedures.”

 

Notwithstanding the foregoing, treaty relief may notbe available to U.S. holders of ADSs. In a number of clarifications, theMinistry of Finance expressed an opinion that ADS holders (rather than thedepositary) should be treated as the beneficial owners of dividends for thepurposes of the double tax treaty provisions applicable to taxation of dividendincome from the underlying ordinary shares, provided that the tax residenciesof the ADS holders are duly confirmed and information on the number of sharesand data on the beneficiaries is available in the appropriate form. However, inthe absence of any specific provisions in the Russian tax legislation withrespect to the concept of tax treaty beneficial ownership and taxation ofincome of beneficial owners, it is unclear how the Russian tax authorities andcourts would ultimately treat the ADS holders in this regard. Moreover, from apractical perspective, it may not be possible for the depositary to collectresidence confirmations from all ADS holders and submit such information to usand, in addition, we may be unaware of the exact amount of income payable toeach holder.

 

Therefore, with respect to legal entities ororganizations who are U.S. holders, we may be obligated to withhold income taxat a rate of 15% from dividend payments made to the depositary, unless prior tomaking such dividend payments to the depositary, we are provided withconfirmation that U.S. holders are beneficial owners of dividends within themeaning of the United States—Russia income tax treaty and all administrativerequirements for claiming treaty benefits are met. Although non-residentholders of ADSs may apply for a refund of a portion of the tax withheld underan applicable tax treaty, the procedure to do so may be time consuming and noassurance can be given that the Russian tax authorities will grant a refund.See “—United States—Russia Income Tax Treaty Procedures.”

 

With respect to individuals who are U.S. holders ofADSs, we may also be obligated to withhold income tax at the rate of 15% fromdividend payments made to the depositary. Where withholding of personal incometax is not performed, individuals who are U.S. holders of ADSs will then berequired to submit an annual personal tax return to the Russian tax authoritiesand pay Russian income tax at a rate of 15% as under Russian law an individualshould report on his or her tax liabilities in case the relevant tax was duebut not withheld by a tax agent from the relevant payment. When submitting thetax return, individuals who are U.S. holders may claim an application of thereduced rates of withholding tax established by the relevant treaty, providedthat the procedures described in “—United States—Russia Income Tax TreatyProcedures” are complied with. Obtaining the respective approvals from the taxauthorities may be time-consuming and burdensome.

 

If the appropriate documentation has not been providedto us before the start of the payment of dividends by us (*i.e.*, before the second half of August)date, we will withhold tax at the full rate, and U.S. holders that are legalentities qualifying for a reduced rate under the United States—Russia incometax treaty then may file claims for refund within three years with the Russiantax authorities.

 

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For individuals claiming treaty relief, the documentssubstantiating the right for treaty benefits should be submitted to the Russiantax authorities within one year after the end of the year to which thesebenefits relate. In practice, where withholding is performed, the taxauthorities may refuse to refund or credit the 15% tax withheld from payment ofdividends to the depositary and, therefore, it is possible that individuals whoare U.S. holders may be subject to up to a 30% effective tax rate on theirshare of dividends.

 

***Taxation of CapitalGains***

*** ***

*Legalentities and Organizations*

* *

Generally, capital gains arising from the sale, exchangeor other disposition of securities by legal entities or organizations that arenon-resident holders should not be subject to tax in Russia if immovableproperty located in Russia constitutes 50% or less of our assets. If more than50% of our assets were to consist of immovable property located in Russia,legal entities or organizations that are non-resident holders of the securitiesshould be subject to a 20% withholding tax on the gross proceeds from the sale,exchange or other disposition of securities or 24% withholding tax on thedifference between the sales, exchange or other disposition price and theacquisition costs of the ADSs, determined in accordance with Russian taxdeductibility rules. The corporate income tax should decrease from 24% to 20%starting from January 1, 2009.

 

However, an exemption applies if immovable propertylocated in Russia constitutes more than 50% of our assets and the securitiesare traded on a foreign stock exchange. In that case, the proceeds from thesale of securities on that foreign stock exchange shall not be deemed to beincome from sources in Russia, and accordingly, will not be subject to taxationin Russia. The determination of whether more than 50% of our assets consist ofimmovable property located in Russia is inherently factual and is made on anon-going basis and the relevant Russian legislation and regulations in thisrespect are not entirely clear. Hence, there can be no assurance that immovableproperty owned by us and located in Russia does not currently and will notconstitute more than 50% of our assets as at the date of the sale of ADSs bynon-residents.

 

Where the ADSs are sold by legal entities ororganizations to persons other than a Russian company or a foreign company oran organization with a registered permanent establishment in Russia, even ifthe resulting capital gain is considered taxable in Russia, there is currentlyno mechanism under which the purchaser will be able to withhold the tax andremit it to the Russian budget.

 

Under the United States—Russia income tax treaty,capital gains from the sale of shares and/or ADSs by eligible U.S. holdersshould be relieved from taxation in Russia, unless 50% or more of our assets(the term “fixed assets” is used in the Russian version of the treaty) were toconsist of immovable property located in Russia.

 

*Individuals*

* *

The taxation of the income of non-resident individualsdepends on whether this income is received from Russian or non-Russian sources.Russian tax law considers the place of sale as an indicator of source.Accordingly, the sale of securities outside of Russia by individuals who arenon-resident holders should not be considered Russian source income and,therefore, should not be taxable in Russia. However, Russian tax law gives noclear indication as to how the place of sale of securities should be defined inthis respect. Therefore, the Russian tax authorities may have a certain amountof flexibility in concluding whether a transaction is in Russia or out ofRussia.

 

The sale, exchange or other disposal of the shares andADSs by non-resident individual holders in Russia will be considered Russiansource income and will be subject to tax at a rate of 30% on the differencebetween the sales price and the acquisition costs of such securities, as well

 

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asother documented expenses, such as depositary expenses and broker fees, amongothers, defined by the tax rules.

 

Under Russian law, the acquisition costs and relatedexpenses can be deducted at the source of payment if the sale was made by anon-resident holder through a licensed Russian broker, trust manager or otherperson that carries out operations under agency or commission agreements, orother agreements in favor of a taxpayer. Such party (as defined above) shouldalso act as a tax agent and withhold the applicable tax. Such tax agent will berequired to report to the Russian tax authorities the amount of income realizedby the non-resident individual and tax withheld upon the sale of thesecurities.

 

Otherwise, if the sale is made to individuals but notthrough a tax agent, generally no withholding needs to be made and thenon-resident holder will have an obligation to file a tax return, reporthis income realized and apply for a deduction of acquisition expenses (whichincludes filing of support documentation). Although Russian tax law imposes taxagent responsibility only on professional trustees, brokers or dealers, inpractice, the tax authorities may require Russian legal entities andorganizations 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—Russia income tax treaty,capital gains from the sale of the ADSs by eligible U.S. holders should berelieved from taxation in Russia, unless 50% or more of our assets (the term “fixedassets” is used in the Russian version of the United States—Russia Tax Treaty)were to consist of immovable property located in Russia. If this 50% thresholdis not met, individuals who are U.S. holders may seek to obtain the benefit ofthe United States—Russia income tax treaty in relation to capital gainsresulting from the sale, exchange or other disposition of the ADSs.

 

In order to apply the provisions of relevant doubletax treaties, the individual holders should receive clearance from the Russiantax authorities as described below. See “—United States—Russia Income TaxTreaty Procedures” below.

 

***United States—RussiaIncome Tax Treaty Procedures***

*** ***

The Russian Tax Code does not contain a requirementthat a non-resident holder that is a legal entity or organization must obtaintax treaty clearance from the Russian tax authorities prior to receiving anyincome in order to qualify for benefits under an applicable tax treaty.However, a non-resident legal entity or organization seeking to obtain relieffrom or reduction of Russian withholding tax under a tax treaty must provide toa Russian company or foreign company or organization acting through its Russianregistered presence, which is a tax agent (*i.e.*,the entity paying income to a non-resident) a confirmation of its tax treatyresidence that complies with the applicable requirements and a notarizedRussian translation attached to it in advance of receiving the relevant income.The tax residency confirmation needs to be renewed on an annual basis andprovided to the payer of income before the first payment of income in eachcalendar year.

 

A U.S. holder may obtain the appropriate certificationby mailing completed forms, together with the holder’s name, taxpayer identificationnumber, the tax period for which certification is required, and otherapplicable information, to the United States Internal Revenue Service. Theprocedures for obtaining certification are described in greater detail in theinstructions to Internal Revenue Service Form 8802. As obtaining therequired certification from the Internal Revenue Service may take at least sixto eight weeks, U.S. holders should apply for such certification as soon aspossible.

 

In accordance with the Russian Tax Code, to rely ontax treaty benefits, a non-resident holder who is an individual must present tothe tax authorities an official document confirming his

 

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residencyin the home country issued by the competent authorities in his/her country ofresidence and also other supporting documentation including a statementconfirming the income received and the tax paid in the home country, alsoconfirmed by the relevant foreign tax authorities. Technically, such arequirement means that an individual cannot rely on the tax treaty until he orshe pays the tax in the jurisdiction of his or her residence. Therefore,advance relief from or reduction of withholding taxes for individuals willgenerally be impossible as it is very unlikely that the supportingdocumentation for the treaty relief can be provided to the tax authorities andapproval from the latter obtained before any payments are made to individuals.A non-resident holder which is an individual may apply for treaty-basedbenefits within one year following the end of the tax period in which therelevant income was received and the tax was withheld.

 

If a non-resident holder which is a legal entity ororganization does not obtain double tax treaty relief at the time that incomeor gains are realized and tax is withheld by a Russian tax agent, thenon-resident holder may apply for a refund within three years from the end ofthe tax period (a calendar year) in which the tax was withheld. To process aclaim for a refund, the Russian tax authorities require (i) apostilled orlegalized confirmation of the tax treaty residence of the non-resident at thetime the income was paid, (ii) an application for the refund of the taxwithheld 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 to above may be morecomplicated with respect to ADSs and no assurance can be given that we will be ableto apply the respective double tax treaties when paying dividends tonon-resident holders or that ADS holders would be successful in receivingrelevant tax refunds.

 

Neither the depositary nor us has or will have anyobligation to assist an ADS holder with the completion and filing of any taxforms.

 

***Stamp Duties***

*** ***

No Russian stamp duty will be payable by the holdersof ADSs upon carrying out of transactions with the securities as discussedabove (*i.e.,* on a purchaseof the securities, sale of the securities, etc.).

 

**Certain United States Federal IncomeTax Consequences**

** **

The following is a general description of certainmaterial United States federal income tax consequences that apply to you if youare, for United States federal income tax purposes, a beneficial owner of ADSsthat is an individual who is a citizen or resident of the United States, acorporation created or organized in or under the laws of the United States, anystate thereof or the District of Columbia, an estate the income of which is subjectto U.S. federal income tax regardless of its source, or a trust, if a UnitedStates court can exercise primary supervision over the administration of thetrust and one or more United States persons can control all substantial trustdecisions, or if the trust has a valid election in effect under applicable U.S.Treasury Regulations to be treated as a United States person (in each case, a “U.S.Holder”). This discussion is based on the Internal Revenue Code of 1986, asamended, or the Code, Treasury Regulations promulgated thereunder, judicialdecisions, and published rulings and administrative pronouncements of the

 

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InternalRevenue Service, or the IRS, all as in effect as of the date of this document.These authorities are subject to differing interpretations and may change,possibly retroactively, resulting in U.S. federal income tax consequencesdifferent from those discussed below. No ruling has been or will be sought fromthe IRS with respect to the matters discussed below, and there can be noassurance that the IRS will not take a contrary position regarding the taxconsequences of the acquisition, ownership or disposition of ADSs, or that anysuch contrary position would not be sustained by a court. If a partnership(including any entity treated as a partnership for United States federal incometax purposes) is a beneficial owner of ADSs, the United States federal incometax treatment of a partner in the partnership will generally depend on thestatus of the partner and the activities of the partnership. Accordingly,partnerships that hold ADSs and partners in such partnerships are urged toconsult their tax advisors regarding the specific U.S. federal income taxconsequences to them. The following discussion does not deal with the taxconsequences to any particular investor or to persons in special tax situationssuch 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 is limited to U.S. Holdersholding ADSs as “capital assets” within the meaning of Section 1221 of theCode and whose functional currency is the U.S. dollar. The discussion belowdoes not address the effect of any United States state or local tax law orforeign tax law. This discussion also does not address any tax consequencesrelating to the direct ownership of ordinary shares.

 

The discussion below assumes that the representationscontained in the deposit agreement are true and that the obligations in thedeposit agreement and any related agreement will be complied with in accordancewith their terms. For purposes of applying United States federal income taxlaw, we believe, and the following discussion assumes, that a holder of an ADSshould be treated as the owner of the underlying shares of common stockrepresented by that ADS, although this matter is not free from doubt.

 

The U.S. Treasury has expressed concerns thatintermediaries in the chain of ownership between the holder of an ADS and theissuer of the shares underlying the ADS may be taking actions that areinconsistent with the beneficial ownership of the underlying shares. Accordingly,the analysis of the creditability of Russian withholding taxes described belowand the availability of the reduced tax rate for dividends received by certainnon-corporate U.S. Holders (discussed

 

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below)could be affected by actions taken by intermediaries in the chain of ownershipbetween the holder of ADSs and our company if as a result of such actions theholders of ADSs are not properly treated as beneficial owners of underlyingshares and future actions that may be taken by the U.S. Treasury. The remainderof this discussion assumes that a holder of an ADS will be treated as thebeneficial owner of the underlying shares of common stock represented by suchADS for United States federal income tax purposes.

 

***Taxation ofDistributions on ADSs***

*** ***

For United States federal income tax purposes, thegross amount of a distribution, including any Russian withholding taxes, paidby us with respect to ADSs will be treated as a taxable foreign source dividendon the date of actual or constructive receipt by the depositary to the extentof our current and accumulated earnings and profits, computed in accordancewith United States federal income tax principles. For taxable years beginningbefore January 1, 2011, if you are a non-corporate U.S. Holder suchdividends may be “qualified dividend income” that is taxed at the lowerapplicable capital gains rate provided that certain conditions are satisfied,including (1) certain holding period requirements are satisfied, (2) either(a) our ADSs continue to be listed on the New York Stock Exchange (orother national securities exchange that is registered under section 6 ofthe Securities Exchange Act of 1934, as amended, or the Nasdaq Stock Market) or(b) we are eligible for the benefits of the United States—Russia incometax treaty, and (3) we are not, for the taxable year in which the dividendwas paid, or in the preceding taxable year, a “passive foreign investmentcompany” (as discussed below). Distributions with respect to ADSs in excess ofour current and accumulated earnings and profits will be applied against andwill reduce your tax basis in such ADSs and, to the extent in excess of suchtax basis, will be treated as gain from a sale or exchange of such ADSs. Youshould be aware that we do not intend to calculate our earnings and profits forUnited 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 any distribution paid in rubles willequal the U.S. dollar value of such rubles, calculated using the exchange ratein effect on the date of receipt by the depositary, regardless of whether thepayment is actually converted into U.S. dollars. Generally, any gain or lossresulting from currency exchange rate fluctuations during the period from thedate of receipt by the depositary to the date the rubles are converted intoU.S. dollars will be treated as ordinary income or loss from sources within theUnited States for foreign tax credit limitation purposes. Additionally, you maybe required to recognize foreign currency gain or loss on the receipt of arefund of Russian withholding tax pursuant to the United States—Russia incometax treaty to the extent the United States dollar value of the refund differsfrom the dollar equivalent of that amount on the date of receipt of theunderlying distribution.

 

Russian withholding tax at the rate applicable to youunder the United States— Russia income tax treaty should be treated as aforeign income tax that, subject to generally applicable limitations andconditions, is eligible for credit against your U.S. federal income tax liabilityor, at your election, may be deducted in computing taxable income. If Russiantax is withheld at a rate in excess of the rate applicable to you under theUnited States—Russia income tax treaty, you may not be entitled to credits forthe excess amount, even though the procedures for claiming refunds and thepractical likelihood that refunds will be made available in a timely fashionare uncertain. If the dividends are qualified dividend income (as discussedabove), the amount of the dividend taken into account for purposes ofcalculating the foreign tax credit limitation will generally be limited to

 

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thegross amount of the dividend, multiplied by the reduced rate divided by thehighest rate of tax normally applicable to dividends.

 

The limitation on foreign taxes eligible for credit iscalculated separately with respect to specific classes of income. For United Statesforeign tax credit purposes, a dividend distribution with respect to the ADSswill be treated as foreign source “passive category income” but could, in thecase of certain U.S. Holders, constitute “general category income.” The rules relatingto the determination of the foreign tax credit, or deduction in lieu of theforeign tax credit, are complex and you should consult your tax advisors withrespect to those rules.

 

***Taxation on Sale orOther Taxable Disposition of ADSs***

*** ***

The sale or other taxable disposition of ADSs willgenerally result in the recognition of gain or loss in an amount equal to thedifference between the amount realized on the sale or other taxable dispositionand your adjusted basis in such ADSs. That gain or loss will be capital gain orloss and will be long-term capital gain or loss if the ADSs have been held formore than one year. If you are a non-corporate U.S. Holder, such realizedlong-term capital gain is generally subject to a reduced rate of United Statesfederal income tax. Limitations may apply to your ability to offset capitallosses against ordinary income.

 

Gain or loss realized on the sale of ADSs willgenerally be treated as U.S. source income or loss for foreign tax creditpurposes. The use of any foreign tax credits relating to any Russian taxesimposed upon such sale may be limited. You are strongly urged to consult yourtax advisors as to the availability of tax credits for any Russian taxeswithheld on the sale of ADSs.

 

***Passive ForeignInvestment Company Considerations***

*** ***

A foreign corporation generally will be a passiveforeign investment company, or a PFIC, in any taxable year in which, aftertaking into account the income and assets of the corporation and certainsubsidiaries pursuant to applicable “look-through” rules, either (i) atleast 75% of its gross income is “passive income” or (ii) at least 50% ofthe average value of its assets is attributable to assets which produce passiveincome or are held for the production of passive income.

 

We do not believe that we were a PFIC for the yearended December 31, 2008. However, our possible status as a PFIC must bedetermined annually and therefore may be subject to change. Thus there can beno assurance that we will not be treated as a PFIC in our current taxable yearor in the future. If we were to be treated as a PFIC, U.S. Holders generallywould be required to pay additional taxes on certain distributions and gains onsales or other dispositions (including pledges) of the ADSs, at tax rates thatmay be higher than those otherwise applicable. You should consult your taxadvisors regarding the application of the PFIC rules to your investment inthe ADSs.

 

***InformationReporting and Backup Withholding***

*** ***

Dividend payments with respect to ADSs and proceedsfrom the sale or exchange of ADSs may be subject to information reporting tothe IRS and possible U.S. backup withholding at a current rate of 28%. Backupwithholding will not apply, however, to a U.S. Holder who furnishes a correcttaxpayer identification number and makes any other required certification orwho is otherwise exempt from backup withholding. U.S. Holders who are requiredto establish their exempt status generally must provide such certification onIRS Form W-9. U.S. Holders should consult their tax advisors regarding theapplication of the U.S. information reporting and backup withholding rules.

 

Backup withholding is not an additional tax. Amountswithheld as backup withholding may be credited against your U.S. federal incometax liability, and you may obtain a refund of any excess 

 

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amountswithheld under the backup withholding rules by timely filing theappropriate claim for refund with the IRS and furnishing any requiredinformation.

 

**F.Dividends and Paying Agents**

** **

Not applicable.

 

**G.Statement by Experts**

** **

Not applicable.

 

**H.Documents on Display**

** **

The documents that areexhibits to or incorporated by reference in this document can be read at theU.S. Securities and Exchange Commission’s public reference facilities at Room 1024,450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information onthe operation of the Public Reference Room by calling the SEC at1-800-SEC-0330 or, from outside the United States, at 1-202-942-8090. Copiesmay also be obtained from the SEC website at www.sec.gov.

 

**I.Subsidiary Information**

** **

Not applicable.

 

## ***Item11. Quantitative and Qualitative Disclosures about Market Risk***

## *** ***

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 collectibility ofaccounts receivable.

 

We are exposed to marketrisk from changes in both foreign-currency exchange rates and interest rates.Foreign-currency exchange risks exist to the extent that our revenues areprimarily denominated in rubles and our costs are denominated in rubles, U.S.dollars and euros and some of our debt denominated in foreign currency.

 

We are subject to marketrisk deriving from changes in interest rates, which may affect the cost of ourfinancing. We do not use financial instruments such as foreign currencyoptions, interest rate swaps and forward rate agreements, to manage thesemarket risks, because the market for these types of financial instruments inRussia is not well developed and the costs of these instruments is relativelyhigh. We do not hold or issue derivative financial instruments for tradingpurposes.

 

**InterestRate Risk**

** **

Our interest rateexposure results mainly from debt obligations. At December 31, 2008, wehad debt amounting to $673.2 million, which comprised variable-rate borrowingsof $250.0 million and fixed-rate borrowings of $423.2 million. See also “Item5. Operating and Financial Review and Prospects—E. Contractual Obligations.”

 

The following tablespresent our variable and fixed-rate debt obligations as of December 31,2008 by expected maturity dates and related weighted average interest rates.

 

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| ** **                   | ** ** | **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)**                                | ** ** |
| **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 | % |
|                              |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(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 loan**       |   | 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 decreased to $423.2 million and our variable-ratedebt increased to $250.0 million. Our variable-rate debt includes our U.S.dollar-denominated $250.0 million syndicated facility that we entered intoon April 25, 2008. Our fixed-rate debt, which is mostly ruble-denominated,decreased in U.S. dollar terms largely due to the significant depreciation ofthe ruble against the U.S. dollar during the end of 2008 and the first quarterof 2009.  See Notes 13, 14 and 15 to ourConsolidated Financial Statements included under “Item 18. FinancialStatements.”

 

Thefollowing tables present our variable and fixed-rate debt obligations as of December 31,2007 by maturity dates and related weighted average interest rates*.

 

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| ** **                   | ** ** | **Expected Maturity Date as of December 31, 2007** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Currency**                                                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** | **Interest********rates at********December********31, 2007** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Variable-rate loans***     |       | Rubles                                                                                |       | $ | 86,734 |   | — |   | — |   | — |   | — |   | $ | 86,734 |   | $ | 86,734 |   | 7.6 | % |
| **Total variable rate debt** |       |                                                                                  |       | $ | 86,734 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 86,734 |   | $ | 86,734 |   | 7.6 | % |
|                              |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*Our variable-rate loans are linked to Mosprime rate

 
| ** **                | ** ** | **Expected Maturity Date as of December 31, 2007** | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Currency**                                                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** | **Interest********rates at********Decemer********31, 2007** | ** ** |
| ** **                | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Fixed-rate loan**       |       | Rubles                                                                                |       | $ | 17,605 |   | $ | 5,607 |   | $ | 9,095 |   | $ | 5,527 |   | $ | 10,101 |   | $ | 47,935 |   | $ | 41,228 |   | 5.2 | % |
|                      |       | U.S. dollars                                                                          |       | 8,913 |   | 5,248 |   | 968 |   | 176 |   | — |   | 15,305 |   | 15,305 |   | 4.5 | % |
|                      |       | Euro                                                                                  |       | 7,753 |   | 8,422 |   | 4,900 |   | 1,650 |   | 309 |   | 23,034 |   | 23,034 |   | 5.3 | % |
| **Fixed-rate Notes**      |       | U.S. dollars                                                                          |       | 300,000 |   | — |   | — |   | — |   | — |   | 300,000 |   | 300,000 |   | 8.0 | % |
|                      |       | Rubles                                                                                |       | — |   | — |   | 105,922 |   | — |   | — |   | 105,922 |   | 108,836 |   | 9.0 | % |
| **Total fixed rate debt** |       |                                                                                  |       | $ | 334,271 |   | $ | 19,277 |   | $ | 120,885 |   | $ | 7,353 |   | $ | 10,410 |   | $ | 492,196 |   | $ | 488,403 |   | 7.7 | % |

 

During2007, our fixed-rate debt increased to $492.2 million and our variablerate debt increased to $86.7 million as a result of our incurrence ofadditional short-term and long-term debt. See also Notes 13, 14 and 15 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.

 

Asof December 31, 2008, our U.S. dollar debt position amounted to $256.1million and our euro debt position amounted to $22.1 million, compared to aU.S. dollar debt position of $315.3 million and euro debt position of $23.0million as of December 31, 2007.

 

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| ** **     | ** ** | **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 |   |

 
| ** **     | ** ** | **Expected Maturity Date as of December 31, 2007** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Currency**                                                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and thereafter** | ** ** | **Total** | ** ** | **Fair********value** | ** ** |
| ** **     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Debt**       |       | Rubles                                                                                |       | $ | 104,339 |   | $ | 5,607 |   | $ | 115,017 |   | $ | 5,527 |   | $ | 10,101 |   | $ | 240,591 |   | $ | 236,798 |   |
|           |       | U.S. dollars                                                                          |       | 308,913 |   | 5,248 |   | 968 |   | 176 |   | 0 |   | 315,305 |   | 315,305 |   |
|           |       | Euro                                                                                  |       | 7,753 |   | 8422 |   | 4,900 |   | 1,650 |   | 309 |   | 23,034 |   | 23,034 |   |
| **Total debt** |       |                                                                                  |       | $ | 421,005 |   | $ | 19,277 |   | $ | 120,885 |   | $ | 7,353 |   | $ | 10,410 |   | $ | 578,930 |   | $ | 575,137 |   |

 

During2008, the ruble depreciated against the U.S. dollar and the euro. We incurred anet foreign exchange loss of $58.8 million, which was comprised of gains andlosses from euro- and U.S. dollar denominated obligations, respectively, aswell as a foreign exchange loss from our U.S. dollar-denominated syndicatedfacility. In order to measure the foreign currency exchange rate effect of ourU.S. dollar-denominated syndicated loan facility, we used the ruble exchangerate as of December 31, 2008, which depreciated by 23.7% against the U.S.dollar as of May 8, 2008.

 

In2009, the ruble depreciated against the U.S. dollar by 6.0% compared to December 2008from 29.38 rubles per U.S. dollar to 31.15 rubles per U.S. dollar as of June 16,2009. We have material U.S. dollar-denominated debt as of December 31,2008, which primarily resulted in subsequently incurred foreign currency lossof $15.7 million.

 

During2007, the ruble appreciated against the U.S. dollar and the euro. We incurred anet foreign exchange gain of $18.1 million, which was comprised of gains andlosses from euro- and U.S. dollar-denominated obligations, respectively, aswell as foreign exchange gains from our U.S. dollar-denominated notes. Forpurposes of accounting for our U.S. dollar-denominated notes, we used theexchange rate as of December 31, 2007, which appreciated by 6.7% againstthe December 31, 2006 exchange rate resulting in a foreign exchange gain.

 

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.”

## *** ***

## ***Item 12.Description of Securities Other than Equity Securities***

## *** ***

Notapplicable.

 

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** **

**PART II**

** **

## ***Item13. Defaults, Dividend Arrearages and Delinquencies***

 

None.

 

## ***Item 14. MaterialModifications to the Rights of Security Holders and Use of Proceeds***

 

None.

 

## ***Item 15. Controlsand 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 to bedisclosed in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in our reports that wefile or submit under the Exchange Act is accumulated and communicated tomanagement, including our chief executive officer and chief financial officer,as appropriate to allow timely decisions regarding its required disclosure. Indesigning and evaluating our disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management was required to apply its judgment inevaluating 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, 2008, the end of the periodcovered by this report, our disclosure controls and procedures were noteffective at a reasonable 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 

 

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principles,and that our receipts and expenditures are being made only in accordance withauthorizations of our management 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, 2008 in accordancewith the framework set forth in the report of the Treadway Commission’sCommittee of Sponsoring Organizations (COSO), “Internal Control—Integrated Framework.”

 

As a result of management’s assessment of our internalcontrol over financial reporting as of December 31, 2008, 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 may occur and may not be detected on a timely basis bymanagement in the normal course of business.*

 

Similar toour assessment at December 31, 2007, the material weakness results fromthe fact that there is no comprehensive accounting system in place to supportthe consolidation of our financial statements and the transformation of thestatutory financial statements of our subsidiaries into U.S. GAAP. We also have not retained sufficient accounting personnel with theappropriate level of U.S. GAAP knowledge to perform timely procedures to ensurethe accuracy of both the interim and annual financial statement closingprocesses. As a result of a material weakness, a number of errors in ourfinancial statements were not detected on a timely basis by management in thenormal course 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, 2008.

 

The Company’s independent registered publicaccountants, Ernst & Young LLC, audited the consolidated financialstatements included in this Annual Report on Form 20-F. The effectivenessof the Company’s internal control over financial reporting has been audited byErnst & Young LLC as stated in their reporting appearing below, whichexpresses an adverse opinion on the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2008.

** **

**(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.

 

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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.

 

Actions taken and planned to be taken by management toimprove the internal control over financial reporting include the possibleimplementation of financial consolidation software to automate the process oftransforming statutory accounting records into U.S. GAAP records for use in thepreparation of the U.S. GAAP consolidated financial statements, hiringadditional senior level accounting personnel for our U.S. GAAP department toallow U.S. GAAP executives to perform higher level review duties timely, enhancement of timely internal reviews of the statutory and U.S. GAAPfinancial statements, including clarifying roles and accountabilities,implementing additional prevent and detect controls, providing additional stafftraining, and other procedures, to improve the interimand annual financial statement closing process.

** **

**(d)  Changesin Internal Control over Financial 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 RegisteredPublic Accounting Firm**

 

The Board of Directors and Shareholders of

Wimm-Bill-Dann Foods OJSC

 

We have audited Wimm-Bill-Dann Foods OJSC’s (the Company) internalcontrol over financial reporting as of December 31, 2008, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria). Wimm-Bill-Dann Foods OJSC’s managementis responsible for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting included in the accompanying Management’s Annual Report onInternal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with 

 

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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 inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

 

A material weakness is 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 or interimfinancial statements will not be prevented or detected on a timely basis. Thefollowing material weaknesses has been identified and included in management’sassessment.

* *

*U.S. GAAP**FinancialStatement Close Process*

* *

The Company has identified both design and operatingdeficiencies in its U.S. GAAP financial statement close process, including theprocess the Company uses to transform statutory financial accounting recordsinto U.S. GAAP accounting records.  Thefollowing design and operating deficiencies comprise a material weakness in theCompany’s internal controls over its U.S. GAAP financial reporting:

 

·                  The Company did not have sufficient and skilled accounting and financepersonnel necessary to perform appropriate processes and controls; timely,consistently and appropriately identify, capture and analyze financiallysignificant information; and to properly transform accounting recordsmaintained on a statutory basis of accounting into U.S. GAAP accountingrecords.  As a result, audit adjustmentswere proposed and recorded by the Company in order to properly reflect certain,primarily non-routine transactions in the Company’s U.S. GAAP financialstatements including adjustments related to:

 

·                  income statement classification of certain sales incentives:

·                  the fair value of derivative contracts,

·                  investments,

·                  deferred tax assets.

 

·                  The Company does not have in place a comprehensive U.S. GAAP accountingsystem, initially records transactions on a statutory basis of accounting, andlater transforms statutory accounting records into U.S. GAAP accountingrecords. The Company uses a set of complex spreadsheets to transform itsstatutory financial accounting records into U.S. GAAP accounting records andultimately into U.S. GAAP financial statements and related financial statementdisclosures.  Due to the lack of acomprehensive U.S. GAAP accounting system, design of controls over thecompleteness and accuracy of its transformation process, and its relatedexternal U.S. GAAP financial reporting process is not effective.  As a result, audit adjustments were proposed and recorded by the Company to:

 

·                  eliminate amounts improperly carried forward from prior periodtransformation,

·                  correct clerical inaccuracies in amounts used in the U.S. GAAPtransformation.

 

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 of the Company’s consolidated financial statements willnot be prevented or detected on a timely basis.  This 

 

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material weakness was considered in determining thenature, timing, and extent of audit tests applied in our audit of the 2008financial statements, and this report does not affect our report dated June 17,2009 on those financial statements.

 

In our opinion, because of the effect of the material weaknessdescribed above on the achievement of the objectives of the control criteria,Wimm-Bill-Dann Foods OJSC has not maintained effective internal control overfinancial reporting as of December 31, 2008, based on the COSO criteria.

 

/s/ ERNST & YOUNG LLC

 

Moscow, Russia

 

June 17,2009

** **

**(f) Changesin Internal Control over Financial Reporting**

** **

Managementhas evaluated, with the participation of our chief executive officer and chieffinancial officer, whether any changes in our internal control over financialreporting that occurred during the period covered by this annual report havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. Other than the matters described inthis Item 15, there have not been any changes in internal control overfinancial reporting that occurred during 2007 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting. Management believes the measures they are taking to remediate thematerial weakness will continue to have an impact on our internal control overfinancial reporting in future periods.

## *** ***

## ***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 and Services***

 

Ernst &Young LLC has served as our independent public accountants for the fiscal yearsended December 31, 2008 and 2007, 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 2008 and 2007, respectively.

 

| ** ** | ** ** | **Year ended December 31,**             | ** ** |
|------------|------------|--------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| ** ** | ** ** | **(in thousands of U.S. dollars)** | ** ** |
| Audit Fees |       | $                                                      | 1,385      |   | $ | 1,585 |   |
| Total      |       | $                                                      | 1,385      |   | $ | 1,585 |   |

 

Notax and other advisory services were provided to us by Ernst & Youngduring the years ended December 31, 2008 and 2007.

 

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**AuditFees**

 

Auditservices consisted of the audit of the consolidated financial statements, preparedunder the U.S. GAAP as of and for the years ended December 31, 2008 and2007, the Russian statutory audit of stand-alone financial statements ofcertain of our subsidiaries prepared in accordance with Russian AccountingStandards as of and for the years ended December 31, 2008 and 2007,reviews of the consolidated condensed financial statements, prepared under theU.S. GAAP for the three months ended March 31, 2008 and 2007, the sixmonths ended June 30, 2008 and 2007 and the nine months ended September 30,2008 and 2007 and services performed by our external auditors in 2007 inconnection with the issuance of our Eurobonds and review of the prospectus forour ruble bonds.

** **

**Audit-relatedFees**

 

Nosuch services were provided to us in 2008 and 2007.

** **

**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, 2008 and 2007.

 

**AuditorIndependence under U.S. Rules**

 

FromSeptember 1998 to April 2009, one of our directors had a consultancyrelationship with Ernst & Young (CIS) Ltd and its successor, Ernst &Young LLC (each referred to as “EY Russia”). EY Russia became our auditors in2002.  The director was named to theAudit Committee of the Board of Directors in July 2008, and has attendedfour meetings of the Audit Committee since becoming a member. The consultancyrelationship was terminated on April 24, 2009 after the director reportedthe relationship in responding to a company questionnaire which had been sentto all directors by management at the recommendation of EY Russia. During thesame period, the director has had two indirect relationships with EY Russiathrough organizations in which the director participates, which relationshipsare expected to continue. EY Russia conducted an inquiry into the consultancyrelationship with a view to determining whether EY Russia’s auditorindependence is or was impaired in any period. The EY Russia inquiry consisted of document reviews and interviews ofcurrent and former EY Russia personnel. Our counsel also conducted an inquiry, which consisted of interviews ofthe director, the Chairman of the Audit Committee and certain members of ourmanagement.  Neither the director nor EYRussia believes that the direct relationship was, or the indirect relationshipsare, or have been, material to them in any period.  Certain documents reviewed in the course ofthe inquiry indicated that certain EY Russia personnel had and the EY Russiaaudit partner for us from 2002 to 2005, who is currently the Chairman of ourAudit Committee, may have had concurrent knowledge of the director’s businessrelationship with EY Russia in March 2003 after field work for the 2002audit had been completed.  The inquirydid not identify facts or circumstances that would suggest that the concurrentknowledge of such EY Russia personnel of the business relationship with thedirector impaired EY Russia’s independence. Based on the inquiry, EY Russia concluded that such information did notaffect the nature, timing or extent of the audit procedures conducted for 2002,2003, 2004 or 2005.  Furthermore, theaudit partners for us for 2006, 2007 and 2008 were not aware of the businessrelationship between EY Russia and the director.  After completion of the inquiry, on June 16,2009, EY Russia informed the Board of Directors that it believes that: (i) whilethe direct relationship with the director was not in accordance with the U.S.independence rules, EY Russia’s objective and impartial judgment was notimpaired; (ii) its indirect relationships with the director did not and donot impair EY Russia’s independence under U.S. independence rules; and (iii) thedirect and indirect relationships with the director do not violate the Russianauditor independence rules.  On June 16,2009, the Board of Directors considered this matter in light of all the factsand 

 

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circumstances andunanimously determined (with the director and the Chairman of the AuditCommittee not participating in the determination) that a reasonable investorwith knowledge of all relevant facts and circumstances would conclude that EYRussia is and was capable of exercising objective and impartial judgment on allissues encompassed within the accountants’ engagement.

## *** ***

## ***Item 16D.Exemption from the Listing Standards for Audit Committees***

 

Notapplicable.

## *** ***

## ***Item 16E.Purchases of Equity Securities by the Issuer and Affiliated 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.  Through the preceding transaction; we haverepurchased a total of 0.62% of our share capital for total consideration of$3.0 million. The repurchase was not made pursuant to a repurchase plan orprogram, and we did not have any repurchase plan or program in effect in 2008.No purchases of our ADSs were made by Wimm-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**                                                 |       | —                                                    | ** ** | **—**                                                                                                                             | ** ** | **—**                                                                                                                                                                            | ** ** |
|                     |            |                                                             |            |                                                           |            |                                                                                                                                        |            |                                                                                                                                                                                       |            |  |

 

----

(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 June,Wimm-Bill-Dann Finance repurchased on the open market in Russia additional6,500 and 721,200 of our own shares for an average price of $26.38 and $27.14,respectively. These repurchases were not made pursuant to a repurchase plan orprogram, and we do not as of the date of this annual report have any repurchaseplan or program in effect.

 

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Thefollowing table sets forth, for each month in 2009 and for the year as a whole,the total number of our ordinary shares repurchased by Wimm-Bill-Dann Finance andthe average price 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                                         |       | $                                             | 12.89      |                                                                                                     | —     |                                                                                                                                        | —     |   |
| March 1-31     |       | 155,000                                         |       | $                                             | 13.94      |                                                                                                     | —     |                                                                                                                                        | —     |   |
| April 1-30     |       | 79,650                                          |       | $                                             | 19.90      |                                                                                                     | —     |                                                                                                                                        | —     |   |
| May 1-31       |       | 6,500                                           |       | $                                             | 26.38      |                                                                                                     | —     |                                                                                                                                        | —     |   |
| June 1-30      |       | 721,200                                         |       | $                                             | 27.14      |                                                                                                     | —     |                                                                                                                                        | —     |   |
| July 1-31      |       | —                                          |       | —                                        |       | —                                                                                                   |       | —                                                                                                                                      |       |
| August 1-31    |       | —                                          |       | —                                        |       | —                                                                                                   |       | —                                                                                                                                      |       |
| September 1-30 |       | —                                          |       | —                                        |       | —                                                                                                   |       | —                                                                                                                                      |       |
| October 1-31   |       | —                                          |       | —                                        |       | —                                                                                                   |       | —                                                                                                                                      |       |
| November 1-30  |       | —                                          |       | —                                        |       | —                                                                                                   |       | —                                                                                                                                      |       |
| December 1-31  |       | —                                          |       | —                                        |       | —                                                                                                   |       | —                                                                                                                                      |       |
| **Total**           | ** ** | **1,287,008**                                   |       | —                                        | ** ** | **—**                                                                                               | ** ** | **—**                                                                                                                                  | ** ** |

 

Throughthe preceding transactions, we have repurchased a total of 2.93% of our sharecapital for total consideration of $27.6 million. We may continue to repurchaseour ordinary shares from time to time.

 

## ***Item 16F. Change in Registrant’sCertifying Accountant***

 

Notapplicable.

## *** ***

## ***Item 16G. Corporate Governance***

 

Weare a company organized under the laws of the Russian Federation and qualify asa foreign private issuer as such term is defined in Rule 3b-4 of theExchange Act. In accordance with the NYSE corporate governance rules, listedcompanies that are foreign private issuers are permitted in some circumstancesto follow home country practice in lieu of the provisions of the corporategovernance rules contained in Section 303A of the NYSE Listed CompanyManual that are applicable to U.S. companies. In addition, foreign private issuers listed on the NYSE must discloseany significant ways in which their corporate governance practices differ fromthose followed by U.S. companies listed on the NYSE.  With regard to our corporate governancepractices, these differences can be summarized as follows:

 

**Comparison of the rules ofcorporate governance developed by the New York Stock**

**Exchange and Wimm-Bill-Dann’scorporate 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.                                                                                 |

 

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| 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 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                                                                                                                                                                                                                                                   |   | Our Audit Committee  satisfies the requirements of Rule 10A-3 under the Exchange Act. Our                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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| Rule 10A-3 under the  Exchange Act. (Section 303A.06)                                                                                                                                                                          |   | 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 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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|                                                                                                                                                                                                                               |   | 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. |

 

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** **

**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                                                                        | F-1      |
| Report  of Independent Registered Public Accounting Firm                                                              | F-2      |
| Consolidated  Balance Sheets as of December 31, 2008 and 2007                                                    | F-3      |
| Consolidated Statements of Income and Comprehensive  Income for the years ended December 31, 2008, 2007 and 2006 | F-5      |
| Consolidated Cash Flow Statements for the years ended  December 31, 2008, 2007 and 2006                          | F-6      |
| Consolidated  Statements of Shareholders’ Equity for the years ended December 31,  2008, 2007 and 2006      | F-8      |
| Notes to  the Consolidated Financial Statements                                                                       | F-9      |

 

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## ***Table of Contents***

 

## ***Item19. Exhibits***

** **
| 1.1    |   | Charter  of Wimm-Bill-Dann Foods OJSC restated version (English Translation), approved  September 9, 2008.                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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.                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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 favour 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  favour 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. P81044, dated March 1, 2008, by and between CJSC Tetra Pak and  OAO Wimm-Bill-Dann.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2.1  |   | Annex  2 to Contract P81044, dated March 1, 2008, by and between CJSC Tetra Pak  and OAO Wimm-Bill-Dann.                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2.2  |   | Annex  3 to Contract P81044, dated March 1, 2008, by and between CJSC Tetra Pak  and OAO Wimm-Bill-Dann.                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2.3  |   | Annex  4 to Contract P81044, dated March 1, 2008, by and between CJSC Tetra Pak  and OAO Wimm-Bill-Dann.                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2.4  |   | Annex  5 to Contract P81044, dated March 1, 2008, by and between CJSC Tetra Pak  and OAO Wimm-Bill-Dann.                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2.5  |   | Annex  1.4 to Contract P81044, dated March 1, 2008, by and between CJSC Tetra  Pak and OAO Wimm-Bill-Dann.                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3    |   | Contract  No. P81055, dated March 1, 2008, by and between CJSC Tetra Pak and  OAO Wimm-Bill-Dann Beverages.                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3.1  |   | Amendment  No. 1 to the Addendum No. 4 to Contract No. P81055, dated  March 1, 2008, by and between CJSC Tetra Pak and OAO Wimm-Bill-Dann  Beverages.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3.2  |   | Annex  4 to Contract No. P81055, dated March 1, 2008, by and between CJSC  Tetra Pak and OAO Wimm-Bill-Dann Beverages.                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3.3  |   | Additional  agreement 8 to Contract No. P81055, dated March 1, 2008, by and  between CJSC Tetra Pak and OAO Wimm-Bill-Dann Beverages.                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3.4  |   | Annex  1.5 to Contract No. P81055, dated March 1, 2008, by and between  CJSC Tetra Pak and OAO Wimm-Bill-Dann Beverages.                                                                                                                                                                                                                                                                                                                                     |

 

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| 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 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.                                                                                                                                                                                       |

 

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| 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. |

 

**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: June 18, 2009 | By:                       | /s/ Tony D. Maher |
|                | Name:                     | Tony D. Maher |
|                | Title:                    | Chief Executive Officer |

 

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**Contents**

** **
| Report of Independent  Registered Public Accounting Firm     | F-2    |
|--------------------------------------------------------------|--------|
|                                                         |   |
| Consolidated Financial Statements                            |   |
| Consolidated  Balance Sheets                                 | F-3    |
| Consolidated  Statements of Income  and Comprehensive Income | F-5    |
| Consolidated  Statements of Cash Flows                       | F-6    |
| Consolidated Statements of Shareholders’ Equity         | F-8    |
|                                                         |   |
| Notes to Consolidated Financial Statements                   | F-9    |

 

F-1

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Table of Contents

 

**Report of Independent Registered PublicAccounting Firm**

 

The Board of Directors andShareholders

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 31,2008 and2007,and the related consolidated statements of income and comprehensive income,shareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2008. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial 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 asevaluation the overall financial statement presentation. We believe that ouraudits provide 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, 2008 and 2007, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2008, in conformity with U.S. generally accepted accountingprinciples.

 

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 31,2008, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated June 17, 2009 expressed an adverse opinion thereon.

 

/s/ Ernst & Young LLC

 

 

**Moscow, Russia**

**June 17, 2009**

 

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Table of Contents

 

**Wimm-Bill-DannFoods**

 

**Consolidated Balance Sheets**

 

*(Amounts in thousands of U.S. dollars, except share data)*

 
| ** **                                                                     | ** ** | **December 31,** | ** **                |
|--------------------------------------------------------------------------------|------------|-----------------------|---------------------------|
| ** **                                                                     | ** ** | **2008**              | ** **                | **2007** | ** ** |
| **Assets**                                                                     | ** ** | ** **            | ** **                |   | ** ** |
| **Current assets:**                                                            | ** ** | ** **            |                      |   |   |
| Cash  and cash equivalents                                                     |       | $                     | 277,252                   |   | $ | 33,452 |   |
| Trade  receivables, net (Note 4)                                               |       | 125,453               |                      | 157,608 |   |
| Inventory  (Note 5)                                                            |       | 225,950               |                      | 261,254 |   |
| Taxes  receivable                                                              |       | 64,916                |                      | 65,689 |   |
| Advances  paid                                                                 |       | 14,834                |                      | 43,924 |   |
| Net  investment in direct financing leases (Note 6)                            |       | 1,774                 |                      | 1,349 |   |
| Deferred  tax asset (Note 16)                                                  |       | 11,828                |                      | 17,479 |   |
| Other  current assets (Note 7)                                                 |       | 12,934                |                      | 11,903 |   |
| **Total current assets**                                                       | ** ** | **734,941**           | ** **                | **592,658** | ** ** |
| ** **                                                                     | ** ** | ** **            |                      |   |   |
| **Non-current assets:**                                                        | ** ** | ** **            |                      |   |   |
| Property, plant and equipment, net (Note 9)                                    |       | 692,277               |                      | 767,654 |   |
| Intangible assets, net (Note 8)                                                |       | 34,999                |                      | 34,015 |   |
| Goodwill (Note 10)                                                             |       | 108,748               |                      | 129,391 |   |
| Net investment in direct financing leases –  non-current portion (Note 6) |       | 948                   |                      | 972 |   |
| Deferred tax asset – non-current portion (Note 16)                        |       | 1,484                 |                      | 2,947 |   |
| Other non-current assets (Note 11)                                             |       | 3,568                 |                      | 5,465 |   |
| **Total non-current assets**                                                   | ** ** | **842****,****024**   | ** **                | **940,444** | ** ** |
| **Total assets**                                                               | ** ** | **$**                 | **1,****576****,****965** | ** ** | **$** | **1,533,102** | ** ** |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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Table of Contents

 

**Wimm-Bill-DannFoods**

 

**ConsolidatedBalance Sheets (continued)**

 

*(Amounts in thousands of U.S. dollars, except sharedata)*

 
| ** **                                                                                                                                                        | ** ** | **December 31,** | ** **    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                                                                                                                        | ** ** | **2008**              | ** **    | **2007** | ** ** |
| **Liabilities and shareholders’ equity**                                                                                                                     | ** ** | ** **            | ** **    | ** ** | ** ** |
| **Current liabilities:**                                                                                                                                          |       |                  |          |   |   |
| Trade  accounts payable                                                                                                                                           |       | $                     | 133,886       |   | $ | 130,729 |   |
| Advances  received                                                                                                                                                |       | 8,342                 |          | 13,626 |   |
| Short-term loans (Note 13)                                                                                                                                        |       | 66,278                |          | 98,819 |   |
| Long-term loans, current portion (Note 13)                                                                                                                        |       | 8,632                 |          | 6,455 |   |
| Long-term  notes  payable, current portion (Note 14)                                                                                                              |       | 159,153               |          | 300,000 |   |
| Taxes  payable                                                                                                                                                    |       | 18,984                |          | 14,351 |   |
| Accrued  liabilities (Note 12)                                                                                                                                    |       | 33,864                |          | 51,877 |   |
| Other  payables                                                                                                                                                   |       | 43,073                |          | 40,349 |   |
| **Total current liabilities**                                                                                                                                     | ** ** | **472,212**           | ** **    | **656,206** | ** ** |
| ** **                                                                                                                                                        |       |                  |          |   |   |
| **Long-term liabilities:**                                                                                                                                        |       |                  |          |   |   |
| Long-term loans (Note 13)                                                                                                                                         |       | 327,157               |          | 34,631 |   |
| Long-term notes payable (Note 14)                                                                                                                                 |       | 88,494                |          | 105,922 |   |
| Other long-term payables                                                                                                                                          |       | 10,048                |          | 18,346 |   |
| Deferred  taxes – long-term portion (Note 16)                                                                                                                |       | 22,754                |          | 31,011 |   |
| **Total long-term liabilities**                                                                                                                                   | ** ** | **448,453**           | ** **    | **189,910** | ** ** |
| **Total liabilities**                                                                                                                                             | ** ** | **920,665**           | ** **    | **846,116** | ** ** |
| **Minority interests**                                                                                                                                            | ** ** | **11,863**            | ** **    | **13,862** | ** ** |
|                                                                                                                                                              |       |                  |          |   |   |
| **Shareholders’ equity**:                                                                                                                                    |       |                  |          |   |   |
| Common  stock: 44,000,000 shares authorized and issued with a par value of 20 Russian  rubles; 43,725,535 shares outstanding (December 31, 2007: 44,000,000) |       | 29,908                |          | 29,908 |   |
| Share  premium account                                                                                                                                            |       | 164,132               |          | 164,132 |   |
| Treasury  stock, at cost                                                                                                                                          |       | (3,014                | )             | — |   |
| Accumulated  other comprehensive income (loss):                                                                                                                   |       |                  |          |   |   |
| Currency  translation adjustment                                                                                                                                  |       | (17,214               | )             | 110,171 |   |
| Retained  earnings                                                                                                                                                |       | 470,625               |          | 368,913 |   |
| **Total shareholders’ equity**                                                                                                                               | ** ** | **644,437**           | ** **    | **673,124** | ** ** |
| **Total liabilities and shareholders’ equity**                                                                                                               | ** ** | **$**                 | **1,576,965** | ** ** | **$** | **1,533,102** | ** ** |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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Table of Contents

 

**Wimm-Bill-DannFoods**

 

## ***Consolidated Statements of Income and Comprehensive Income***

 

*(Amounts in thousands of U.S. dollars, except share data)*

 
| ** **                                                              | ** ** | **Year ended December 31,** | ** **       |
|-------------------------------------------------------------------------|------------|----------------------------------|------------------|
| ** **                                                              | ** ** | **2008**                         | ** **       | **2007** | ** ** | **2006** | ** ** |
| **Sales**                                                               | ** ** | **$**                            | **2,823,564**    | ** ** | **$** | **2,438,328** | ** ** | **$** | **1,762,127** | ** ** |
|                                                                    | ** ** | ** **                       | ** **       | ** ** | ** ** | ** ** | ** ** |
| **Cost of  sales**                                                      | ** ** | **(1,910,528**                   | **)**            | **(1,654,879** | **)** | **(1,194,159** | **)** |
| **Gross  profit**                                                       | ** ** | **913,036**                      | ** **       | **783,449** | ** ** | **567,968** | ** ** |
|                                                                    | ** ** | ** **                       |             |   |   |   |   |
| Selling and distribution expenses                                       |       | (488,110                         | )                | (387,853 | ) | (246,054 | ) |
| General and administrative expenses                                     |       | (171,400                         | )                | (180,922 | ) | (134,481 | ) |
| Other operating expenses, net                                           |       | (8,383                           | )                | (704 | ) | (31,812 | ) |
|                                                                    | ** ** | ** **                       |             |   |   |   |   |
| **Operating  income**                                                   | ** ** | **245,143**                      | ** **       | **213,970** | ** ** | **155,621** | ** ** |
|                                                                    | ** ** | ** **                       |             |   |   |   |   |
| Financial income and expenses, net (Note 19)                            |       | (101,504                         | )                | (16,851 | ) | (15,480 | ) |
| **Income before provision for income taxes and minority interest** | ** ** | **143,639**                      | ** **       | **197,119** | ** ** | **140,141** | ** ** |
|                                                                    | ** ** | ** **                       |             |   |   |   |   |
| Provision  for income taxes (Note 16)                                   |       | (39,898                          | )                | (54,302 | ) | (41,560 | ) |
|                                                                    |       |                             |             |   |   |   |   |
| Minority interests                                                      |       | (2,029                           | )                | (2,769 | ) | (3,197 | ) |
| **Net income**                                                          | ** ** | **$**                            | **101,712**      | ** ** | **$** | **1****40****,****048** | ** ** | **$** | **95,384** | ** ** |
|                                                                    | ** ** | ** **                       | ** **       | ** ** | ** ** | ** ** | ** ** |
| **Other comprehensive (loss) income**                                   | ** ** | ** **                       | ** **       | ** ** | ** ** | ** ** | ** ** |
| Currency  translation adjustment                                        |       | (127,385                         | )                | 41,002 |   | 39,403 |   |
| **Comprehensive (loss) income**                                         | ** ** | **$**                            | **(25,673**      | **)** | **$** | **181****,****050** | ** ** | **$** | **134,787** | ** ** |
| **Earnings per share - basic and diluted**                              | ** ** | **$**                            | **2****.****31** | ** ** | **$** | **3.18** | ** ** | **$** | **2.17** | ** ** |
|                                                                    | ** ** | ** **                       |             |   |   |   |   |
| Weighted average number of shares outstanding,  basic and diluted       |       | 43,993,827                       |             | 44,000,000 |   | 44,000,000 |   |

* *

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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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****8**                      | ** **              | **200****7** | ** ** | **200****6** | ** ** |
| **Cash flows from  operating activities:**                                         | ** ** | ** **                        | ** **              | ** ** | ** ** | ** ** | ** ** |
|                                                                               | ** ** |                              | ** **              |   | ** ** |   | ** ** |
| **Net  Income**                                                                    | ** ** | **$**                             | **10****1****,****712** | ** ** | **$** | **140,048** | ** ** | **$** | **95,38****4** | ** ** |
|                                                                               |       |                              |                    |   |   |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                              |                    |   |   |   |   |
| Minority interest                                                                  |       | 2,029                             |                    | 2,769 |   | 3,197 |   |
| Depreciation and  amortization                                                     |       | 115,823                           |                    | 86,574 |   | 62,329 |   |
| Foreign currency  loss (gain)                                                      |       | 54,203                            |                    | (20,191 | ) | (13,660 | ) |
| Provision for  doubtful accounts                                                   |       | 8,155                             |                    | 1,649 |   | 3,130 |   |
| Loss (gain) on  disposal of property, plant and equipment                          |       | 4,038                             |                    | (4,633 | ) | 2,340 |   |
| Gain on sale of  subsidiary                                                        |       | (2,574                            | )                       | (978 | ) | — |   |
| Deferred tax charge  (benefit)                                                     |       | 54                                |                    | 4,893 |   | (6,672 | ) |
| Write-off of tangible  assets and intangible assets                                |       | 321                               |                    | 931 |   | 15,633 |   |
| Write-off of goodwill                                                              |       | —                            |                    | — |   | 2,539 |   |
| Amortization of  bonds issue expenses                                              |       | 1,716                             |                    | 2,617 |   | 1,197 |   |
| Other non-cash  charges and credits, net                                           |       | (2,526                            | )                       | 858 |   | 1,728 |   |
| ** **                                                                         |       |                              |                    |   |   |   |   |
| **Changes  in operating assets and liabilities:**                                  |       |                              |                    |   |   |   |   |
| Inventory                                                                          |       | (6,331                            | )                       | (66,951 | ) | (15,255 | ) |
| Trade receivables                                                                  |       | (2,274                            | )                       | (61,638 | ) | (20,023 | ) |
| Advances paid                                                                      |       | 29,931                            |                    | (10,449 | ) | (16,224 | ) |
| Taxes receivable                                                                   |       | (11,033                           | )                       | (11,291 | ) | 8,187 |   |
| Other current  assets                                                              |       | (3,300                            | )                       | 2,721 |   | (5,549 | ) |
| Other non-current  assets                                                          |       | —                            |                    | (26 | ) | 45 |   |
| Trade accounts  payable                                                            |       | 32,137                            |                    | 17,001 |   | 21,713 |   |
| Advances received                                                                  |       | (1,277                            | )                       | (766 | ) | 1,400 |   |
| Taxes payable                                                                      |       | 8,467                             |                    | 4,356 |   | 3,608 |   |
| Accrued liabilities                                                                |       | (10,603                           | )                       | 10,694 |   | 14,710 |   |
| Other  current payables                                                            |       | 2,522                             |                    | (1,364 | ) | 6,152 |   |
| Other long-term payables                                                           |       | —                            |                    | (20 | ) | 4,045 |   |
|                                                                               | ** ** |                              | ** **              |   | ** ** |   | ** ** |
| **Total  cash provided by operating activities**                                   | ** ** | **$**                             | **321****,****190**     | ** ** | **$** | **96,804** | ** ** | **$** | **1****69****,954** | ** ** |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

** **

**F-6**

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**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****8**                      | ** **  | **2007** | ** ** | **2006** | ** ** |
| **Cash flows from  investing activities:**                             | ** ** | ** **                        | ** **  | ** ** |   |   |   |
| Cash paid for  acquisition of subsidiaries, net of cash acquired       |       | $                                 | (4,050      | ) | $ | (24,850 | ) | $ | (134,367 | ) |
| Cash paid for  property, plant and equipment                           |       | (189,003                          | )           | (189,049 | ) | (127,713 | ) |
| Proceeds from  disposal of property, plant and equipment               |       | 6,454                             |        | 3,668 |   | 883 |   |
| Cash returned from  short-term bank deposits and other current  assets |       | —                            |        | 6,800 |   | 33,106 |   |
| Other investing  activities                                            |       | 1,195                             |        | 390 |   | (67 | ) |
| **Net  cash used in investing activities**                             | ** ** | **(185,404**                      | **)**       | **(203,041** | **)** | **(228,158** | **)** |
|                                                                   |       |                              |        |   |   |   |   |
| **Cash flows from  financing activities:**                             |       |                              |        |   |   |   |   |
| Proceeds from long-term notes  payable, net of debt issuance costs     |       | 207,473                           |        | 147,909 |   | — |   |
| Short-term loans and  notes, net                                       |       | (30,454                           | )           | (33,946 | ) | 85,760 |   |
| Repayment of long-term  loans                                          |       | (308,917                          | )           | (5,081 | ) | (21,414 | ) |
| Proceeds from long-term  loans                                         |       | 315,579                           |        | 6,778 |   | 30,214 |   |
| Repayment of long-term  payables                                       |       | (14,445                           | )           | (18,811 | ) | (19,416 | ) |
| Repayment of long-term  notes payable                                  |       | —                            |        | — |   | (52,719 | ) |
| Cash paid for treasury  stock acquisition                              |       | (3,014                            | )           | — |   | — |   |
| Dividends paid                                                         |       | —                            |        | (5,420 | ) | (24,336 | ) |
|                                                                   |       |                              |        |   |   |   |   |
| **Total cash provided by (used in) financing activities**              | ** ** | **1****66****,222**               | ** **  | **91,429** | ** ** | **(1,911** | **)** |
|                                                                   |       |                              |        |   |   |   |   |
| Impact of exchange rate  differences on cash and cash equivalents      |       | (58,208                           | )           | 7,950 |   | 7,322 |   |
| ** **                                                             | ** ** | ** **                        | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Net  increase********(decrease) in cash and cash  equivalents**      | ** ** | **243,800**                       | ** **  | **(6,858** | **)** | **(52,793** | **)** |
| **Cash  and cash equivalents**, **at beginning  of the year**          | ** ** | **33****,****452**                | ** **  | **40,310** | ** ** | **93,103** | ** ** |
| **Cash  and cash equivalents, at the end of the year**                 | ** ** | **$**                             | **277,252** | ** ** | **$** | **33,452** | ** ** | **$** | **40,310** | ** ** |

* *
| ** **                                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Supplemental  information:**                                 |       |     |       |     |       |     |       |
| Income taxes paid                                              |       | $        | 60,343     |     | $          | 58,700   |       | $ | 53,451 |   |
| Interest paid                                                  |       | 44,293   |       | 38,285   |       | 25,731   |       |
| Income taxes offset  with VAT receivables                      |       | —   |       | 238      |       | 1,466    |       |
| Taxes other than  income taxes offset with VAT receivables     |       | 796      |       | 357      |       | 7,929    |       |
| Vendor financed  acquisitions of property, plant and equipment |       | 6,967    |       | 6,860    |       | 5,561    |       |
|                                                                |            |          |            |          |            |          |            |  |  |  |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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Table of Contents

 

Wimm-Bill-Dann Foods

 

ConsolidatedStatements of Shareholders’ Equity

 

*(Amountsin thousands of U.S. dollars, except share data)*

 
| ** **                                                   | ** ** | ** **       | ** ** | ** **          | ** ** | ** **  | ** **   | ** **        | ** ** | ** **            | ** ** | **Accumulated**   | ** **  | ** **   | ** ** | ** **  | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|---------------------|------------|-------------|--------------|-------------------|------------|-----------------------|------------|-------------------|-------------|--------------|------------|-------------|------------|
| ** **                                                   | ** ** | ** **       | ** ** | ** **          | ** ** | ** **  | ** **   | ** **        | ** ** | **Share**             | ** ** | **other**         | ** **  | ** **   | ** ** | ** **  | ** ** |
| ** **                                                   | ** ** | **Common Stock** | ** ** | **Treasury shares** | ** ** | **premium** | ** **   | **comprehensive** | ** ** | **Retained**          | ** ** | ** **        | ** **  |
| ** **                                                   | ** ** | **Shares**       | ** ** | **Amount**          | ** ** | **Shares**  | ** **   | **Amount**        | ** ** | ** ****account** | ** ** | **income (loss)** | ** **  | **earnings** | ** ** | **Total**   | ** ** |
| **Balances at December 31, 2005**                       | ** ** | **44,000,000**   | ** ** | **$**               | **29,908** | ** **  | **—**   | ** **        | **$**      | **—**            | ** ** | **$**             | **164,132** | ** **   | **$**      | **29,766**  | ** ** | **$** | **163,237** | ** ** | **$** | **387,043** | ** ** |
| Net income                                                   |       | —           |       | —              |       | —      |         | —            |       | —                |       | —            |        | 95,384       |       | 95,384      |       |
| Currency translation adjustment                              |       | —           |       | —              |       | —      |         | —            |       | —                |       | 39,403            |        | —       |       | 39,403      |       |
| Dividends on common stock, including income taxes of  $3,270 |       | —           |       | —              |       | —      |         | —            |       | —                |       | —            |        | (24,336      | )          | (24,336     | )          |
| **Balances at December 31, 2006**                       | ** ** | **44,000,000**   | ** ** | **29,908**          | ** ** | **—**  | ** **   | **—**        | ** ** | **164,132**           | ** ** | **69,169**        | ** **  | **234,285**  | ** ** | **497,494** | ** ** |
| Net income                                                   |       | —           |       | —              |       | —      |         | —            |       | —                |       | —            |        | 140,048      |       | 140,048     |       |
| Currency translation adjustment                              |       | —           |       | —              |       | —      |         | —            |       | —                |       | 41,002            |        | —       |       | 41,002      |       |
| Dividends on common stock, including income taxes of  $571   |       | —           |       | —              |       | —      |         | —            |       | —                |       | —            |        | (5,420       | )          | (5,420      | )          |
| **Balances at December 31, 2007**                       | ** ** | **44,000,000**   | ** ** | **29,908**          | ** ** | **—**  | ** **   | **—**        | ** ** | **164,132**           | ** ** | **110,171**       | ** **  | **368,913**  | ** ** | **673,124** | ** ** |
| Net income                                                   |       | —           |       | —              |       | —      |         | —            |       | —                |       | —            |        | 101,712      |       | 101,712     |       |
| Currency translation adjustment                              |       | —           |       | —              |       | —      |         | —            |       | —                |       | (127,385          | )           | —       |       | (127,385    | )          |
| Treasury stock                                               |       | —           |       | —              |       | (274,465    | )            | (3,014            | )          | —                |       | —            |        | —       |       | (3,014      | )          |
| **Balances at December 31, 2008**                       | ** ** | **44,000,000**   | ** ** | **$**               | **29,908** | ** **  | **(274,465** | **)**             | **$**      | **(3,014**            | **)**      | **$**             | **164,132** | ** **   | **$**      | **(17,214** | **)**      | **$** | **470,625** | ** ** | **$** | **644,437** | ** ** |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements

 

Years ended December 31,2008, 2007 and 2006

## *** ***

*(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 31,2008, 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 still drinks.**

** **

**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).

 

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. Pro formaresults of operations reflecting these acquisitions have not been presentedbecause 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. Minority interests in the netassets and net results of the Company’s subsidiaries are shown under “Minorityinterests” in the accompanying consolidated balance sheets and statements ofincome and comprehensive income.

 

**ComprehensiveIncome**

** **

Comprehensive income isdefined as the change in equity of a company during a period from non-ownersources. Comprehensive (loss) income of WBD Foods for the years ended December 31,2008, 2007 and 2006 was ($25,673), $181,050 and $134,787, respectively, andconsists of net income and a currency translation adjustment in the amount of($127,385), $41,002, and $39,403, respectively.

 

F-9

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**2.        **Summary of SignificantAccounting Policies (continued)

 

**Translation Methodology**

 

Starting from January 1, 2003, Russia is nolonger considered a hyperinflationary economy, therefore, the U.S. GAAPfinancial statements are prepared using the local currency, the Russian ruble,as the functional currency for WBD Foods and its Russian subsidiaries. Subsequenttranslation to the reporting currency, the U.S. dollar, is made in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 52, *Foreign Currency Translation* (“SFAS No. 52”). Allassets and liabilities of the Company and its subsidiaries with functionalcurrencies other than the U.S. dollar are translated into U.S. dollarequivalents at exchange rates as follows: (1) asset and liability accountsat the rate of exchange in effect on the balance sheet date, (2) revenuesand costs, income and expenses at the average exchange rates for the year, and (3) shareholders’equity accounts at historical exchange rates. Translation gains or losses arerecorded as a separate component of shareholders’ equity, and transaction gainsand losses are reflected in net income.

 

In respect of Wimm-Bill-Dann Netherlands B.V.,the U.S. dollar has been used to prepare the financial statements as this isits functional currency. 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 SFAS No. 52.

 

**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, 2008 and 2007, theofficial rates of exchange were 29.38 rubles = 1 U.S. dollar and24.55 rubles = 1 U.S. dollar, respectively. Thetranslation of local currency denominated assets and liabilities into U.S.dollars for the purposes of these financial statements does not indicate thatthe Company could realize or settle, in U.S. dollars, the reported values ofthese assets and liabilities. Likewise, it does not indicate that the Companycould return or distribute the reported U.S. dollar value of capital to itsshareholders.**

 

**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.

 

**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.

 

F-10

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Table of Contents

 

Wimm-Bill-Dann Foods

 

**Notes to Consolidated FinancialStatements (continued)**

** **

**2.            Summary of Significant Accounting Policies (continued)**

** **

**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 consolidatedfinancial statements.

** **

**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.

 

**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 the consolidatedstatement of income.

 

F-11

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**2.         Summary of Significant Accounting Policies (continued)**

 

**Property, Plant andEquipment (continued)**

 

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 |   | 3-25  years |
| Computer hardware       |   | 3-12  years |
| Other                   |   | 2-15  years |

 

Construction inprogress comprises costs directly related to construction of property, plantand equipment. Depreciation commences once construction in progress is completeand the property, plant and equipment are put into operation.

 

The Companycapitalizes interest costs with respect to qualifying construction projects.

 

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.

 

**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 determinableuseful life are tested and evaluated for impairment in combination with otherlong-lived assets when indicators of impairment exist.

 

Indefinite-lived trademarks are evaluated annually forimpairment or when indicators exist indicating such assets may be impaired,such determination of fair value being based on the relief-from-royalty method.This method involves estimating probable future sales, and then applying anappropriate royalty rate to arrive at the income attributable to trademarks infuture years, which is then discounted to net present value.

 

**Goodwill**

 

Goodwill represents the purchase price for businessesacquired in excess of the fair value of identifiable net assets acquired.

 

In cases where the fair value of the net assetsacquired exceeds the purchase price, that excess (negative goodwill) is allocatedas a pro rata reduction of the amounts that otherwise would have been assignedto the identifiable assets acquired, excluding financial assets other thaninvestments accounted for by the equity method, assets to be disposed of bysale, deferred tax assets and any current assets. If any excess remains afterreducing to zero the amounts that otherwise would have been assigned to thoseassets, that remaining excess is recognized as an extraordinary gain in theperiod in which the business combination is completed.

 

F-12

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**2.         Summary of Significant Accounting Policies (continued)**

** **

**Goodwill (continued)**

 

Goodwill is notamortized, but instead tested for impairment at least annually or wheneverindicators of impairment arise. The Companyapplies a two-step process to determine if there was any goodwill impairment.The first step involves a comparison of the estimated fair value of each of theCompany’s three reporting units to its carrying amount, including goodwill. Inperforming the first step, the Company determines the fair value of a reportingunit using a discounted cash flow (“DCF”) analysis. Determining fair valuerequires the exercise of significant judgment, including judgment aboutappropriate discount rates, perpetual growth rates, and the amount and timingof expected future cash flows. The cash flows employed in the DCF analysis arebased on the Company’s most recent budget and, for years beyond the budget, theCompany’s estimates, which are based on assumed growth rates. The discountrates used in the DCF analysis are intended to reflect the risks inherent inthe future cash flows. If the estimated fair value of a reporting unit exceedsits carrying amount, goodwill of the reporting unit is not impaired and thesecond step of the impairment test is not necessary. If the carrying amount ofa reporting unit exceeds its estimated fair value, then the second step of thegoodwill impairment test must be performed. In the second step of the goodwillimpairment test the Company calculates the implied fair value of the reportingunit’s goodwill by deducting the fair value of all tangible and intangibleassets from the fair value of the reporting unit and compares this with itsgoodwill carrying amount to measure the amount of impairment, if any. If thecarrying amount of the reporting unit’s goodwill exceeds the implied fair valueof that goodwill, an impairment is recognized equal to the difference.

 

The impairment test with regards togoodwill was performed at December 31, 2008. Fair values of eachreporting unit were calculated using discounted cash flow techniques exceedingthe carrying amounts, consequently, no impairment issues arose.

 

**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. Impairment loss isincluded in other operating expenses in the consolidated statement of income.

 

At December 31,2008, the Company reviewed its long-lived assets, including intangible assetswith determinable useful life, for indicators of impairment in accordance withSFAS No. 144, *Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed*.As a result of our review, no indicators of impairment were identified.

 

F-13

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**2.         Summary of Significant Accounting Policies (continued)**

 

**Revenue Recognition**

** **

Sales are recognized, net of VAT and discounts, whengoods are shipped or delivered to customers, depending on the sales terms. Atthe time of shipment, in accordance with the Company’s standard salesagreements, title is transferred and the customer assumes the risk and rewardsof ownership. The Company has a number of contracts where sales are recognizedupon delivery, which is when the ownership title transfers to the customer.Such agreements apply only to Moscow-city based customers with no actual delaysbetween the shipping and delivery dates. Thus, the transfer of ownership rightsnormally occurs on the same day.

 

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 and comprehensive 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 and comprehensive income. Shipping andhandling expenses for the years ended December 31, 2008, 2007 and 2006were $135,598, $111,228 and $73,565, 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 is recognized. Interest expense incurred in government grant loan programsis recognized in financial income and expenses, net.

 

**Debt Issuance Costs**

 

Debt issuance costs are capitalized andamortized over the term of the related debt.

** **

**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.

 

F-14

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**2.         Summary of Significant Accounting Policies (continued)**

** **

**Advertising Costs**

 

Advertising costs are expensed as incurred, except formass-media advertising which is expensed the first time the advertising isshown. Advertising costs for the years ended December 31, 2008, 2007 and2006 were $109,625, $102,409 and $67,538, respectively.

** **

**Stockoptions plan**

** **

The Company follows the provisions of SFAS No. 123(revised), *Share-Based Payment* (“SFAS No. 123(R)”),which requires all companies to measure compensation cost for all share-basedpayments (including employee stock options) at fair value. The fair value ofshare-based payment awards is estimated on the date of grant using anoption-pricing model. 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 domestic customer base. At December 31, 2008, 2007 and 2006, theCompany had no other significant concentrations of credit risk. The Companydoes not usually require collateral from its customers.

 

**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 $219,260 at December 31, 2008. The fair value ofthe variable-rate loan approximates carrying value and the fair value of thefixed-rate loans is estimated at $167,412 at December 31, 2008.

* *

*SegmentReporting*

 

SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*, requires that a businessenterprise report financial and descriptive information about its reportableoperating segments. WBD Foods currently manages its business as three majoroperating segments — dairy,****beverages and babyfood production anddistribution, and accordingly, reports segment information on this basis.

 

F-15

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**2.         Summary of Significant Accounting Policies (continued)**

** **

**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 December 4, 2007, the FASB issued SFAS No. 141(R),*Business Combinations* (“SFAS No. 141(R)”) and SFAS No. 160,*Accounting and Reporting of Noncontrollinginterest in Consolidated Financial Statements, an amendment of ARB No. 51* (“SFAS No. 160”). These newstandards will significantly change the financial accounting and reporting ofbusiness combination transactions and noncontrolling (or minority) interests inconsolidated financial statements. The Company will be required to adopt SFAS No. 141(R) andSFAS No. 160 on January 1, 2009, and early adoption and retroactiveapplication are prohibited. Under SFAS No. 141(R) acquisition relatedcosts will not be capitalized but expensed as incurred. The Company does notexpect SFAS No. 141(R) and SFAS No. 160 to have a materialimpact on the Company’s consolidated financial position and results ofoperations.

 

In April 2008,FASB issued FASB Staff Position (“FSP”) FSP FAS 142-3, *Determinationof the Useful Life of Intangible Assets* (“FSP FAS 142-3”) with theobjective of improving the consistency between the useful life of a recognizedintangible asset under SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS No. 142”) and the period of expectedcash flows used to measure the fair value of the asset under SFAS No. 141(R) andother U.S. GAAP standards. FSP FAS 142-3 establishes additional factors to beconsidered by an entity in developing assumptions about renewal or extensionused to determine the useful life of an intangible asset recognized under SFAS No. 142.FSP FAS 142-3 is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008. Company will adopt FSP FAS 142-3effective January 1, 2009. The Company does not expect FSP FAS 142-3 tohave a material impact on the Company’s consolidated financial position andresults of operations.

 

In October 2008,FASB issued FSP FAS 157-3, *Determining the Fair Valueof a Financial Asset when the Market for That Asset Is Not Active* (“FSPFAS 157-3”) that applies to financial assets within the scope of accountingpronouncements that require or permit fair value measurements in accordancewith SFAS No. 157, *Fair Value Measurements*(“SFAS No. 157”). FSP FAS 157-3 clarifies the application of SFAS No. 157in a market that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. FSP FAS 157-3 was effective uponissuance, including prior periods for which financial statements have not beenissued. Revisions resulting from a change in the valuation technique or itsapplication shall be accounted for as a change in accounting estimate (SFAS No. 154,*Accounting Changes and Error Corrections*,(“SFAS No. 154”)). The disclosure provisions of SFAS No. 154 for achange in accounting estimate are not required for revisions resulting from achange in valuation technique or its application. Application of FSP FAS 157-3did not have a material impact on the Company’s consolidated financialstatements.

 

F-16

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**3.**                            BusinessesAcquired

 

Acquisition of Minority Interests

 

The changes in minorityinterest during the years ended December 31, 2008 and 2007 were asfollows:

 
| **Balance at December 31, 2006**                              | ** ** | **$**  | **18,977** | ** ** |
|--------------------------------------------------------------------|------------|--------|------------|------------|
| Acquisitions by the Company of minority interests in  subsidiaries |       | (9,217 | )          |
| Acquisition of subsidiaries                                        |       | 121    |       |
| Minority interest share in net income                              |       | 2,769  |       |
| Currency translation adjustment                                    |       | 976    |       |
| Other                                                              |       | 236    |       |
| **Balance at December 31, 200****7**                          | ** ** | **$**  | **13,862** | ** ** |
| Acquisitions by the Company of minority interests in  subsidiaries |       | (1,727 | )          |
| Minority interest share in net income                              |       | 2,029  |       |
| Currency translation adjustment                                    |       | (2,301 | )          |
| **Balance at December 31, 200****8**                          | ** ** | **$**  | **11,863** | ** ** |

 

*2008*

 

In July-November 2008, WBD Foods acquired anadditional 2.57% interest in WBD Beverages for cash consideration of $3,263. Asa result of this transaction, WBD Foods has a 100% interest in WBD Beverages.Thepurchase price in excess of fair value of net assets acquired of $1,536 wasrecorded 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.

** **

*2006*

 

In December 2006,WBD Foods acquired 0.26% of WBD OJSC, a subsidiary, from shareholders of WBD Foodsfor cash consideration of $812. Thepurchase price in excess of fair value of net assets acquired of $415 wasrecorded as goodwill.

 

F-17

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notesto Consolidated Financial Statements (continued)

 

**3.         BusinessesAcquired (continued)**

** **

Acquisition of Minority Interests (continued)

 

In October 2006,WBD Foods acquired 30.35% of Nazarovskoe MilkOJSC, a subsidiary, fromminority shareholders for cash consideration of $1,982. The purchase price in excess of fair value of net assets acquired of$771 was recorded as goodwill.

 

In January 2006, WBDFoods acquired 20% of Moscow Babyfood Plant (“ZDMP”),a subsidiary, fromminority shareholders for cash consideration of $6,955. The fair value of net assets acquired in excess of purchase price of$4,192 was subsequently recorded as a reduction of the value of property, plantand equipment.

 

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 subsequently recorded as a reduction of thevalue of property, 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 is 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 wasallocated to property, 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.

 

*2006*

 

In September 2006, the Company acquired 100% of****SurgutCity Dairy Plant for cash consideration of $4,536. The acquisition ofSurgut Dairy Plant allows the Company to gain a leading position in a promisingregion and continue its expansion in the markets of the Urals and Siberia.Having its own enterprise in Surgut, the company is able to optimize itsexpenditure on logistics by reducing the need to transport products betweenregions. The fair value of net assets acquired in excess of purchase price of$617 was recorded as a reduction of the fair value of property, plant andequipment.

 

F-18

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notesto Consolidated Financial Statements (continued)

 

**3.         BusinessesAcquired (continued)**

 

Business Combinations (continued)

 

InNovember, 2006, the Company acquired 93.74%of****Ochakovo Dairy Plant for cashconsideration of $66,792. Ochakovo Dairy Plant is the fourth largest dairyproducer in Russia and one of the largest dairy enterprises in Moscow. Theplant produces milk, sour cream, yogurts, cheese curds and other dairy productsunder a strong brand portfolio (including brands such as 33 Cows, Pastushok,Kremlin Products and Actilife). Theacquisition of Ochakovo Dairy Plant allows the Company to increase its share of the Moscow dairymarket in volume and in value, to enrich brand portfolio and obtain a bettercooperation with key retailers and suppliers in Moscow and Moscow region.During the year subsequent the acquisition the Company finalized an allocationof purchase price as follows: property, plant and equipment of $32,479,intangible assets of $12,562, long-term investments of $11, goodwill of$31,437, current assets of $18,026, less liabilities of $27,723.

 

In December 2006, theCompany acquired 83.36% of Angarsky Milk Plant OJSC (Molka OJSC) forcash consideration of $4,908. The purchase of Molka OJSC allows the Company tocontinue its expansion in the Siberian market. By having its own enterprise inIrkutsk region, the company gains the ability to optimize logisticalexpenditures by eliminating the need for long-distance transport of productsbetween regions. The cash consideration paid for this acquisition was allocatedto property, plant and equipment of $1,923, long-term investments of $2,goodwill of $3,722, current assets of $1,051, less liabilities of $1,790.

 

In December 2006, theCompany acquired 100% of Manros Group for cash consideration of $51,336.Manros Group comprises of six companies of which four are dairy productionplants. Manros produces milk, sour cream, yogurts, cottage cheese, kefir andother dairy products under “Na zdorovie”, “Molochnaya Dolina” and “Vkusnika”brands. The acquisition of Manros further strengthens the Company’s market positionin the fast-growing Siberian region, where continued economic growth istranslating into ever growing demand across our offering of healthy productsaimed at the entire family. With the Manros acquisition the Company increasedits market share in Siberia and the Far East, thus, re-enforcing its leadershipin the region. The cash consideration paid for this acquisition was allocatedto property, plant and equipment of $25,191, intangible assets of $5,937,goodwill of $37,053, non-current assets of $240, current assets of $10,365,less liabilities of $27,450.

 

F-19

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**4.**                            TradeReceivables, Net

 

Trade receivables as of December 31,2008 and 2007 were as follows:

 
| ** **                        | ** ** | **2008**   | ** **  | **2007**   | ** ** |
|-----------------------------------|------------|------------|-------------|------------|------------|
|                              | ** ** | ** ** |        |       |       |
| Trade  receivables                |       | $          | 131,248     |       | $          | 161,334 |   |
| Allowance  for doubtful accounts  |       | (5,795     | )           | (3,726     | )          |
| **Total  trade receivables, net** | ** ** | **$**      | **125,453** | ** ** | **$**      | **157,608** | ** ** |

 

The changes in the allowance for doubtful accounts for the years ended December 31,2008, 2007 and 2006 were as follows:

 
| ** **                       | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**  | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|-----------|------------|
|                             | ** ** | ** ** | ** ** | ** ** |       |      |       |
| Balance, beginning of  period    |       | $          | 3,726      |       | $          | 7,078     |       | $ | 5,126 |   |
| Provision for doubtful  accounts |       | 8,155      |       | 1,649      |       | 3,130     |       |
| Write off of trade  receivables  |       | (4,908     | )          | (6,016     | )          | (2,027    | )          |
| Recovery                         |       | (229       | )          | —     |       | —    |       |
| Currency translation  adjustment |       | (949       | )          | 1,015      |       | 849       |       |
| **Balance,  end of period**      | ** ** | **$**      | **5,795**  | ** ** | **$**      | **3,726** | ** ** | **$** | **7,078** | ** ** |

 

**5.**                            Inventory

 

Inventory as of December 31, 2008 and2007 was as follows:

 
| ** **           | ** ** | **2008**   | ** **  | **2007**   | ** ** |
|----------------------|------------|------------|-------------|------------|------------|
|                 | ** ** | ** ** |        |       |       |
| Raw materials        |       | $          | 140,031     |       | $          | 170,459 |   |
| Work in progress     |       | 20,618     |        | 21,260     |       |
| Finished goods       |       | 65,301     |        | 69,535     |       |
| **Total  inventory** | ** ** | **$**      | **225,950** | ** ** | **$**      | **261,254** | ** ** |

 

**6.**                            NetInvestment in Direct Financing Leases

 

Commencing from 1999,the Company announced a program called “Dairy Rivers of Russia” with thepurpose of ensuring a steady and reliable source of milk. Under this programthe Company acquired agricultural equipment and leased such equipment toseveral farms. These transactions were classified as direct financing leases.The lease agreements typically vary from one to five years and provide anequipment transfer option free of charge at the end of the lease term. Thelease receivables are denominated in euro, U.S. dollars and Russian rubles. Thelessees have the option to settle the receivable through the delivery of milksupplies to the Company based on a predetermined schedule. The settlement isbased on milk prices which are variable dependent upon prevailing marketprices.

 

F-20

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**6.         NetInvestment in Direct Financing Leases (continued)**

 

The following liststhe components of the net investment in direct financing leases at December 31,2008 and 2007:

 
| ** **                                   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
|                                         | ** ** | ** ** |       |       |       |
| Total future minimum lease  payments         |       | $          | 3,068      |       | $          | 3,004 |   |
| Less: Unearned income                        |       | (346       | )          | (683       | )          |
| **Net  investment in direct finance leases** | ** ** | **$**      | **2,722**  | ** ** | **$**      | **2,321** | ** ** |
| Current portion                              |       | 1,774      |       | 1,349      |       |
| Long-term portion                            |       | 948        |       | 972        |       |

 

At December 31,2008, total future minimum lease payments to be received for each of the fivesucceeding fiscal years are as follows:

 
| ** ** | ** ** | **Years ended  December 31,** | ** ** |
|------------|------------|------------------------------------|------------|
|       |       |                               |       |
| 2009       |       | $                                  | 2,025      |   |
| 2010       |       | 568                                |       |
| 2011       |       | 276                                |       |
| 2012       |       | 155                                |       |
| 2013       |       | 42                                 |       |
| Thereafter |       | 2                                  |       |
|       | ** ** | **$**                              | **3,068**  | ** ** |

 

**7.**                            OtherCurrent Assets

** **

Other current assets as of December 31,2008 and 2007 were as follows:

 
| ** **              | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|
|                    | ** ** | ** ** |       |       |       |
| Assets held for sale    |       | $          | 32         |       | $          | 1,457 |   |
| Restricted cash         |       | 34         |       | 1,970      |       |
| Other debtors, net      |       | 7,010      |       | 5,647      |       |
| Prepaid expenses        |       | 2,357      |       | 1,770      |       |
| Other                   |       | 3,501      |       | 1,059      |       |
| **Total  other assets** | ** ** | **$**      | **12,934** | ** ** | **$**      | **11,903** | ** ** |

 

F-21

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements(continued)

 

**8.**                            IntangibleAssets, Net

 

Intangible assets as of December 31, 2008 and2007 were comprised of the following:

 
| ** **                                  | ** ** | **2008**                   | ** ** | **2007**                      | ** ** |
|---------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** |
|                                        | ** ** | ** **                 | ** ** | ** **                    |       |   |   |   |   |
| Intangible assets with  determinable lives: | ** ** | ** **                 | ** ** | ** **                    |       |   |   |   |   |
| Software                                    |       | $                          | 16,874     |                          | $          | (4,898 | ) | $ | 8,415 |   | $ | (2,554 | ) |
| Trademarks                                  |       | 4,816                      |       | (1,850                        | )          | 5,639 |   | (1,227 | ) |
| Supplier  contracts                         |       | 103                        |       | (100                          | )          | 155 |   | (150 | ) |
| Others                                      |       | 2,408                      |       | (530                          | )          | 2,459 |   | (803 | ) |
| Intangible assets  with indefinite lives:   |       |                       |       |                          |       |   |   |   |   |
| Trademarks                                  |       | 18,176                     |       | —                        |       | 22,081 |   | — |   |
| **Total****intangible****assets**           | ** ** | **$**                      | **42,377** | ** **                    | **$**      | **(7,378** | **)** | **$** | **38,749** | ** ** | **$** | **(4,734** | **)** |

 

Software and supplier contracts have a weightedaverage useful life of five years, and trademarks have a weighted averageuseful life of ten years. Included in software as of December 31, 2008, is$7,931 of capitalized software development costs related to the implementationof the new ERP system, which is expected to be launched in 2010 and have anestimated useful life of seven years.

 

Amortization expense during the years ended December 31,2008, 2007 and 2006 amounted to $3,668, $2,487 and $1,564, respectively.

 

Amortization expense relating to the net carryingamount of intangible assets at December 31, 2008 is estimated to be thefollowing:

 
| ** ** | ** ** | **Years ended December 31,** | ** ** |
|------------|------------|-----------------------------------|------------|
|       |       |                              |       |
| 2009       |       | $                                 | 3,087      |   |
| 2010       |       | 2,813                             |       |
| 2011       |       | 2,480                             |       |
| 2012       |       | 1,752                             |       |
| 2013       |       | 1,541                             |       |
| Thereafter |       | 5,150                             |       |
| **Total**  | ** ** | **$**                             | **16,823** | ** ** |

 

F-22

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**9.**                            Property,Plant and Equipment, Net

 

The net book value ofproperty, plant and equipment at December 31, 2008 and 2007 was comprisedof the following:

 
| ** **                                               | ** ** | **2008**    | ** **  | **2007**      | ** ** |
|----------------------------------------------------------|------------|-------------|-------------|---------------|------------|
|                                                     | ** ** | ** **  |        |          |       |
| Buildings                                                |       | $           | 263,307     |          | $          | 277,130 |   |
| Machinery  and equipment                                 |       | 620,622     |        | 660,847       |       |
| Computer  hardware                                       |       | 20,133      |        | 18,315        |       |
| Other                                                    |       | 72,498      |        | 72,295        |       |
| **Gross  book value of property, plant and equipment**   | ** ** | **976,560** | ** **  | **1,028,587** | ** ** |
| Accumulated  depreciation                                |       | (401,758    | )           | (390,890      | )          |
| Advances  paid for property, plant and equipment         |       | 18,826      |        | 27,106        |       |
| Construction  in progress and equipment for installation |       | 98,649      |        | 102,851       |       |
| **Total  property, plant and equipment, net**            | ** ** | **$**       | **692,277** | ** **    | **$**      | **767,654** | ** ** |

 

The Company capitalized interest costs of $6,653,$6,421, and $519 during the years ended December 31, 2008, 2007 and 2006,respectively, with respect to qualified construction projects. The totalamounts of interest incurred are $51,197, $41,409 and $28,417 during the yearsended December 31, 2008, 2007 and 2006, respectively. The amounts ofinterest expensed for these periods are presented further in Note 19.

 

Depreciation expense during the years ended December 31,2008, 2007 and 2006 amounted to $112,155, $84,087, and $60,765, respectively.

 

Assets recorded under capital leases are included tomachinery and equipment in the gross book value of $11,884. The respectiveaccumulated depreciation of those assets is amounted to $7,059. Future minimumlease payments to be paid on capital lease contracts are presented further inNote 15.

** **

**10.**                     Goodwill

 

The changes in the carrying amount of goodwill for each segment for theyears ended December 31, 2008 and 2007 were as follows:

 
| ** **                            | ** ** | **Dairy** | ** **  | **Beverages** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-----------|-------------|---------------|------------|-----------|------------|
| Balance at  December 31, 2006    |       | $         | 99,015      |          | $          | 6,975     |       | $ | 105,990 |   |
| Acquisitions                          |       | 14,859    |        | 170           |       | 15,029    |       |
| Currency translation adjustment       |       | 7,856     |        | 516           |       | 8,372     |       |
| 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** | ** ** |

** **

**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-23

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**11.**                     Other Non-Current Assets

 

Other non-current assets at December 31, 2008and 2007 were comprised as follows:

 
| ** **                                | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
|                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt issuance costs, net  of amortization |       | $          | 3,458      |       | $          | 1,006 |   |
| Advances                                  |       | —     |       | 4,326      |       |
| Other                                     |       | 110        |       | 133        |       |
| **Total other assets**                    | ** ** | **$**      | **3,568**  | ** ** | **$**      | **5,465** | ** ** |

** **

**12.**                     Accrued Liabilities

 

Accrued liabilities at December 31, 2008 and 2007were comprised as follows:

 
| ** **                                               | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                     | ** ** | ** ** |       |       |       |
| Payroll related accruals                                 |       | $          | 13,472     |       | $          | 38,697 |   |
| Interest accruals                                        |       | 7,207      |       | 3,629      |       |
| Audit and other  professional services accruals          |       | 1,806      |       | 2,681      |       |
| Marketing and advertising  accruals                      |       | 907        |       | 1,511      |       |
| Tax contingencies                                        |       | 1,793      |       | 1,832      |       |
| Customer allowances and  sales volume discount provision |       | 2,545      |       | 163        |       |
| Other accruals                                           |       | 6,134      |       | 3,364      |       |
| **Total  accrued liabilities**                           | ** ** | **$**      | **33,86**  | ** ** | **$**      | **51,877** | ** ** |

** **

**13.**                     Short-Term and Long-TermLoans

 

Short-term bank loans at December 31, 2008 and2007 were as follows:

 
| ** **                 | ** ** | **2008**               | ** ** | **2007**   | ** ** |
|----------------------------|------------|------------------------|------------|------------|------------|
| ** **                 | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** |
|                       |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Euro-denominated           |       | 1                      |       | $          | 355        |   | 16.00 | % |   |   | $ | — |   | — |   |
|                       |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Ruble-denominated          |       | 7                      |       | 65,923     |       | 14.97 | % | 24 |   | 97,514 |   | 7.13 | % |
| ** **                 |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| U.S. dollar-denominated    |       |                   |       | —     |       | — |   | 3 |   | 1,305 |   | 7.75 | % |
| **Total short-term loans** | ** ** | ** **             | ** ** | **$**      | **66,278** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **98,819** | ** ** | ** ** | ** ** |

 

F-24

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**13.       Short-Termand Long-Term Loans (continued)**

 

Long-termloans at December 31, 2008 and 2007 were as follows:

 
| ** **                                | ** ** | **2008**               | ** ** | **2007**    | ** **      |
|-------------------------------------------|------------|------------------------|------------|-------------|-----------------|
| ** **                                | ** ** | **No. of  loans** | ** ** | **Amount**  | ** **      | **Weighted  average  interest rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** |
| Euro-denominated (maturity  2011-2020)    |       | 2                      |       | $           | 4,730           |   | 1.83 | % | 2 |   | $ | 6,729 |   | 1.86 | % |
| Ruble-denominated  (maturity 2010-2012)   |       | 32                     |       | 81,059      |            | 9.84 | % | 26 |   | 34,357 |   | 5.34 | % |
| U.S.  dollar-denominated (maturity 2011)  |       | 1                      |       | 250,000     |            | 4.42 | % |   |   | — |   | — |   |
| **Total  amount of long-term borrowings** | ** ** | ** **             | ** ** | **335,789** | ** **      | ** ** | ** ** | ** ** | ** ** | **41,086** |   |   |   |
| Less  current portion of long-term loans  |       |                   |       | (8,632      | )               |   |   |   |   | (6,455 | ) |   |   |
| ** **                                | ** ** | ** **             | ** ** | ** **  | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total long-term loans**                 | ** ** | ** **             | ** ** | **$**       | **327,****157** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **3****4****,631** | ** ** | ** ** | ** ** |

##### *** ***

On April 25, 2008,the Company borrowed a $250,000 syndicated loan (the “Loan”) due April 2011.The Loan bears the interest at an annual rate of LIBOR plus 1.75% (3.99% as of December 31,2008), payable every three months. The loan agreement contains a number ofcovenants including requirements to maintain certain financial ratios. The proceedsof the Loan were used for the refinancing of the existing debt and generalcorporate purposes.

 

On December 2,2008 the Company entered into a secured loan agreement with Sberbanklending for 1,250 million rubles ($42.5 million at exchange rate as of December 31,2008) with fixed interest rate payable on the monthly basis. Of this amount 750million rubles ($25.5 million at the exchange rate as of December 31,2008) is payable in December 2009, and 500 million rubles ($16.9 millionat the exchange rate as of December 31, 2008) is payable in May 2010.

 

##### ***On December 17, 2008 weentered into a fixed interest rate short-term unsecured loan agreement withAlfa Bank in the amount of 1,300 million rubles ($44.3 million at the exchangerate as of December 31, 2008), payable in June 2009.***

##### *** ***

##### ***Guarantees***

 

At December 31, 2008 and 2007, 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, 2008 and 2007, WBD Foods and certainother major subsidiaries guaranteed certain short-term and long-term bank loansreceived by third parties in amount of $251 and $648 respectively.**

 

F-25

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**13.       Short-Termand Long-Term Loans (continued)**

 

##### ***Maturityof Long-Term Loans and Long-Term Notes Payable***

 

The combined aggregatematurities of long-term loans and long-term notes payable (Note 14)outstanding at December 31, 2008 were as follows:

 
| ** **                                            | ** ** | **Years  ended December 31,** | ** **      |
|-------------------------------------------------------|------------|------------------------------------|-----------------|
|                                                  |       |                               |            |
| 2009                                                  |       | $                                  | 167,785         |   |
| 2010                                                  |       | 138,313                            |            |
| 2011                                                  |       | 257,934                            |            |
| 2012                                                  |       | 6,133                              |            |
| 2013                                                  |       | 4,932                              |            |
| Thereafter                                            |       | 8,339                              |            |
| **Total long-term loans and long-term notes payable** | ** ** | **$**                              | **583****,436** | ** ** |

##### *** ***

##### ***Collateral***

 

Certainof the Company’s inventories and property, plant and equipment served ascollateral for the short-term and long-term loans from Rosselkhozbank UralsibBank and Sberbank.

 

At December 31, 2008 and2007 the assets that served as collateral consisted of the following:

 

·                                Inventory in the amounts of $nil and $3,192,respectively; and

·                                Property, plant and equipment with a net bookvalue of $75,513 and $78,008, respectively.

 

The Sberbank loan is asecured loan agreement. None of the other short-term and long-term loans andlong-term notes payable are secured.

 

**14.**                     Long-Term Notes Payable

 

Notes payable issued by WBD Foods at December 31,2008 and 2007 were as follows:

 
| **Issuer**                         | ** ** | **Currency** | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|------------------------------------|------------|--------------|------------|-------------|------------|-------------|------------|
| WBD Foods                          |       | U.S. dollar  |       | $           | —     |        | $          | 300,000 |   |
| WBD Foods                          |       | Ruble        |       | 247,647     |       | 105,922     |       |
| **Total**                          | ** ** | ** **   | ** ** | **247,647** | ** ** | **405,922** | ** ** |
| less current portion               |       |         |       | 159,153     |       | 300,000     |       |
|                               |       |         |       |        |       |        |       |
| **Total  long-term notes payable** | ** ** | ** **   | ** ** | **$**       | **88,494** | ** **  | **$**      | **105,922** | ** ** |

** **

*WBD Foods U.S. Dollar Notes*

 

On May 21, 2003, UBS (Luxembourg) S.A. issued8.5% Loan Participation Notes due 2008 for the sole purpose of funding a$150,000 loan (the “Loan Notes”) to WBD Foods. The Loan Notes bore interest atan annual rate of 8.5%, payable semi-annually in arrears on May 21 and November 21of each year. The Loan Notes matured and was fully repaid in May 2008.

 

F-26

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**Table of Contents**

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements (continued)

 

**14.**                     Long-Term Notes Payable(continued)

 

*WBD Foods U.S. Dollar Notes (continued)*

 

On February 6, 2007, UBS (Luxembourg) S.A. issued 7.5% LoanParticipation Notes due 2008 for the sole purpose of funding a $150,000 loan(the “Loan”) to WBD Foods. The Loan bore interest at an annual rate of 7.5%,payable in two installments on November 14, 2007 and May 14, 2008.The loan matured and was fully repaid in May 2008.

 

*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 ($102,109 at the exchange rateas of December 31, 2008, of which $13,615 have been repaid as of December 31,2008). 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.**

** **

In March andApril 2008, the Company placed bonds on the Moscow Inter-bank CurrencyExchange (MICEX) with a total nominal value of 5 billion rubles ($170,181 atthe exchange rate as of December 31, 2008, of which $11,027 (324 millionrubles) have been repaid as of December 31, 2008). The bonds have amaturity of five years and coupons are paid on a half-yearly basis. Theinterest rates for both coupons in the first year are equal and amount to 9.30%annually, and the rates for subsequent coupons will be set hereinafter based onthe market conditions. The bonds are due in March 2013, and bondholdershave a put option exercisable on March 6, 2009, at 100% of nominal valueplus accrued interest. The bonds are classified as current debt as of December 31,2008.

 

On March 6,2009 the Company carried out the repayment of these bonds from its own cashsources in the amount of 4,660.3 million rubles, which is the equivalent of$158,611 and $129,850 at the exchange rates at December 31, 2008 and March 6,2009, respectively. The balance outstanding as of March 6, 2009 was 15.7million rubles, which is the equivalent of $534 and$437 at the exchange rates at December 31, 2008 and March 6, 2009,respectively. The rates for the three subsequent coupons for the next one andhalf years were set at 15% annually.

 

In May and June 2009, the Company issuedbonds on MICEX raising cash of 3 billion rubles, ($96,945 at the exchange ratesat the 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 is15.0% for the next one and half years. The interest is payable semi-annually,commencing in September, 2009.

 

**15.**                     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 31,2008 and 2007:

 

F-27

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements (continued)

 
| ** **                                     | ** ** | **2008** | ** ** | **2007**   | ** ** |
|------------------------------------------------|------------|----------|------------|------------|------------|
| Vendors’ financing obligations, including |       |     |       |       |       |
| Current portion                                |       | $        | 14,593     |       | $          | 15,731 |   |
| Long-term portion                              |       | 8,883    |       | 17,372     |       |
| **Total vendor financing obligations**         | ** ** | **$**    | **23,476** | ** ** | **$**      | **33,103** | ** ** |

 

F-28

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**15.**                     Vendor Financing(continued)

 

The Company has agreements withsuppliers of equipment, which provide financing for the periods ranging from 1to 9 years. As of December 31, 2008 and 2007, vendor financing obligationswere $6,084 and $14,000, respectively, 12,063thousand euros and 11,138 thousandeuros, respectively (equivalent to $17,015 and $16,305 as of December 31,2008 and 2007, respectively) and 11,076 thousand rubles and 68,678 thousandrubles, respectively (equivalent to $377 and $2,798 as of December 31,2008 and 2007, respectively). This financing is provided at average interestrate of 7.85%.

 

The maturity of vendors financing obligationsoutstanding at December 31, 2008 was as follows:

 
| ** **                                      | ** ** | **Years ended  December 31,** | ** **         |
|-------------------------------------------------|------------|------------------------------------|--------------------|
|                                            |       |                               |               |
| 2009                                            |       | $                                  | 16,241             |   |
| 2010                                            |       | 6,039                              |               |
| 2011                                            |       | 3,678                              |               |
| 2012                                            |       | 571                                |               |
| 2013                                            |       | 33                                 |               |
| Total maturity of vendor  financing obligations |       | 26,562                             |               |
| Less: amount representing  interest             |       | (3,086                             | )                  |
| **Total  vendor financing obligations**         | ** ** | **$**                              | **23****,****476** | ** ** |

 

**16.**                     Income Tax

 

WBD Foods’ provision forincome taxes for the years ended December 31, 2008, 2007 and 2006 was asfollows:

 
| ** **                            | ** ** | **2008** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|------------|------------|
|                                  |       |     |       |       |       |       |       |
| Current income tax  provision         |       | $        | 39,844     |       | $          | 49,409     |       | $ | 48,232 |   |
| Deferred income tax  charge/(benefit) |       | 54       |       | 4,893      |       | (6,672     | )          |
| **Total  provision for income taxes** | ** ** | **$**    | **39,898** | ** ** | **$**      | **54,302** | ** ** | **$** | **41,560** | ** ** |

** **

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 Company assessed its deferred tax assets and liabilities at the newstatutory income tax rate. The effect of this rate change on the Company’sdeferred tax assets and liabilities amounted to $3,446.

 

Foreigncurrent income tax provisions for the years ended December 31, 2008, 2007and 2006 were $2,511, $2,068 and $2,372, respectively.  Foreign deferred income tax (benefit) charge forthe years ended December 31, 2008, 2007 and 2006 were $(1,611), $69 and$(258), respectively.

 

F-29

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes toConsolidated Financial Statements (continued)

 

**16.       Income Tax (continued)**

 

The reconciliation of theincome tax provision using Russian statutory income tax rate of 24% to theCompany’s provision for income taxes is as follows:

 
| ** **                                                                      | ** ** | **2008** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
|                                                                            |       |     |       |       |       |       |       |
| Income before provision  for income taxes                                       |       | $        | 143,639    |       | $          | 197,119    |       | $ | 140,141 |   |
| Russian statutory tax rate                                                      |       | 24       | %          | 24         | %          | 24         | %          |
| Income tax provision at  Russian statutory rate                                 |       | 34,473   |       | 47,309     |       | 33,634     |       |
| Tax effect of expenses not  deductible for national statutory taxation purposes |       | 13,238   |       | 12,758     |       | 10,829     |       |
| Tax effect of income not taxable for  national statutory taxation purposes      |       | (3,193   | )          | (2,396     | )          | (2,172     | )          |
| Tax effect of income tax at different rates                                     |       | (1,290   | )          | (947       | )          | (849       | )          |
| Increase (decrease) in valuation allowance                                      |       | (1,594   | )          | (2,741     | )          | (370       | )          |
| Tax effect of income tax  rate change                                           |       | (3,446   | )          | —     |       | —     |       |
| Tax effect of other  permanent differences                                      |       | 1,710    |       | 319        |       | 488        |       |
| **Provision  for income taxes**                                                 | ** ** | **$**    | **39,898** | ** ** | **$**      | **54,302** | ** ** | **$** | **41,560** | ** ** |

 

Temporary differences between the tax bases ofassets and liabilities and the respective carrying amounts in theseconsolidated financial statements give rise to the following deferred taxassets and liabilities at December 31, 2008 and 2007:

 
| ** **                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets/(liabilities) arising  from tax effect of: |       |     |       |     |       |
| Losses carried forward                                         |       | $        | 4,100      |     | $          | 4,546 |   |
| Intangible assets                                              |       | 1,506    |       | 602      |       |
| Property, plant and equipment                                  |       | 1,988    |       | 2,534    |       |
| Allowance for doubtful accounts                                |       | 4,231    |       | 4,857    |       |
| Obsolescence and net realizable value inventory  write off     |       | 688      |       | 3,431    |       |
| Payroll related accruals                                       |       | 1,408    |       | 6,849    |       |
| Accrued liabilities                                            |       | 2,073    |       | 2,999    |       |
| Other                                                          |       | 677      |       | 41       |       |
| Gross deferred tax asset                                       |       | 16,671   |       | 25,859   |       |
| Less valuation allowance for deferred tax  assets              |       | (2,762   | )          | (4,356   | )          |
| Deferred tax assets net of valuation  allowance                |       | 13,909   |       | 21,503   |       |
| Intangible assets                                              |       | (4,253   | )          | (5,229   | )          |
| Property, plant and equipment                                  |       | (16,606  | )          | (23,877  | )          |
| Investments in direct finance leases                           |       | (549     | )          | (2,661   | )          |
| Debt issuance costs                                            |       | (691     | )          | (241     | )          |
| Other                                                          |       | (1,252   | )          | (80      | )          |
| Gross deferred tax liability                                   |       | (23,351  | )          | (32,088  | )          |
| **Net  deferred tax liability**                                | ** ** | **$**    | **(9,442** | **)**    | **$**      | **(10,585** | **)** |
| Balance sheet classification is as follows:                    |       |     |       |     |       |
| Current deferred tax asset                                     |       | 11,828   |       | 17,479   |       |
| Long-term deferred tax asset                                   |       | 1,484    |       | 2,947    |       |
| Long-term deferred tax liability                               |       | (22,754  | )          | (31,011  | )          |

 

F-30

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements (continued)

 

**16.       Income Tax (continued)**

 

In the context of the Company’s currentstructure, tax losses and current tax assets of the different subsidiaries maynot be set off against current tax liabilities and taxable profits of othersubsidiaries and, accordingly, taxes may accrue even where there is a netconsolidated tax loss. Therefore, deferred tax assets of one subsidiary of theCompany are not offset against deferred tax liabilities of another subsidiary.As of December 31, 2008 and 2007, a valuation allowance has been recordedfor deferred tax assets in the amounts of $2,762 and $4,356, respectively, asit is not more likely than not that sufficient taxable profit will be availableto offset the deductible temporary differences to which these assets relate.

 

For statutory incometax purposes, WBD Foods and its subsidiaries had accumulated tax losses of$19,246 which may be carried forward for use against future taxable income, ofwhich $6,114, $1,398, $2,826 and $8,908, expire in the period 2015-2018, respectively.

 

Starting from January 1,2007, the Company adopted the provisions of FIN 48 (Note 2). The Companyrecognizes interest accrued related to unrecognized tax benefits and penalties,if any, as a part of income tax expense. Currently, the tax years ended December 31,2008, 2007 and 2006 remained subject to examination by Russian, Ukraine,Kazakh, Uzbek and Georgian tax authorities, and the years ended December 31,2008 and 2007 remained subject to examination by Kyrgyz tax authorities. In2008, the Company’s Russia-based subsidiaries’ Wimm-Bill-Dann OJSC’s, WBD Foodsand TK WBD tax filings for the years ending December 31, 2004 through 2006were audited by tax authorities. As a result, our unrecognized tax benefitswere reassessed. The reconciliation of the total amounts of unrecognized taxbenefit is follows:

 
| ** **                                                                                                                                                                         | ** ** | **Year ended  December 31,****2008** | ** ** | **Year ended  December 31,****2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| **Unrecognized  tax benefits as of the beginning of the year**                                                                                                                     | ** ** | **$**                                     | **579**    | ** **                                | **$**      | **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                                                                                                                         |       | 306                                       |       | 642                                       |       |
| Decrease of tax positions taken during the  current period                                                                                                                         |       | —                                    |       | (127                                      | )          |
| Increase of tax positions taken during a  prior period                                                                                                                             |       | 10                                        |       | 349                                       |       |
| Decrease of tax positions taken during a  prior period                                                                                                                             |       | (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                                                                                                                                            |       | 73                                        |       | 48                                        |       |
| **Unrecognized  tax benefits as of the end of the year, including**                                                                                                                | ** ** | **$**                                     | **517**    | ** **                                | **$**      | **579** | ** ** |
| Net unrecognized  tax benefits                                                                                                                                                     |       | 440                                       |       | 431                                       |       |
| Tax fines and  penalties                                                                                                                                                           |       | 77                                        |       | 148                                       |       |
| **Unrecognized  tax benefits as of the end of the year**                                                                                                                           | ** ** | **$**                                     | **517**    | ** **                                | **$**      | **579** | ** ** |

 

F-31

----

**Table of Contents**

** **

Wimm-Bill-Dann Foods

 

Notes toConsolidated Financial Statements (continued)

** **

**16.       Income Tax (continued)**

 

The total amount of unrecognized tax benefits that, ifrecognized, would affect the effective income tax rate is $440 and $431 as of December 31,2008 and December 31, 2007. Accrued income tax penalties and interest were$77 and $148 as of December 31, 2008 and December 31, 2007. For theyear ended December 31, 2008 and December 31, 2007, the Companyaccrued additional fines and penalties (interest) of $50, $27 and $79, $69,respectively.

 

**17.**                     Government Grants

** **

In the period 1993-1999 Moscow Babyfood Plant (“ZDMP”)received capital grants from the Russian and Moscow Governments. These grantsrelated to the acquisition of property, plant and equipment for babyfoodproduction and are recognized in the consolidated statements of income in theperiod in which the depreciation expense on the related property, plant andequipment is incurred. The conditions of the grants are that ZDMP must continueto use the related property, plant and equipment for babyfood production.Management believes that it has complied with this condition and will continueto comply in the future.

 

The non-currentportion of Government grants is reported as part of other long-term payables,and the short-term portion is reported as part of other payables on the balancesheet. The movement in capital government grants during the years ended December 31,2008, 2007 and 2006 was as follows:

 
| Balance  at December 31, 2005                                  |       | $      | 5,393   |       |
|---------------------------------------------------------------------|------------|--------|---------|------------|
| Amortization                                                        |       | (2,507 | )       |
| Decrease of government  grants due to minority interest acquisition |       | (646   | )       |
| Currency  translation adjustment                                    |       | 307    |    |
| Balance  at December 31, 2006                                  |       | 2,547  |    |
| Amortization                                                        |       | (1,612 | )       |
| Currency translation adjustment                                     |       | 116    |    |
| Balance  at December 31, 2007                                  |       | 1,051  |    |
| Amortization                                                        |       | (80    | )       |
| Currency  translation adjustment                                    |       | (160   | )       |
| **Balance  at December 31, 2008**                              | ** ** | **$**  | **811** | ** ** |
| Short-term portion                                                  |       | 65     |    |
| Long-term portion                                                   |       | 746    |    |

 

Grants are amortized once the related property, plantand equipment are put into operation. Amortization is reported as a reductionin the depreciation expense of the related property, plant and equipment.

 

WBD Foods did not receiveany grants during the years ended December 31, 2008 and 2007.

** **

**18.**                     Shareholders’ Equity

 

In accordance with Russian corporatelaws, earnings available for dividends are limited to profits, denominated indomestic currency, after certain deductions. No dividends were declared for theyear ended December 31, 2008.

 

F-32

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to ConsolidatedFinancial Statements (continued)

 

**19.**                     Financial Income andExpenses, net

 

Financial income andexpenses, net for 2008, 2007, and 2006 were comprised of the following:

 
| ** **                                    | ** ** | **2008** | ** **  | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------|------------|----------|-------------|------------|------------|------------|------------|
|                                          |       |     |        |       |       |       |       |
| Interest  expense                             |       | $        | 44,544      |       | $          | 34,988     |       | $ | 27,898 |   |
| Interest  income                              |       | (6,648   | )           | (2,952     | )          | (4,372     | )          |
| Foreign  currency losses (gains), net         |       | 58,811   |        | (18,120    | )          | (10,288    | )          |
| Loss  on currency forward contracts           |       | 2,546    |        | —     |       | —     |       |
| Bank  charges                                 |       | 2,868    |        | 2,912      |       | 2,070      |       |
| Other  financial (income) expense, net        |       | (617     | )           | 23         |       | 172        |       |
| **Total  financial income and expenses, net** | ** ** | **$**    | **101,504** | ** ** | **$**      | **16,851** | ** ** | **$** | **15,480** | ** ** |

** **

The Company’s net income was negatively affected bycurrency exchange rate fluctuations resulting in a $58,811 net foreign exchangeloss primarily from its U.S. dollars denominated debt.

 

During the fourth quarter of 2008, as part of its cashmanagement function, the Company entered into short-term currency forwardcontracts, typically settled within 40 days. As of December 31, 2008,under the terms of these contracts, the Company has obligations to purchase1,281 million rubles for $44,320 during January 2009. The fair value ofsuch contracts was included in other payables in the amount of $2,546. No suchcontracts were entered into during 2007.

 

**20.**                     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 andcomprehensive income. Pension costs amounted to $37,934, $32,466 and $26,270 in2008, 2007 and 2006, respectively. WBD Foods has no other pension obligations.

 

**21.**                     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 minority interests and deferred taxes. Transfersbetween segments are made at values that approximate market values.

 

F-33

----

**Table of Contents**

** **

Wimm-Bill-Dann Foods

 

**Notes to Consolidated FinancialStatements (continued)**

** **

**21.       Segment Information (continued)**

###### ** **

###### **Operating Segments — yearended December 31, 2008**

 
| ** **                                                                | ** ** | **Dairy**     | ** **              | **Beverages** | ** ** | **Baby********Food**   | ** ** | **Common and  corporate assets/  expenses** | ** **         | **Intersegment  receivables/  payables** | ** ** | **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)**                                             | ** ** | ** **    | ** **              | ** **    | ** ** | ** **             | ** ** | ** **                                  | ** **         | ** **                               | ** ** | **$**              | **103,795** | ** ** |
| Deferred income tax expense                                               |       |          |                    |          |       |                   |       |                                        |               |                                     |       | (54                | )           |
| Minority interest                                                         |       |          |                    |          |       |                   |       |                                        |               |                                     |       | (2,029             | )           |
| **Net income**                                                            |       |          |                    |          |       |                   |       |                                        |               |                                     | ** ** | **$**              | **101,712** | ** ** |
| **Segment total assets**                                                  | ** ** | **$**         | **1,314,832**           | ** **    | **$**      | **245,825**            | ** ** | **$**                                       | **112,493**        | ** **                               | **$**      | **262,864**        | ** **  | **$** | **(359,049** | **)** | **$** | **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** | ** ** |

 

###### **Operating Segments — yearended December 31, 2007**

 
| ** **                                                                | ** ** | **Dairy**     | ** **    | **Beverages** | ** ** | **Baby********Food** | ** ** | **Common and  corporate assets/  expenses** | ** ** | **Intersegment  receivables/  payables** | ** ** | **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)**                                             | ** ** | ** **    | ** **    | ** **    | ** ** | ** **           | ** ** | ** **                                  | ** ** | ** **                               | ** ** | **$**            | **147,710** | ** ** |
| Deferred income tax expense                                               |       |          |          |          |       |                 |       |                                        |       |                                     |       | (4,893           | )           |
| Minority interest                                                         |       |          |          |          |       |                 |       |                                        |       |                                     |       | (2,769           | )           |
| **Net income**                                                            | ** ** | ** **    | ** **    | ** **    | ** ** | ** **           | ** ** | ** **                                  | ** ** | ** **                               | ** ** | **$**            | **140,048** | ** ** |
| **Segment total assets**                                                  | ** ** | **$**         | **1,195,861** | ** **    | **$**      | **280,103**          | ** ** | **$**                                       | **73,391** | ** **                               | **$**      | **63,617**       | ** **  | **$** | **(179,870** | **)** | **$** | **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** | ** ** |

 

F-34

----

Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**21.       Segment Information (continued)**

###### ** **

###### **Operating Segments — yearended December 31, 2006**

 
| ** **                                                                | ** ** | **Dairy**     | ** **  | **Beverages** | ** ** | **Baby   food** | ** ** | **Common and  corporate assets/  expenses** | ** ** | **Intersegment  receivables/  payables** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|---------------|-------------|---------------|------------|-----------------|------------|---------------------------------------------|------------|------------------------------------------|------------|------------------|------------|
| Total sales                                                               |       | $             | 1,339,621   |          | $          | 324,074         |       | $                                           | 117,152    |                                     | $          | —           |       | — |   | $ | 1,780,847 |   |
| Inter segment sales                                                       |       | (18,720       | )           | —        |       | —          |       | —                                      |       | —                                   |       | (18,720          | )          |
| **Sales  to external customers**                                          | ** ** | **1,320,901** | ** **  | **324,074**   | ** ** | **117,152**     | ** ** | **—**                                  | ** ** | **—**                               | ** ** | **1,762,127**    | ** ** |
| Cost of sales                                                             |       | (917,813      | )           | (209,630      | )          | (66,716         | )          |                                        |       | —                                   |       | (1,194,159       | )          |
| **Gross profit**                                                          | ** ** | **403,088**   | ** **  | **114,444**   | ** ** | **50,436**      | ** ** | **—**                                  | ** ** | **—**                               | ** ** | **567,968**      | ** ** |
| Operating expenses                                                        |       | (243,943      | )           | (105,712      | )          | (18,116         | )          | (44,576                                     | )          | —                                   |       | (412,347         | )          |
| **Operating  income (loss)**                                              | ** ** | **159,145**   | ** **  | **8,732**     | ** ** | **32,320**      | ** ** | **(44,576**                                 | **)**      | **—**                               | ** ** | **155,621**      | ** ** |
| Financial income and  expense, net and current provision for income taxes |       |          |        |          |       |            |       |                                        |       |                                     |       | (63,712          | )          |
| **Net  segment profit (loss)**                                            | ** ** | ** **    | ** **  | ** **    | ** ** | ** **      | ** ** | ** **                                  | ** ** | ** **                               | ** ** | **$**            | **91,909** | ** ** |
| Deferred income tax  benefit                                              |       |          |        |          |       |            |       |                                        |       |                                     |       | 6,672            |       |
| Minority interest                                                         |       |          |        |          |       |            |       |                                        |       |                                     |       | (3,197           | )          |
| Net income                                                                |       |          |        |          |       |            |       |                                        |       |                                     | ** ** | **$**            | **95,384** | ** ** |
| **Total  assets**                                                         | ** ** | **$**         | **915,244** | ** **    | **$**      | **214,706**     | ** ** | **$**                                       | **90,122** | ** **                               | **$**      | **128,683**      | ** ** | **$** | **(172,819** | **)** | **$** | **1,175,936** | ** ** |
| **Expenditure for property,  plant and equipment**                        | ** ** | **$**         | **93,322**  | ** **    | **$**      | **13,474**      | ** ** | **$**                                       | **19,356** | ** **                               | **$**      | **3,811**        | ** ** | **$** | **—** | ** ** | **$** | **129,963** | ** ** |
| **Depreciation and  amortization**                                        | ** ** | **$**         | **46,849**  | ** **    | **$**      | **11,515**      | ** ** | **$**                                       | **3,010**  | ** **                               | **$**      | **955**          | ** ** | **$** | **—** | ** ** | **$** | **62,329** | ** ** |

 

For the years ended December 31, 2008, 2007, and2006, approximately 93% of sales were generated in and sold to customers inRussia. As of December 31, 2008 and 2007, the long-lived assets of theCompany located in Russia were $667,948 and $757,672, respectively.

 

**22.**                     Share-based Awards

 

In 2006 the Companyestablished stock option plan for a number of its executives.

 

The exercise price ofthe options equals the average closing price of the stock over the90 trading days period preceding each annual grant. Each tranche vestsone-third annually over a three year period and can be settled in cash. Thecontractual terms of options are three to five years from grant date.

 

Since April 1,2007, a long-term incentive plan for top management was approved by the Boardof Directors. According to this program a certain number of senior managementare rewarded with Stock Appreciation Rights (“SAR”) linked to the price of theCompany’s ADR. Commencing April 1, 2007 all outstanding stock options wereconverted into SARs on the following basis: 1 stock option = 1 SAR.

 

The exercise price ofSARs is determined as the average market value of ADR of the Company over theperiod January 1st to the date prior to the Board meeting atwhich the prior year U.S. GAAP Statements are approved. The exercise priceof SARs granted in 2008 was $114.02. Each tranche vests one-third annually overa three year period and is settled in cash. The contractual terms of SARs arefive years from grant date.

 

F-35

----

**Table of Contents**

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**22.**                     Share-based Awards(continued)

 

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, 2005** | ** ** | **—**                         | ** ** | **$**                                                    | **—** | ** ** |
| Granted                                    |       | 225                                |       | 26.84                                                    |       |
| Canceled                                   |       | —                             |       | —                                                   |       |
| Forfeited                                  |       | —                             |       | —                                                   |       |
| Exercised                                  |       | —                             |       | —                                                   |       |
| **Outstanding at  December 31, 2006** | ** ** | **225**                            | ** ** | **26.84**                                                | ** ** |
| Granted                                    |       | 363                                |       | 64.09                                                    |       |
| Canceled                                   |       | —                             |       | —                                                   |       |
| Forfeited                                  |       | (5                                 | )          | 63.86                                                    |       |
| Exercised                                  |       | (8                                 | )          | 39.23                                                    |       |
| **Outstanding at  December 31, 2007** | ** ** | **575**                            | ** ** | **49.86**                                                | ** ** |
| Granted                                    |       | 426                                |       | 114.02                                                   |       |
| Exercised                                  |       | (202                               | )          | 38.20                                                    |       |
| Forfeited                                  |       | (63                                | )          | 84.93                                                    |       |
| **Outstanding at  December 31, 2008** | ** ** | **736**                            | ** ** | **$**                                                    | **87.17**  | ** ** |

 

TheCompany expensed $2,540, $15,951 and $2,205 for all share-based awards for thetwelve months ended December 31, 2008, 2007 and 2006, respectively. As of December 31,2008, there was approximately $1,046 of total unrecognized compensation costrelated to non-vested SARs awards. The cost is expected to be recognized over aweighted average requisite service period of 1.88 years. The estimated weightedaverage fair value per share of non-vested SARs as of December 31, 2008and 2007 was $2.95 and $81.52, respectively.

 

Theremaining contractual term of the SARs awards outstanding as of December 31,2008 is 1.68 years and the SARs have no aggregate intrinsic value. Theestimated weighted average fair value per share of the outstanding share basedawards as of December 31, 2008 and 2007 was $3.02 and $84.72,respectively.

 

Asof December 31, 2008, 311,000 SARs granted were vested and exercisable,which have a $74.15 weighted average exercise price, 1.41 years of remainingcontractual life and the SARs have no aggregate intrinsic value as of December 31,2008.

 

Cashpaid by the Company to settle SARs exercised in 2008, 2007 and 2006 amounted to$17,903, $578 and $nil, respectively.

 

Inaccordance with SFAS No. 123(R), the awards have been accounted for as aliability and, as such, the awards’ fair value is remeasured at each reportingdate until the date of settlement.

 

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**22.**                     Share-based Awards(continued)

 

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 as of the grant dates in the periodof twelve months ended December 31, 2008 were as follows:

 
| ** **                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**     | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|--------------|------------|
| Volatility (1)              |       | 66.22%   |       | 44.46%   |       | 32.28-36.55% |       |
| Risk-free interest rate (2) |       | 8.39%    |       | 6.08%    |       | 6.10-6.18%   |       |
| Dividend yield (3)          |       | 0%       |       | 0.41%    |       | 0.77-1.53%   |       |
| Expected life (years) (4)   |       | 3 years  |       | 3 years  |       | 3 years      |       |

 

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(1)                      The volatility is based on historical volatilityof the Company’s common stock over the same term as the expected term of theaward.

(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 grant date.

(4)                      The expected life is based on the contractualterm of the share based awards and assumption that the share based awards willbe exercised after the vesting period but before end of contractual term.

 

**23.**                     Related Parties

 

Milk Suppliers

 

During 2008, 2007 and 2006, the Companypurchased milk from certain milk supplying companies, which are controlled bymembers of its control group of shareholders, amounting to $15,289, $17,473 and$12,175, respectively. As of December 31, 2008 and 2007 accounts payableto these milk-supplying companies in respect of milk received amounted to $475and $410, respectively.

 

AlfaStrahovanie

 

During 2007 and 2006 one of the members of WBD Foods’Board of Directors was also a member of the Board of Directors of insurancecompany AlfaStrahovanie. Insurance services received from AlfaStrahovanie in2007 and 2006 amounted to approximately $1,048 and $660, respectively. As of December 31,2007, accounts payable to AlfaStrahovanie in respect to these services amountedto $119. In 2008 the WBD Foods’ Director disposed of his interest inAlfaStrahovanie.

 

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**24.**                     Commitments andContingencies

** **

Russian Environment andCurrent Economic Situation

 

Russia continues economic reforms and developmentof its legal, tax and regulatory frameworks as required by a market economy.The future stability of the Russian economy is largely dependent upon thesereforms and developments and the effectiveness of economic, financial andmonetary measures undertaken by the government.

 

The Russian economy is vulnerable to marketdownturns and economic slowdowns elsewhere in the world. The ongoing globalfinancial crisis has resulted in capital markets instability, significantdeterioration of liquidity in the banking sector, and tighter credit conditionswithin Russia. While the Russian Government has introduced a range ofstabilization measures aimed at providing liquidity and supporting debtrefinancing for Russian banks and companies, there continues to be uncertaintyregarding the access to capital and cost of capital for the Company and itscounterparties, which could affect the Company’s financial position, results ofoperations and business prospects.

 

Taxation

 

Russian tax, currency and customs legislation issubject 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 Federation suggestthat 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.

 

Assuch, significant additional taxes, penalties and interest may be assessed. Wecannot determine the amount of unasserted claims that may manifest, if any, orthe likelihood of any unfavorable outcome. Fiscal periods remain open to reviewby the authorities in respect of taxes for three calendar years proceeding theyear of review. Under certain circumstances reviews may cover longer periods.

 

Overall, management believes that the Company haspaid or accrued all taxes that are applicable as of December 31, 2008.Where uncertainty exists, the Company has accrued tax liabilities based onmanagement’s best estimate of the probable outflow of resources embodyingeconomic benefits, which will be required to settle these liabilities. Possibleliabilities for non-income tax contingencies and income tax contingencies otherthan those that meet the more-likely-than-not recognition threshold, identifiedby management at the balance sheet date as those that can be subject todifferent interpretations of the tax laws and regulations, are not accrued inthe consolidated financial statements.

 

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**24.       Commitments and Contingencies (continued)**

 

Taxation (continued)

 

In 2008 the Russian tax authorities carried out anaudit of Wimm-Bill-Dann for fiscal years 2004 through 2006 and found some ofthe Company’s suppliers negligent (i.e. not upholding their tax dutiesproperly) and made a demand from the Company for reimbursement of VAT andincome tax in the aggregate amount of approximately $7.8 million. The Company hasappealed this decision with the higher tax authorities as well as in court. Asa result, the higher tax authority recognized that these claims were partiallyinvalid and reduced the total claims to approximately $2.0 million. The Companyis also awaiting a court ruling on this case, which is currently pending. Noamount has been accrued in relation to this claim. The Company is disputingthis claim and believes it is likely that it will defend such actionsuccessfully. However the expected outcome of such court cases is unclear.

 

In addition, the Moscow Regional service of RussianInterior Ministry has launched an investigation of alleged violations of thetax code by the Company. The Company believes that this investigation is basedon the assessment by the Russian tax authorities for the financial years 2004through 2006 described above. Although the Company cannot estimate the outcomeof this investigation, the Company is convinced that the investigation has nolegal basis, and the Company has lodged an appeal with the Moscow CityProsecutor’s Office. The investigation is currently pending. Although theCompany continues to provide the results of due diligence carried out on itssuppliers to the relevant Russian authorities, the Company cannot exclude thepossibility that some of these suppliers will be found to have been negligentby the tax authorities and that a claim could be made against the Company.

 

Transfer Pricing

 

**Russiantransfer pricing rules were established in 1999, giving Russian tax authoritiesthe right to control prices for transactions between related entities andcertain other types of transactions between independent parties, such asforeign trade transactions or transactions with significant price fluctuations.The Russian transfer pricing rules are vaguely drafted, leaving wide scopefor interpretation by Russian tax authorities and arbitration courts and theiruse in politically motivated investigations and prosecutions. Managementbelieves that the prices used by the Company are market prices and, therefore,comply with the requirements of Russian tax law on transfer pricing. However,due to the uncertainties in interpretation of transfer pricing legislation, thetax authorities may challenge 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 Packaging Materials**

** **

**Themajority of the Company’s packaging materials are purchased from one supplier.There can be no assurance that, in the event of a loss of this supplier orunfavorable developments in the business practices of this supplier,substantially all of the current levels of packaging materials could bepurchased at comparable, or nearly comparable, prices on the internationalmarket.**

 

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Table of Contents

 

Wimm-Bill-Dann Foods

 

Notes to Consolidated Financial Statements (continued)

 

**24.       Commitments and Contingencies (continued)**

 

Capital commitments

 

As of December 31, 2008, our capital commitmentsamounted to $32.2 million.

 

Operating leases

 

During the years ended December 31, 2008, 2007and 2006, the Company was not involved in any non-cancelable operating leasesarrangements. The operating lease expenses for the years were as follows:$10,510, $8,956 and $7,504, 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.

 

**25.**                     Subsequent Events

 

From January 2009 through June 16, 2009the Company purchased from the open market 1,287,008 shares into treasury,which constitute 2.93% of the Company’s share capital, for total considerationof $27,599.

 

In May 2009 theCompany repaid ruble loan to Alfabank in the amount of 1,300 million rubles,which is the equivalent of $44,247 and $39,997 at the exchange rates at December 31,2008 and at dates of repayment, respectively.

 

On June 3, 2009the Company repaid ruble loan to Sberbank in the amount of 1,250 millionrubles, which is the equivalent of $42,545 and $40,674 at the exchange rates atDecember 31, 2008 and June 3, 2009, respectively.

 

In 2009, the Company experienced significantadverse currency fluctuations. The ruble to U.S. dollar and ruble to euroexchange rates increased from 29.38 and 41.44 as at December 31, 2008 to31.15 and 43.30 as at June 16, 2009, respectively. The Company has thefollowing payables denominated in U.S. dollars and euros as at December 31,2008:

 

·                                Vendor finance payables in the amount of$6,084 and 12.0 million euro;

·                                Euro denominated loans in the amount of$3,605;

·                                Syndicated loan in the amount of $250,000;

·                                Trade payables for concentrates and packagingmaterials in the amount of $10,969 and 10.4 million euro.

 

The effect of thischange in exchange rates on the amounts outstanding as of December 31,2008 would have resulted in a foreign currency loss of approximately $15,720for the period from January 1, 2009 through June 16, 2009.

 

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