BULGARTABAC-HOLDING AD ANNUAL SEPARATE FINANCIAL ...

BULGARTABAC-HOLDING AD ANNUAL SEPARATE FINANCIAL STATEMENTS FOR 2011 CONTENTS SEPARATE STATEMENT OF COMPREHENSIVE INCOME 1 SEPARATE STATEMENT OF FINANCIAL POSITION 2 SEPARATE STATEMENT OF CASH FLOWS 3 SEPARATE STATEMENT OF CHANGES IN EQUITY 4 NOTES TO THE FINANCIAL STATEMENTS 1. BACKGROUND CORPORATE INFORMATION ............................................................................................................................. 5 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ............................................................. 6 3. REVENUE ............................................................................................................................................................................................. 31 4. OTHER OPERATING GAINS AND LOSSES ................................................................................................................................... 32 5. COSTS OF MATERIALS .................................................................................................................................................................... 33 6. PERSONNEL EXPENSES ................................................................................................................................................................... 33 7. COSTS OF HIRED SERVICES ........................................................................................................................................................... 34 8. BOOK VALUE OF GOODS SOLD ..................................................................................................................................................... 35 9. ACCRUED / (REVERSED) IMPAIRMENT OF ASSETS, NET ...................................................................................................... 35 10. OTHER OPERATING EXPENSES .................................................................................................................................................. 36 11. INVESTMENT GAINS AND LOSSES ............................................................................................................................................. 36 12. INCOME TAX (BENEFIT) / EXPENSE........................................................................................................................................... 37 13. PROPERTY, PLANT AND EQUIPMENT ....................................................................................................................................... 38 14. INTANGIBLE ASSETS ...................................................................................................................................................................... 40 15. INVESTMENTS IN SUBSIDIARIES ................................................................................................................................................ 41 16. AVAILABLE-FOR-SALE INVESTMENTS .................................................................................................................................... 43 17. LONG-TERM RECEIVABLES FROM RELATED PARTIES ..................................................................................................... 43 18. LONG-TERM LOANS TO EMPLOYEES ....................................................................................................................................... 44 19. DEFERRED TAX ASSETS AND LIABILITIES ............................................................................................................................. 44 20. OTHER NON-CURRENT ASSETS .................................................................................................................................................. 46 21. LONG-TERM TRADE RECEIVABLES ......................................................................................................................................... 47 22. INVENTORIES ................................................................................................................................................................................... 47 23. RECEIVABLES FROM RELATED PARTIES ............................................................................................................................... 49 24. TRADE RECEIVABLES .................................................................................................................................................................... 53 25. OTHER CURRENT ASSETS ............................................................................................................................................................ 57 26. CASH AND CASH EQUIVALENTS ................................................................................................................................................. 59 27. CAPITAL AND RESERVES .............................................................................................................................................................. 60 28. RETIREMENT BENEFIT OBLIGATIONS .................................................................................................................................... 61 29. TRADE AND OTHER PAYABLES .................................................................................................................................................. 63 30. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY ................................................................................................. 65 31. CONTINGENT LIABILITIES AND COMMITMENTS ................................................................................................................ 66 32. RELATED PARTIES .......................................................................................................................................................................... 74 33. FINANCIAL RISK MANAGEMENT ............................................................................................................................................... 77 34. PRIVATISATION, LIQUIDATION AND INSOLVENCY PROCEDURES................................................................................. 88 35. EVENTS AFTER THE END OF THE REPORTING PERIOD ..................................................................................................... 90 36. CLAIMS TO THE COMPANY ......................................................................................................................................................... 90

BULGARTABAC-HOLDING AD ANNUAL SEPARATE FINANCIAL STATEMENTS FOR 2011

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1. BACKGROUND CORPORATE INFORMATION

Bulgartabac - Holding AD is a commercial entity incorporated in November 1993 pursuant to order No. 115 of the Council of Ministers for the transformation of State Organisation Bulgartabac into Bulgartabac - Holding EAD and 22 joint-stock companies with state participation. By means of a decision of the General Meeting of Shareholders of 1997 the company Bulgartabac - Holding EAD was transformed into Bulgartabac - Holding AD.

As a result of the publicly announced tender, in pursuance of a decision № 3219-P dated 18 April 2011 (promulgated in the State Gazette, issue 34 of 10 May 2011) of the Agency of Privatisation and Post Privatisation Control (the Agency), a privatisation contract between the Agency and BT Invest GmbH, Austria, was signed on 12 September 2011 for the privatisation of 79.83% of the capital of Bulgartabac-Holding AD, Sofia.

On 14 October 2011, the Agency, in its capacity of a seller, transferred to BT Invest GmbH, Austria, 5,881,380 shares, or 79.83% of the capital of Bulgartabac-Holding AD.

The Company’s registered address and address of management is at 62 Graf Ignatiev Street, Sofia city. The court registration of the Company dates back to 1994, Decision No. 1 of 05 April 1994 of the Sofia City Court. The Company was entered into the Trade Register at the Registry Agency under UIC 831636680.

Bulgartabac - Holding AD is a public company under the Public Offering of Securities Act. These financial statements will be published with the Financial Supervision Commission, Bulgarian

Stock Exchange – Sofia AD, and the Trade Register.

1.1. Ownership and management

Bulgartabac - Holding AD is a public company under the Public Offering of Securities Act. The distribution of the Company’s share capital as at 31 December 2011 is as follows: • BT Invest GmbH, Austria 79.83 % • Corporate Commercial Bank 8.21% • Other legal entities 10.52 % • Individuals 1.44 % At 31 December 2011 Bulgartabac - Holding AD has a one-tier management system – Board of

Directors (BD). The Board of Directors comprises 5 members. The Chairman of BD is Alexander Jurjevich Romanov. The Company is managed and represented jointly by the two Executive Directors, Vencislav Zlatkov Cholakov and Angel Dimitrov Dimitrov. Ivan Atanasov Bilarev is registered as Procurator with the Trade Register at the Registry Agency and is authorized to represent the company jointly with either one of the Executive Directors.

1.2. Scope of activity

The Company has an unlimited permit No. 1011 dated 21 December 2004 issued by the Council of

Ministers for industrial processing of tobacco. The object of activity of the Company in 2011 includes the following types of transactions and deals: • management of share participation and financial resources; • foreign and domestic trade; • buying-up and industrial processing of tobacco;


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• participation in Bulgarian companies and in their management; • intellectual property transactions. 1.3. Structure of the Company

The Company holds shares (between 78.22% and 100% of the capital) in 8 domestic companies. The

share capital of these companies amounts to BGN 10,529 thousand (the portion of BGN 9,562 thousand is held by Bulgartabac - Holding AD, allocated in 9,562,200 ordinary registered shares with a nominal value of BGN 1 each). Bulgartabac - Holding AD exercises control over 7 of these companies and in 1 of them it does not hold the power to manage its financial and operating policies due to the fact that the entity has become an object of judicial control (declared in insolvency proceedings)(Note 15).

The object of the subsidiaries’ activities is as follows: • buy-up, industrial processing, preparation for export and trade in tobacco; • production, preparation for export and trade in tobacco products; • distribution of tobacco products. The main indications of the economic environment influencing the Company’s activity throughout the

period 2007 – 2011 are depicted in the table bellow:

Indicator 2007 2008 2009 2010 2011

GDP in ml. BGN* 60,185 69,295 68,322 70,511 75,265 Annual real growth of GDP* 6,4% 6,2% -5,5% 0,4% 1,7 GDP per capita in BGN 7,379 8,711 8,735 9,362 -** Year-end inflation 12,5% 7,8% 0,6% 4,5% 2,8% Average exchange rate of USD for the year 1,42904 1,33723 1,40670 1,47738 1,40645 Year-end exchange rate of USD 1,33122 1,38731 1,36409 1,47276 1,51158 Year-end basic interest rate 4,58% 5,77% 0,55% 0,18% 0,22% Unemployment (year-end) 6,91% 6,27% 9,13% 9,24% 10,4%

Source: NSI (except the data on the unemployment rate), BNB, National Employment Agency * preliminary data of NSI for 2011. ** No data for year 2011.

2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY 2.1. Statement of compliance

The separate financial statements of Bulgartabac - Holding AD have been prepared in accordance with

all International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards

Board (IASB), which comprise: International Financial Reporting Standards, International Accounting

Standards and Interpretations of the International Financial Reporting Standards Interpretation Committee

(IFRIC) or by the former Standing Interpretations Committee (SIC), which are in force from 1 January 2011 and

are endorsed by the Commission of the European Union (the Commission).


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2.2. New and amended International Financial Reporting Standards

2.2.1. Adoption of new and amended International Financial Reporting Standards

For the current financial year the Company has adopted all new and/or revised standards and

interpretations issued by the International Accounting Standards Board (IASB) and approved by the

Commission of the European Communities, which are applicable to its activity. The Company’s current

accounting policies have not necessitated amendments for adapting the application of all new and/or revised

IFRS in effect for the current reporting year beginning on 1 January 2011, since they do not refer to its activities

and the usual composition and characteristic of its assets and liabilities, or during the period there has not

existed any objects or transactions that have been affected by the changes in the amended IFRS. The effect of

the changes in IFRS for the Company consists only of the introduction of new and the expansion of already

established disclosures and also of changes in the presentation of the financial statements without this affecting

the amounts stated therein. These standards and interpretations include the following changes: an effective

standard has been replaced, one new interpretation of the Interpretation Committee (IFRIC) was adopted and

amendments and improvements of effective standards and interpretations of the Interpretation Committee

(IFRIC) were made, as follows:

• IFRS 1 (amended) First-time Adoption of International Financial Reporting Standards (effective for annual periods beginning on or after 1 January 2011). The amendments relate primarily to: the application of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, when they concern the first financial statements prepared in accordance with IFRS; the use of the adopted value for transactions that are subject to regulation of their value and additional requirements in the presentation of interim financial statements;

• IFRS 1 (amended) First-time Adoption of International Financial Reporting Standards (effective for annual periods beginning on or after 1 July 2010). These amendments relate to the period from which the amendments in the standard apply in relation to the implementation of Interpretation 19 of IFRIC Extinguishing Financial Liabilities with Equity Instruments;

• IFRS 3 (amended) Business Combinations (effective for annual periods beginning on or after 1 July 2010). The amendments relate to: the measurement at the date of acqusition of the components of non-controlling interests, share-based payment transactions and rules for assessing the price of business combinations;

• IFRS 7 (amended) Financial Instruments: Disclosure (effective for annual periods beginning on or after 1 July 2010). These amendments relate to the period from which the amendments in the standard apply as supplemented by IFRS 3 Business Combinations (revised in 2008) and in particular, to the elimination of the exception for application of IFRS 7 regarding conditional consideration contract in the event of a business combination reported by the acquiring entity. These contracts are reported in accordance with paragraphs 65А – 65E of IFRS 3 (amended in 2010);

• IFRS 7 (amended) Financial Instruments: Disclosure (effective for annual periods beginning on or after 1 January 2011). These amendments relate to the disclosure of qualitative information in the context of quantitative data with the aim to enable the users to make connection between this data and thus, to form an overall view of the nature and grade of risks originating from financial instruments;


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• IFRS 8 (amended) Operating Segments (effective for annual periods beginning on or after 1 January

2011). These amendments relate to the period from which the amendments in the standard apply as supplemented by IAS 24 Related Party Disclosures (revised in 2009) and in particular, the judgements about entities under the control of the State when these are determined as one separate client;

• IAS 1 (amended) Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2011). The amendments relate to information to be presented in the statement of changes in equity or in the notes;

• IAS 21 (amended) The Effects of Changes in Foreign Exchange Rates (effective for annual periods beginning on or after 1 July 2010). These amendments relate to the period from which the amendments in the standard apply as supplemented by IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) and in particular, when there is a disposal or partial disposal of foreign operations;

• IAS 24 (revised) Related Party Disclosures (applied retrospectively for annual periods beginning on or after 1 January 2011); it replaces IAS 24 Related Party Disclosures (revised in 2003). The amendments aim at improving the definition of the scope and types of related parties, they introduce a partial exception from the requirement for full related party disclosures – with regard to government authorities and their related parties.

• IAS 28 (amended) Investments in Associates (effective for annual periods beginning on or after 1 July 2010). These amendments relate to the period from which the amendments in the standard apply as supplemented by IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) and in particular, to the way of reporting by the investor of investments in an associated company where significant influence is lost;

• IAS 31 (amended) Interest in Joint Ventures (effective for annual periods beginning on or after 1 July 2010). These amendments relate to the period from which the amendments in the standard apply as supplemented by IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) and in particular, to the way of reporting by the investor of investments in an associated company where the investor ceases to have joint control over an entity;

• IAS 32 (amended) Financial Instruments: Presentation (effective for annual periods beginning on or after 1 July 2010). These amendments relate to the period from which the amendments in the standard apply as supplemented by IFRS 3 Business Combinations (revised in 2008) and in particular, to the elimination of the exception for application of IAS 32 regarding conditional consideration contract in the event of a business combination reported by the acquiring entity. These contracts are reported in accordance with paragraphs 65А – 65E of IFRS 3 (amended in 2010);

• IAS 32 (amended) Financial Instruments: Presentation (effective for annual periods beginning on or after 1 February 2010) – clarifies the classification of rights issues. The amendments relate to supplementing the definition of the term “financial liability” as well as the principles for distinguishing financial instruments between financial liabilities or equity instruments;

• IAS 34 (amended) Interim Financial Reporting (effective for annual periods beginning on or after 1 January 2011). The amendments relate to the need to disclose explanations about significant events and transactions, and other information in the interim financial statements, through which disclosures the relevant information, presented in the last annual financial statements, is updated;


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• IAS 39 (amended) Financial Instruments: Disclosure and Measurement (effective for annual periods beginning on or after 1 July 2010). These amendments relate to the period from which the amendments in the standard apply as supplemented by IFRS 3 Business Combinations (revised in 2008) and in particular, to the elimination of the exception for application of IAS 39 regarding conditional consideration contract in the event of a business combination reported by the buyer. These contracts are reported in accordance with paragraphs 65А – 65E of IFRS 3 (amended in 2010);

• Interpretation of IFRIC 13 (amended) Customer Loyalty Programmes (effective for annual periods beginning on or after 1 January 2011). The amendments relate to the assessment of the fair value of awarded credits;

• Interpretation of IFRIC 14 (amended) Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after 1 January 2011). The amendments relate to the elimination of certain undesired consequences as a result of the treatement of preliminary payments of future contributions if there is a minimum requirement for funding;

• Interpretation of IFRIC 19 (new) Extinguising Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). IFRIC 19 addresses the accounting by an entity when the terms of a financial liability are renegotiated and results in the entity issuing equity instruments to the advantage of the creditor of the entity to extinguish all or part of the financial liability.

At the date of approval of these financial statements for issue the following effective standards have

been amended: • IFRS 1 (amended) First-time Adoption of International Financial Reporting Standards (effective for

annual periods beginning on or after 1 July 2011). The amendments relate to the period of implementation of the amendements of the standard in relation to the implementation of IFRS 7 Financial Instruments: Disclosure.

• IFRS 7 (amended) Financial Instruments: Disclosure — Transfers of Financial Assets (effective for annual periods beginning on or after 1 July 2011). The amendments aim to help users of financial statements better evaluate the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position.

2.2.2. New and amended International Financial Reporting Standards issued but not yet effective

At the date of approval of these financial statements for issue new standards have been adopted and

effective standards have been amended and improved, which have been adopted by IAS Board but are not yet effective and endorsed by the European Commission:

• IFRS 7 (amended) Financial Instruments: Disclosure (effective for annual periods beginning on or

after 01 January 2013 and the interim periods within these annual periods). These amendments relate to

the new requirements to enlarge the disclosures regarding the offsetting of financial assets and

liabilities with the aim to enable the investors and users of financial statements better evaluate the efect

or potential effect of the offsetting and to improve the comparability between the financial statements

prepared in accordance with the requirements of IFRS and those prepared in accordance with US

GAAP.


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• IFRS 7 (amended) Financial Instruments: Disclosure (effective for annual periods beginning on or

after 1 January 2015) or upon the first-time adoption of IFRS 9 Financial Instruments). The

amendments relate to disclosure requirements upon the first-time adoption of IFRS 9 Financial

Instruments;

• IFRS 9 Financial Instruments (effective for annual periods beginning on or after 01 January 2015). The

new Standard replaces parts of IAS 39 and specifies principles, rules and criteria for classification and

evaluation of financial assets, incl. hybrid contracts. It introduces the requirement that the classification

of financial assets shall be made on the basis of the business model of the company with regard to their

management and of the characteristics of the agreed cash flows of the respective assets. Two main

groups and respectively, types of evaluation, are introduced - at amortizable and at fair value.

• IFRS 10 Consolidated Financial Statements (effective for annual periods beginning on or after 01

January 2013). IFRS 10 substitutes the consolidation principles provided for by IAS 27 and SIC 12

Consolidation – Special Purpose Entities, through the implementation of one consolidation model for

all entities based on control, regardless of the type of investee and the form of control. IFRS 10

includes new definitions of control; an investor controls an investee if it possesses simultaneously all of

the following three elements: power over the investee, exposure, or rights, to variable returns from its

involvement with the investee, and ability to use its power over the investee to affect the amount of the

investor’s return.

• IFRS 11 Joint Arrangements (effective for annual periods beginning on or after 01 January 2013).

IFRS 11 introduces new accounting requirements towards joint arrangements replacing IAS 31

Interests in Joint Ventures. The possibility to apply the proportionate consolidation method has been

eliminated with regard to reporting jointly controlled entities. In addition, IFRS 11 eliminates jointly

controlled assets and defines joint operations and joint ventures.

• IFRS 12 Disclosure of Interests in Other Entities (effective for annual periods beginning on or after 01

January 2013). IFRS 12 is a standard on disclosure requirements for all consolidated and non-

consolidated entities where an entity holds interests. The aim of IFRS 12 is to mandate disclosures such

that users of financial statements can evaluate, where control exists, any restrictions that might exist on

the consolidated assets and liabilities, the exposure to risks associated with interests in non-

consolidated entities, as well as the involvement of the non-controlling interest owners in the activity of

the consolidated entity.

• IFRS 13 Fair Value Measurement (effective for annual periods beginning on or after 01 January 2013).

IFRS 13 replaces the guidelines for fair value determination provided for in the existing IFRS by a

separate standard. IFRS 13 defines the fair value, provides recommendations on how to determine fair

value and introduces certain requirements for its disclosure. IFRS 13 does not change the requirements

for items to be assessed or disclosed at fair value.

• IAS 1 (amended) Presentation of Financial Statements (effective for annual periods beginning on or after 1 July 2012). The amendments aim to improve the presentation of the components of the statement of comprehensive income, although they do not change the possibility to present all items of income and


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expenses recognised for a given period in one statement of comprehensive income or in two related statements (separate statements of income and comprehensive income). Aditional disclosure requirements are introduced according to which the information contained in the items of other comprehensive income shall grouped into two categories: information that, if certain conditions are met, will be recognised subsequently under the heading of current profits and losses, and information that will not be recognised under the heading of current profits and losses. Taxes relating to these items will have to be presented analogically.

• IAS 12 (amended) Deferred Taxes (effective for annual periods beginning on or after 1 January 2012).

The amendments clarify that the measurement of deferred taxes relating to non-current assets shall be

made by taking into account the expectations and intentions about the manner of recovery of the

invested funds – through future use or through sale. The amendments provide practical guidance

regarding assets stated at fair value in accordance with IAS 40 Investment Property. When calculating

the deferred taxes on these assets it is accepted that the amount of these investments will be recovered

through sale. As a result of these amendments, SIC 21 Income Taxes - Recovery of Revalued Non-

Depreciable Assets was withdrawn. Guidance previously contained in the withdrawn SIC is now

incorporated in the amended IAS 12.

• IAS 19 (amended) Employee Benefits (effective for annual periods beginning on or after 1 January 2013). The key amendments relate to the changes in the requirements for recognition and disclosure of defined benefit plans. The method of excess of the 'corridor limit' of 10 percent for recognition of actuarial profits and losses no longer applies.

• IAS 27 (reissued) Separate Financial Statements (effective for annual periods beginning on or after 01

January 2013). The amendments relate to the adoption of IFRS 10. The reissued IAS 27 Separate

Financial Statements replaces IAS 27 Consolidated and Separate Financial Statements (issued in 2008).

The requirements for consolidation contained in IAS 27 (issued in 2008 г.) have been revised and

incorporated as part of the new IFRS 10 Consolidated Financial Statements.

• IAS 28 (amended) Investments in Associates and Joint Ventures (effective for annual periods

beginning on or after 01 January 2013). The amendments relate to the adoption of IFRS 10, IFRS 11

and IFRS 12. The amended IAS 28 Investments in Associates and Joint Ventures replaces IAS 28

Investments in Associates (issued in 2003)

• МСС 32 (amended) Financial Instruments – Presentation (effective for annual periods beginning on or

after 01 January 2014). The amendments relate to the implementation and presentation of the

requirements for offsetting the financial assets and liabilities.

• IFRS 1 (amended) First-time Adoption of International Financial Reporting Standards – additional exemptions for entities that cease to exist due to conditions of severe hyperinflation (effective for annual periods beginning on or after 1 July 2011). The amendments provide guidance on how an entity should resume presenting financial statements in accordance with IFRS after a period, during which its functional currency has been subject to hyperinflation.

These IFRS have not been adopted for earlier application by the Company. They will be adopted for

application by the Company for financial statements for annual periods beginning on or after 1 January 2012.

The Company’s management is of the opinion that the adopted new standards and amendments will have an


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impact in the future on its financial statements. However, the Company’s management has not yet prepared a

detailed assessment of the effect of the amendments to the standards commencing on or after 1 January 2012,

including quantitative assessment.

2.3. Basis of preparation of the financial statements These annual separate financial statements have been prepared on a historical cost basis, except for

property, plant and equipment (fixed tangible assets) that are measured at fair value as disclosed in the accounting policies below.

The financial statements have been prepared in accordance with the requirements and principles of going concern, current accrual, prudence, matching of revenue and expenses, and consistency in presentation.

Assets and liabilities or revenue and expenses have not been offset unless so required or permitted by a certain IFRS.

The Company maintains its accounting books and records in Bulgarian leva (BGN) that is the

Company’s presentation currency. Data in the financial statements and notes thereto have been presented and

rounded to the nearest thousand (BGN’000), unless otherwise stated.

During the reporting period the Company has applied consistently the same accounting policies and calculation methods as the ones applied in the previous reporting periods.

2.4. Consolidated financial statements of the Company The Company has started the process of preparation of its consolidated financial statements for 2011 in

accordance with IFRS effective for 2011 and these separate financial statements will be included therein. Pursuant to the planned dates, management expects that the consolidated financial statements will be approved for issue by the Board of Directors of the Company not later than 29 April 2012 and after this date the financial statements will be made available to third parties.

2.5. Comparative data The Company presents comparatives in these financial statements for one previous year. Where necessary, comparatives are reclassified in order to achieve comparability in view of the current

year presentation changes.

2.6. Inflationary restatement of reported figures The Company operated in a hyper-inflatory economic environment until 31 December 1999 and

therefore, inflatory restatements were made in the preparation of the opening balance sheet. The inflatory restatements referred to non-monetary assets and liabilities – property, plant and

equipment, share capital and statutory reserves. The period for which these restatements were made was of 01 July 1993 (the date of incorporation of the Company) to 31 December 1999.

The book value and the accumulated depreciation of property, plant and equipment was restated using the general consumer price index for the period from 01 July 1993 to 31 December 1999. The fair values of the Company’s property, plant and equipment were determined at 31 December 2000 (in relation to the preparation of the opening consolidated balance sheet of Bulgartabac Group in accordance with IAS) with the assistance of


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independent certified valuers. At this date, when these amounts of the assets are higher than their inflatory value, the difference is set aside in a revaluation reserve, and when they are lower – it is accounted for as impairment in the retained earnings.

The components “share capital” and “statutory reserves” had been restated to reflect the impact of

inflation by applying the index for the period from the date of their origin to 31 December 1999. These effects were transferred to the component “retained earnings” in these financial statements. Such an approach had been chosen in order to achieve a more reliable presentation of the share capital and statutory reserves, as the latter were bounded by a number of specific and formal rules, requirements and procedures of the Bulgarian Commercial Act.

2.7. Functional currency and recognition of foreign currency differences The Company’s functional and presentation currency is the Bulgarian Lev. On 1 July 1997 the

Bulgarian Lev was fixed under the Bulgarian National Bank Act to the German Mark at the ratio of BGN 1

equals DEM 1. With the introduction of the Euro (EUR) as an official currency of the European Union, it has

been fixed to the EUR at a ratio of BGN 1.95583 equals EUR 1.

Upon its initial recognition, a foreign currency transaction is recorded in the functional currency

whereas the exchange (spot) rate at the date of transaction or operation is applied to the foreign currency

amount. Cash, receivables and payables denominated in foreign currencies are reported in the functional

currency using the exchange rate published by the Bulgarian National Bank (BNB) at the last working day of

the respective month. At 31 December they are presented in Bulgarian leva at the closing exchange rate of the

Bulgarian National Bank (BNB).

The effects of foreign exchange differences arising on either the settlement of foreign currency

transactions or the reporting of transactions denominated in foreign currencies at exchange rates other than those

they were recognised initially are included in the statement of comprehensive income in the period in which

they arise and are treated as “other operating gains and losses”, with the exception of those related to

investments denominated in foreign currency.

2.8. Revenue Revenue of the Company is recognized on the accrual basis and to the extent that it is probable that the

economic benefits will flow to the Company and the revenue can be measured reliably. Upon sale of products, goods and materials revenue is recognized when the significant risks and

rewards of ownership pass over to the buyer. Upon provision of services, revenue is recognized by reference to the stage of completion of the

transaction at the end of the reporting period, if this stage, as well as the costs incurred for the transaction and the costs to complete the transaction, can be measured reliably.

Revenue is measured at the fair value of the consideration received or receivable, net of any indirect taxes and discounts and rebates granted.

Dividend income is recognized when the right to receive payment is established. Dividends from subsidiaries are presented in the statement of comprehensive income as ordinary operating income.


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Interest income is recognized currently, proportionately to the time basis that reports the effective income from financial assets, by using the effective interest rate method, and includes the difference between the book value and its amount at maturity.

Revenue from sale of investments in subsidiaries and other companies is recognized, in the case of

transactions executed through the Bulgarian Stock Exchange, on the date of transferring the share participation of Bulgartabac - Holding AD in their capital, and in the case of sales by tenders - on the date of contract signing.

Investment income includes interest income accrued by commercial banks on short-term deposits, including the net foreign exchange differences related thereto, and income (dividends) from investments available for sale.

Revenue from licensing fees and royalties is recognized in accordance with the contents of the relevant agreement on the accrual basis.

Net foreign currency differences relating to cash, trade receivables and payables denominated in foreign currencies, are included in the statement of comprehensive income (in the profit or loss for the year) at the time they are incurred and are presented net as “operating gains and losses”.

2.9. Expenses Expenses of the Company are recognised at the time they are incurred and by following the accrual and

matching concepts. Prepayments are deferred for recognition as current expenses to the period to which they relate. 2.10. Operating lease Leases where the lessor keeps the substantial part of all risks and rewards incidental to the ownership of

the specific asset are classified as operating leases. Operating lease payments are recognized as expenses in the statement of comprehensive income on a

straight-line basis over the lease term. Operating lease income is recognized on a straight-line basis over the lease term. Initial direct costs

incurred in negotiating and arranging the operating lease, if any, are added to the carrying amount of the leased assets and are recognized on a straight-line basis over the lease term.

2.11. Provisions Provisions are recognised when the Company has a present obligation, legal or constructive, as a result

of past events, it is probable that an outflow of resources embodying economic benefits will be required to repay/settle the obligation. Provisions are recognised if a reliable estimate can be made of the amount of the obligation based on the best estimate of management at the reporting period end of the expenses that will be required to settle the respective obligation. Where the obligation has a long-term maturity, the estimate is discounted using a rate (a pre-tax rate) that reflects both the current market value of the time value of money and the risks specific to the liability.

If it is expected that expenses, or part thereof, relating to a certain provision will be recovered, the recovery is recognised only if it is practically certain that these expenses will be recovered if the company


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settles its liability. Expenses relating to any provision are presented in the statement of comprehensive income (in the profit or loss for the year) net of the amount of the recovered expenses.

2.12. Property, plant and equipment Property, plant and equipment (fixed tangible assets) are stated in the financial statements at revalued

amount less accumulated depreciation and any impairment losses. The revalued (to fair value) amount of property, plant and equipment was determined initially by

independent valuers at 31 December 2000 (except for fixtures and fittings that are measured at inflated cost). The accumulated depreciation at the revaluation date had been written off.

A review for impairment is made at the end of each reporting period and if there were grounds for impairment, the assets were revalued in order to guarantee that the fair value of a certain revalued asset would not differ significantly from its carrying amount.

The effects of the revaluation were recorded as follows: • In the cases where the new fair value of the assets exceeded their carrying amount, the book value and

accumulated depreciation had been increased proportionally with the index of increase while with the difference between the fair value and the carrying amount of the assets a revaluation reserve was set aside and presented net of the deferred tax effects;

• Where the carrying amount of the assets exceeded the new fair value, the difference between the two amounts had been reported in the income statement except where no revaluation reserve was set aside in prior periods with regard to the said asset. If this was the case, the difference was treated as a decrease of this reserve unless it exceeded its amount in which case the excess was included as an expense in the income statement. Until 31 December 1999 inclusive, the gross book value and accumulated depreciation of property,

plant and equipment had been restated by applying the general consumer price index (Note 2.6). Initial measurement Upon their initial acquisition items of property, plant and equipment are valued at cost, which comprises

the purchase price, including customs duties, non-refundable purchase taxes and any directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs include the cost of site preparation, initial delivery and handling costs, installation costs, professional fees for people related to the project, etc.

The Company has set a materiality level of BGN 700 bellow which the assets acquired regardless of whether they possess the characteristics of a fixed asset or not are treated as current expenses at the time they are available for use as intended by the management.

Upon acquisition of items of property, plant and equipment under deferred settlement terms, the purchase price is equivalent to their price in cash at the date of their recognition. The difference between the amounts paid and the purchase price is reported as an interest expense over the loan term, unless interest expenses are capitalised in accordance with the requirements of IAS 23 Borrowing Costs.

Subsequent measurement The approach chosen by the Company for subsequent measurement of property, plant and equipment is

the revalued amount method under IAS 16 Property, Plant and Equipment. The revalued amount of the items of property, plant and equipment at the revaluation date is their fair value, less any accumulated depreciation and


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impairment losses. The Company has adopted a policy for revaluation of property, plant and equipment in every five years, usually. The frequency of revaluation depends on the changes in fair values of separate items of property, plant and equipment that are revalued. Where their fair value changes materially in shorter periods of time, the revaluation may be made at shorter periods of time as well.

Revaluation of fixed tangible assets Where the carrying amount of an asset is increased as a result of revaluation, the increase is recognized

in other comprehensive income and is accumulated in the equity as a revaluation reserve, unless it reverses a decrease made in a previous revaluation of the same asset which has been recognized as a loss. Where the carrying amount of an asset is decreased as a result of revaluation, the decrease is recognized in other comprehensive income to the point of the existing credit balance of the revaluation reserve in respect of the said asset and the amount of the revaluation reserve accumulated in the equity is thereby reduced. The decrease of the carrying amount of an asset over the amount of the revaluation reserve accumulated therefore is recognized as a loss for the period.

Depreciation methods The Company applies the straight-line depreciation method for its fixed tangible assets. Depreciation

commences at the time the asset is available for use. Land is not depreciated. Useful lives by groups of assets are determined pursuant to their physical wear and tear, specifics of the equipment, the future intentions for use and the estimated obsolescence, and are as follows:

• buildings – from 20 to 70 years (depending on their construction and purpose); • plant and equipment – from 7 to 18 years; • motor vehicles – from 8 to 18 years; • fixtures and fittings – from 2 to 8 years; • hardware – 4 years; • mobile phone sets – 3 years; • advertising facilities – from 2 to 3 years.

The useful life of fixed assets is reviewed at the end of each reporting period and in case any material deviations from the future expectations of their period of use, the latter is adjusted prospectively.

Subsequent costs Repair and maintenance expenses are recognized as current for the period when incurred. Subsequent

expenses relating to an item of property, plant and equipment that have the nature of replacement of certain components, key parts and aggregates, or of improvements and restructuring respectively are capitalized to the carrying amount of the relevant asset and its remaining useful life to the date of capitalization is assessed accordingly. At the same time, the carrying amount of the replaced components is derecognised and is recognised as current expenses for the period of restructure.

Impairment of property, plant and equipment The carrying amounts of property, plant and equipment are reviewed for impairment when events or

changes in circumstances indicate that the carrying amount might significantly differ from their recoverable amount. If any such indications exist that the estimated recoverable amount is lower than their carrying amount, then the latter is written-down to the recoverable amount of the assets (Note 2.28.3).


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The recoverable amount of property, plant and equipment is the greater of the two: the fair value less costs to sell and the value in use. In assessing the value in use, the estimated future cash inflows and outflows, which are expected to be received from the continuing use of the asset and from its disposal at the end of its useful life, are discounted to their present value using a pre-tax discount rate that reflects current market conditions and assessments of the time value of money as well as and the risks specific to the particular asset.

Impairment losses are recognized in the statement of comprehensive income (in the profit or loss for the year), unless a revaluation reserve has been set aside for the specific asset. If this is the case, the impairment loss is recognized against the revaluation reserve and included in the statement of comprehensive income (under the heading of other comprehensive income), unless it exceeds the amount of the reserve in which case the excess is included as an expense in the statement of comprehensive income (in the profit or loss for the year).

Gains and losses on disposal of fixed tangible assets Fixed tangible assets are written off the statement of financial position when they are permanently

withdrawn from use and it is not expected that they will generate any future economic benefits or when they are sold. Gains or losses on sale of separate assets from the group of “property, plant and equipment” are determined by comparing the sales revenue and the carrying amount of the asset at the date of disposal. They are stated net in “other operating gains / (losses), net” on the face value of the statement of comprehensive income (in the profit or loss for the year). The portion of “revaluation reserve” associated with the asset sold is transferred directly to “retained earnings” in the statement of changes in equity.

2.13. Intangible assets Intangible assets are stated in the financial statements at cost less accumulated amortisation and

impairment losses. They include the Company’s own trademarks as well as licenses for use of software. The Company applies the straight-line amortisation method for the intangible assets with determined

useful lives as follows:

• 10 years – for trademarks;

• 4 years – for software.

The carrying amount of the intangible assets is subject to review for impairment when events or changes in the circumstances indicate that the carrying amount might exceed their recoverable amount. Then, the impairment loss is recognized in the result for the current period.

Intangible assets are derecognized from the financial statements upon withdrawal from use (retirement) or sale.

2.14. Investments in subsidiaries Long-term investments, representing shares in subsidiaries, are presented in the financial statements at

cost less any impairment losses. Shares in subsidiaries in most cases are not traded in a stock exchange or the sales of shares at stock markets are of minimum amount. This circumstance does not provide an opportunity to ensure active market price quotations in order to determine reliably the fair value of these shares. Moreover, the future functioning of these companies is related to some uncertainties that affect the ability to make reasonable and justified long-term assumptions for the fair value calculation of their shares through other valuation methods.


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From the date on which the parent company loses its control of a subsidiary, the amount of the

investments in such a company is reported in its separate financial statements in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The carrying amount at the date control of the investment in the former subsidiary is lost is accepted as the acquisition price in the initial measurement of the financial asset in accordance with IAS 39.

The long-term investments in subsidiaries, owned by the Company, are subject to review for impairment. When conditions for impairment are found out this impairment is recognized in the result for the current period (Note 2.28.5).

2.15. Investments available for sale

The Company’s investments, representing shares in other companies, are measured and stated at cost,

less any impairment losses, as these shares are not traded in an active market, no market quotations are available for them in an active market while the assumptions for the application of alternative valuation methods are related to significant uncertainties in respect of achieving a reliable fair value determination. After the date a subsidiary is no longer a subsidiary, the investments in former subsidiaries are included in this group of financial assets (Note 2.14).

The Company’s investments available for sale are reviewed for impairment at the end of each reporting period. If indications of impairment are found out and the impairment amount is determined, the latter is recognised in the statement of comprehensive income (Note 2.28.7.).

2.16. Other non-current assets Other non-current assets represent interest-bearing receivables related to amounts deposited in escrow

accounts and pledge on the positive balance of a company’s bank account (Note 20). They are non-derivative financial assets, the escrow accounts being with a floating interest rate and the pledge - with a fixed interest rate. They are initially measured at cost (nominal amount), which is accepted as their fair value, plus of the direct transaction costs related to these receivables. Subsequently, they are measured at amortised cost determined by applying the effective interest rate method. Gains and losses are recognized in the statement of comprehensive income as finance income (interest) or expenses over the amortization period.

2.17. Inventories Inventories are valued at the lower of cost and net realizable value. Expenses incurred at bringing certain product to its current condition and location, are included in the

acquisition price (cost) as follows: • raw and other readily available materials – all delivery costs, including purchase price, expenses

incurred for services related to buying-up raw materials (tobacco), import customs duties and charges, transportation expenses, non-refundable taxes and other expenses, incurred for rendering the materials ready for usage;

• finished goods and work in progress – direct costs of materials and labour and the attributable proportion of the manufacturing overheads, based on normal operating capacity of production facilities, but excluding administrative expenses, exchange rate differences and borrowing costs.


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Upon putting into production (sale) of inventories, the method of average weighted price (cost) formula

is applied. The net realisable value represents the estimated selling price of an asset in the ordinary course of

business less the estimated costs of completion and the estimated costs necessary to make the sale (Note 2.28.6.).

2.18. Trade receivables Trade receivables are recognized and carried at fair value based on the original invoice amount (cost)

less any allowance for bad debts. Subsequently, they are measured at amortised cost using the effective interest rate method.

An estimate of such allowances for doubtful and bad debts is made when collection of the full amount or of part of it is highly uncertain.

Bad debts are written off when the legal grounds for that are identified or when a particular trade receivable is assessed as fully uncollectible. The write off is made on the account of the allowance formed and/or is recognised as an expense in the current period (Note 2.28.7).

2.19. Interest-bearing monetary loans Monetary loans are recognized initially at cost (nominal amount), which is accepted to be the fair value

of the consideration received on the transaction, net of any direct costs related to these loans. Subsequent to their initial recognition, interest-bearing loans are measured at amortised cost by applying the effective interest rate method. Any gains and losses are recognized in the statement of comprehensive income as finance income (interest) or costs over the amortization period, or when the receivables are settled, derecognized or reduced.

An estimate of the losses from doubtful and bad debts is made when it is highly uncertain that the whole amount or part thereof might not be collected.

Bad debts related to monetary loans are derecognized when the legal grounds for that are identified or or when the receivable is assessed as fully uncollectible. The write off is made on the account of the allowance formed and/or is recognised as an expense in the current year’s result.

Interest-bearing monetary loans are classified as current up to the amount to which the Company has the unconditional right to collect its receivables within 12 months as of the end of the reporting period (Note 2.27.1).

2.20. Cash and cash equivalents Cash includes cash in hand, cash in accountable persons, and cash in current accounts, and cash

equivalents include short-term deposits with banks, with an original maturity of less than three months. Interest accrued on the short-term deposits with commercial banks with maturity of up to 3 months is included in the statement of financial position as part of cash equivalents.

For the purpose of the cash flow statement: • cash receipts from customers and cash paid to suppliers are presented gross, including value added tax

(20%);


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• interest received on term deposits granted with investment purpose are included as cash proceeds from investing activity;

• interest accrued on term deposits with banks with an original maturity of up to 3 months and permanently blocked cash (as collateral on bank guarantees, court proceedings, etc) are presented on the face of the statement of financial position as a part of cash and cash equivalents; they are not included, however, as a part thereof when preparing the cash flow statement.

• VAT paid on purchases of fixed assets is stated as „payables to suppliers” to cash flows from operating activity in so far as it participates and is refunded together with and in the operating flows of the Company for the relevant period (month).

2.21. Non-current assets held for sale Non-current assets are classified as held for sale if their carrying amount will be recovered through sale

and not through continuous use in the Company’s operations. It is accepted that this circumstance exists only where the sale is highly probable and the asset is available for immediate sale in its current state. In addition, management is committed to a sale transaction which is expected to be accomplished within one year from the date of classifying the asset in this group or a buyer is actively sought, as the case may be.

Non-current assets classified as held for sale are measured at the lower of their carrying amount and the fair value less the costs to sell.

As of the date on which the non-current assets are classified in this group, their depreciation is cancelled.

As of the date on which the criteria for classifying an asset as held for sale are no longer satisfied, its classification as an asset held for sale is terminated and the asset is measured at the lower of its carrying amount prior to being classified as held for sale, adjusted with any depreciation and/or revaluation that would have been recognized had the asset not been recognized as held for sale, and its recoverable amount at the date of the subsequent decision providing for that the asset should not be sold.

2.22. Payables to suppliers and other contractors Payables to suppliers and other contractors are carried at an original invoice amount (cost), being the

fair value of the consideration to be paid in future for goods and services received. Subsequently they are measured at amortised cost using the effective interest rate method.

Payables to suppliers and other contractors are derecognized only when they have been settled, i.е. when the liability set in the contract has been settled or its term has expired. Any such derecognition is recognized as income in the result for the current period.

2.23. Pension and other payables to personnel under the social security and labour legislation

The employment and social security relations with the Company’s employees are based on the

provisions of the Labour Code (LC), the effective social security legislation, and the Company’s Collective Labour Agreement (CLA).

The employer’s major responsibility is to make the mandatory social security contributions for the hired employees to the Pension Fund, the Supplementary Mandatory Pension Security (SMPS), to the General


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Diseases and Maternity (GDM) Fund, the Unemployment Fund, the Labour Accident and Professional Diseases (LAPD) Fund, the Guaranteed Receivables of Workers and Employees (GRWE) Fund and for health insurance.

Social security rates are stipulated in the Law on the Budget of the State Social Security and the Law on

the budget of the National Health Insurance Fund for the relevant year. Contributions are allocated between the employer and the secured person at a ratio that is changed on an annual basis and provided for in the Social Security Code (SSC). The total contribution rate to the Pensions Fund, SMPS Fund, GDM Fund, Unemployment Fund and health insurance for 2011 is 30.3 % for the individuals working under the terms of the third category of employment to which the Company’s employees belong. In 2010 the contribution amount was 28.5%. In 2011, GDM Fund and Unemployment Fund are kept at the same amount and the employer : employee ratio (60:40) as the ones effective for 2010. Effective 01 January 2011 the Pensions Fund for the individuals born before 01 January 1960 was changed to 17.8 % (2010: 16%) and is allocated as follows: 9.9% on the account of the employer and 7.9% on the account of the secured person. Pensions Fund for the individuals born after 31 December 1959 was changed to 12.8 % (2010: 11%) and is allocated as follows: 7.1% on the account of the employer and 5.7% on the account of the secured person. The contributions to SMPS (for the Universal Pension Fund) remain the same in terms of amount (5%) and are allocated as follows: 2.8% on the account of the employer and 2,2 % on the account of the secured person.

In 2011, no social security contribution was paid to GRWE (2010: 0.1%). The amount of the health insurance contribution was kept at 8 %, as well as the ratio of employer : employee (60:40). In 2011, the social security contribution for LAPD Fund amounted to 0.4% (2010: 0.5%) and was entirely on the account of the employer.

In 2012, the total amount of social security and health insurance contributions remain the same as those effective in 2011, as also the ratio of employer : employee (60:40). The social security contribution for LAPD Fund remains the same and no social security contribution is paid to GRWE.

In 2011 and 2012, the state participation in the accumulation of the funds for Pension Fund continues through the transfer of 12 % on the sum of social security income of all insured individuals.

There is no established and functioning private voluntary social security fund at the Company. The social security and pension plans applied by the Company in its capacity of an employer are based

on the Bulgarian legislation and are defined contribution plans. Under these plans the employer pays monthly contributions as set by law and has no other legal or constructive payment obligation.

In accordance with the provisions of the Labour Code and the effective Collective Labour Agreement, the employer is obliged, upon termination of the employment contracts, to pay indemnities as follows:

• for non-observed advance notice: for the period of the non-observed advance notice;

• due to closing down of the enterprise or part thereof, staff cuts, reduction of the volume of work and work stoppage for more than 15 days, etc.: one gross monthly salary for each calendar year worked out with the Company, as also for the months worked out, whereas for each month worked out 1/12 part of the gross monthly salary is due;

• upon termination of the employment contract due to illness that has led to permanent disability (invalidity) and provided that they are entitled to pension for length of service and old age - depending on the length of service of the worker or employee with the Company: one gross monthly salary for each calendar year worked out with the Company, as also for the months worked out, whereas for each month worked out 1/12 part of the gross monthly salary is due;


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• upon termination of the employment contract due to illness: at the amount of 300% of the gross salary of the employee for two months if he/she has at least five years of length of service and has not received an indemnity payment on the same grounds;

• upon retirement: depending on the length of service of the worker or employee with the Company: one gross monthly salary for each calendar year worked out with the Company, as also for the months worked out, whereas for each month worked out 1/12 part of the gross monthly salary is due;

• for unused paid leave – for the respective years of the time recognised as length of service. After the above indemnity payments are made, no further liabilities to workers and employees arise for

the employer. The social programme of the Company includes the following payments: paid annual leave, Easter and

New Year holidays determined depending on the financial abilities of the Company, the particular amounts being subject to additional agreement. The employer provides also monthly food vouchers to its personnel and other social benefits, incl. for the International Women’s Day and New Year gifts to workers and employees’ children determined on the basis of the minimum initial salaries for the Company.

Short-term employee benefits Short-term employee benefits in the form of salaries, bonuses and social payments and benefits (payable

within 12 months of the end of the period in which the employees have rendered the service or have met the required terms and conditions) are recognised as an expense in the statement of comprehensive income in the period when the service thereon has been rendered or the requirements for their receipt have been met and as a current liability (less any amounts already paid and deductions due) at their undiscounted amount. The Company’s obligations to make social security and health insurance contributions are recognised as a current expense and liability at their undiscounted amount, together and in the period of accrual of the relevant income to which they are related.

At the date of each set of financial statements, the Company measures the estimated costs on the accumulating compensated leaves, which amount is expected to be paid as a result of the unused entitlement. The measurement includes the undiscounted estimate of the expenses on the employee’s remunerations and the statutory social security and health insurance contributions owed by the employer thereon.

Long-term employee benefits In accordance with the requirements of the Labour Code and the Collective Labour Agreement, the

Company is obliged to pay to its personnel upon retirement an indemnity which depends on the length of service with the Company. In their nature, these are defined benefit schemes.

The calculation of the amount of these liabilities necessitates the involvement of qualified actuaries in order to determine their present value at the date of the financial statements, at which to report them in its statement of financial position, adjusted with the amount of any unrecognised actuarial gains and losses, and respectively the change in their value for the period, incl. any recognised actuarial gains and losses – in the result (net profit/loss) for the period. Past service costs are expensed immediately in the statement of comprehensive income. In the event of changes in the defined benefit scheme the Company has adopted an approach to recognise the past service cost upon retirement due to old age and length of service for the average term to retirement as of the date of entry into force of the change in the scheme.

At the date of the financial statement, the Company assigns actuaries to issue a report with calculations regarding the Company’s long-term retirement benefit obligations. For the purpose, they apply the projected


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unit credit method. The present value of the defined benefit obligation is calculated by discounting the future cash flows that are expected to be paid within the maturity of this obligation and by using the interest rate applicable to government long-term bonds denominated in Bulgarian leva.

The actuarial gains and losses originate from changes in the actuarial assumptions and experience. The Company has adopted an approach of accelerated recognition of actuarial gains (losses) accumulated at period-end. It applies the method of exceeding 10% corridor but calculated against the present value of the liability closing balance. The excess of the unrecognised actuarial gains (losses) thus identified is amortised on a straight-line basis over a 5-year period from the date of origination.

The Company recognizes employee benefit obligations on employment termination before reaching the age of retirement when either there is a commitment based on an announced plan to terminate the employment contract with the respective individuals with no option to reverse it or upon the formal issuance of their documents for voluntary redundancy. Termination benefits due for more than 12 months are discounted and stated in the statement of financial position at their present value.

2.24. Share capital and reserves Being a joint-stock company, Bulgartabac - Holding AD is obliged to register in the Commercial

Register a certain amount of share capital, which should serve as collateral for the receivables of the Company’s creditors. The shareholders are liable for the obligations of the Company only up to the amount of the share of the capital held by each of them and may claim refunding of this share only in case of liquidation or bankruptcy proceedings. The Company reports its share capital at the nominal value of the shares registered with court.

Pursuant to the requirements of the Commercial Act and the Company’s Statutes, the Company is obliged to set aside also the statutory Reserves Fund by using the following sources:

• at least one tenth of the profit, which should be allocated to the Fund until its amount reaches one tenth of the share capital or any larger amount as may be decided by the General Meeting of Shareholders;

• any premium received in excess of the nominal value of shares upon their issue (share premium reserve);

• other sources provided for by a decision of the General Meeting.

The amounts in the statutory reserve can only be used to cover annual loss or losses from previous years. When the amount of the Fund reaches the minimal value as specified in the Statute the excess may be used for increasing the share capital.

Revaluation reserve is set aside from the positive difference between the carrying amount of property, plant and equipment and their fair values at the dates of revaluation. The deferred taxes effect on the revaluation reserve is directly charged to this reserve. The revaluation reserve is transferred to retained earnings when the assets are fully depreciated or leave the patrimony of the Company on sale or withdrawal from use (retirement).

2.25. Income taxes Current income taxes are determined in accordance with the requirements of the Bulgarian tax

legislation – the Corporate Income Taxation Act (CITA). The nominal income tax rate for 2011 is 10% (2010: 10%).


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Deferred income taxes are determined using the liability method on all temporary differences existing at the end of the reporting period between the carrying amounts of the assets and liabilities and their tax bases.

Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences and tax loss carryforwards,

to the extent that it is probable that they will reverse and a sufficient taxable profit will be available or taxable temporary differences might occur, against which these deductible temporary differences and unused tax losses can be utilized.

The carrying amount of all deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is probable that they will reverse and sufficient taxable profit will be generated or temporary tax differences will occur in the same period to allow the deferred tax asset to be utilized or compensated.

Deferred taxes related to items reported in other comprehensive income components are reported directly in the respective equity component or in another item of the statement of financial position.

Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied in the period when the asset will be realised or the liability will be settled (paid), based on the tax laws that are enacted or substantively enacted.

As at 31 December 2011 the deferred income taxes are valued at a tax rate of 10% for 2012 (31 December 2010: 10% for 2011).

2.26. Net earnings per share Basic earnings per share are calculated by dividing the net profit or loss for the period, attributable to

ordinary shareholders, by the average weighted number of ordinary shares outstanding during the period. The average weighted number of shares is the number of ordinary shares outstanding at the beginning of

the period, adjusted by the number of ordinary shares bought back or issued during the period, multiplied by a time-weighting factor. This factor represents the number of days that the specific shares are outstanding as a proportion of the total number of days in the period.

Net diluted earnings per share are not calculated because no diluted potential shares are issued. 2.27. Financial instruments 2.27.1. Financial assets The Company classifies its financial assets in the following categories: “loans and receivables”,

including cash, deposits and cash equivalents, and “investments available for sale”. The classification depends on the substance and purposes of the financial assets at the date of their acquisition. Management determines the classification of the financial assets of the Company at the date of their initial recognition in the statement of financial position.

Usually, the Company recognises its financial assets in the statement of financial position on the date of becoming a party to contractual arrangements for the financial asset acquisition. All financial assets are valued initially at their fair value plus, in the case of financial assets that are not measured at fair value through profit or loss, the direct transaction costs.

Financial assets are derecognised from the Company’s statement of financial position when the rights to receive the cash flows from these assets have expired or have been transferred, and the Company has transferred


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substantial part of all the risks and rewards of ownership of the asset to a third party (entity). Where the Company has retained substantially all the risks and rewards of ownership of a certain transferred financial asset, the asset is still recognised in the Company’s statement of financial position, but the Company recognises also a secured liability (loan) for the consideration received.

Available-for-sale financial assets Available-for-sale financial assets are those non-derivative assets that are either designated as available-

for-sale or are not classified in any other category. These are usually unlisted or not actively traded stocks and shares in other companies, acquired for investment purposes, and are included in the category of non-current assets, except where the Company intends to sell them in the following 12 months and is actively searching for a buyer.

This group includes also investments in subsidiaries when the parent company’s control is lost. Available-for-sale financial assets are measured at: - fair value – in the cases of stocks or shares in companies the securities of which are traded in a

stock exchange; - acquisition cost - in the cases where investments have been made in equity instruments that do not

have a quoted market price in an active market and their fair value cannot be measured reliably due to the fact that the future operations of these companies depend on some uncertainties so as to make sufficiently reasonable and grounded long-term assumptions to be used in calculating the fair value of their shares through other alternative valuation methods.

At the end of the reporting period a review for impairment of financial assets available for sale is

carried out (Notes 2.15 and 2.28.7).

Loans and receivables

Receivables and loans granted (monetary loans) are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Receivables are initially recognised in the statement of financial position at their fair value. Subsequently, receivables and loans granted are measured at their amortised cost using the effective interest method less any allowance for impairment. These assets are included in the group of current assets when they mature within either 12 months or the usual operating cycle of the Company, and the others - in the group of non-current assets. This group of financial assets includes: loans granted, trade receivables, other receivables from contractors and third parties, cash and cash equivalents. Interest income on loans granted and receivables is recognized based on the effective interest rate, except for short-term receivables less than 12 months where the recognition of such interest is accepted unjustifiable as immaterial and within the usual loan terms. Interest income on receivables is presented in the statement of comprehensive income under “other operating gains and losses”, and interest income on loans under “revenue”.

The Company assesses at the end of each reporting period whether events and circumstances have occurred that indicate the existence of objective evidence that an individual financial asset or a group of assets is impaired (Notes 2.18, 2.19 and 2.28.7).

2.27.2. Financial liabilities The Company’s financial liabilities include payables to suppliers and other contractors. They are

recognised initially in the statement of financial position at their fair value at the transaction date, net of any


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direct transaction costs, and are subsequently measured at amortised cost using the effective interest rate method.

Short-term payables that are interest-free are measured at their original value as the effect of discounting is immaterial.

A financial liability is derecognised only when it is settled, i.e. when the contractual obligation is discharged or its term has expired (Note 2.22 and 29).

2.28. Critical accounting judgments on applying the Company’s accounting policies. Key estimates

and assumptions of high uncertainty The preparation of the financial statements of the Company requires management to apply accounting

judgements, estimates and assumptions, which have effect on the book values of reported assets, liabilities, incomes and expenses (and in the conditions of financial crisis the uncertainty is even bigger). Each uncertainty related to these assumptions and estimates may lead to actual results requiring material adjustments in the carrying amounts of the respective assets or liabilities in subsequent reporting periods. The estimates and assumptions made are reviewed on a regular basis. Any adjustments therein are recognized in the financial statements for the period in which the adjustment has been made as well as in all subsequent financial periods.

Information about significant estimates, evaluations and assumptions that have the most significant impact on the recognition and measurement of assets, liabilities, income and expenses, is presented below.

2.28.1. Actuarial calculations of the present value of long-term retirement benefit obligations In assessing the present value of long-term retirement benefit obligations, calculations of certified

actuaries have been used based on assumptions for: • mortality rates based on statistics provided by the National Statistics Institute for the general

mortality rate of the population of the Republic of Bulgaria; • staff turnover rates based on the experience gained over the last few years; • future levels of salaries based on company’s assumptions about the rate of growth; • a discount factor based on the effective annual interest rate determined on the basis of the

return on long-term government security issues (with 10-year maturity). Considering the fact that the average term to retirement is longer than 10 years (for the staff of Bulgartabac-Holding AD it is 19 years), the effective annual interest rate for discounting purposes has been calculated through extrapolation.

All these assumptions have been considered by management as reasonable and appropriate for the

Company (Notes 2.23 and 28). In case of port-retirement defined benefits the Company has adopted the practice to amortise at

accelerate rate the accumulated actuarial gains (losses) by applying a 5-year period to the excess over the 10% corridor calculated against the closing balance of the liability at fair value. Due to the change in the Collective Labour Agreement (effective 01 November 2008), the Company adopted a policy to recognise the past service costs upon retirement due to reaching an old age and length of service for the average term to retirement of 19 years as of the date of entry into force of the plan.


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2.28.2. Revalued amounts of property, plant and equipment The Company has adopted the policy that items of property, plant and equipment are revalued by

independent certified valuers to their fair value every five years as management believes that this is a reasonable period for manifestation of the most typical trends and changes in the prices of properties and other main items of plant and equipment. If, however, their fair value is changed significantly in shorter periods of time, then the revaluation is performed at shorter periods of time as well. Such revaluations were made at 31 December 2000, 31 December 2005 and 31 December 2009 (Note 2.12).

At 31 December 2010, management of Bulgartabac-Holding AD reviewed the fair values of items of land, buildings, plant, equipment, motor vehicles and fixtures and fittings determined by independent certified valuers with the aim to establish whether there are conditions for their revaluation. Based on the review, management has judged that there are no circumstances that require a new revaluation of the assets as the fair value of the assets does not differ significantly from their carrying amount at the date of review (Notes 2.12 and 13).

The following approaches and valuation methods have been used in the review for impairment to measure the fair value of the different types of fixed tangible assets:

• „Market-based approach” through the „market analogues method” – with regard to land, buildings and non-specialised equipment for which actual market and market analogues exist and their market value determined by the comparative method is accepted as basis of comparison;

• „Revenue approach” through the „measurement and revenue value method” – for those of the properties (buildings) for which there are no suitable analogues. Based on the calculations made, the estimated permanently realised rent was taken for the property;

• „Approach based on the acquisition cost of assets” through the „depreciated replacement cost method” – with regard to the specialised buildings, plant and equipment for which no actual market exists and therefore, their depreciated replacement cost is used as a fair value with the hypothesis for their use in a technologically-bound process (cost/asset-based approach - depreciated replacement cost method). The main information sources used for fair value calculations and assessments are the following: а) internal data and opinion of the Company’s management on: the functional status of the assets, the

level of capacity utilization, the intention for sale of specific assets, the general repairs performed, and the perspectives for asset utilisation;

b) public information on the financial, technical, and operating status of the Company during the last five years;

c) published prices of realized transactions on real estate markets, information about completed or quoted transactions for the purchase and sale of similar assets within the Group Bulgartabac;

d) data of the offers made by manufacturers, merchants and importers of new specialized plant and equipment as well as second-hand plant and equipment.

2.28.3. Impairment of property, plant and equipment At the date of each set of financial statements the Company’s management organizes a review for

impairment of land, buildings, plant and equipment, and motor vehicles. Such a review was performed at 31 December 2011 with the assistance of certified valuers in order to determine if any indications of impairment exist. Based on the review, management of Bulgartabac-Holding AD judged that there are indications for impairment of one asset (a recreational facility in the town of Nessebar), which show that its carrying amount


28

exceeds its recoverable amount. The asset was written down to its recoverable amount as determined by the valuers at 31 December 2011.

At 31 December 2010 on the grounds of the review, management of Bulgartabac-Holding AD judged that there were no grounds for impairment (Notes 2.12 and 13).

On the grounds of the review performed by the independent valuers of the terms of use and maintenance of the assets during the last twelve months, management judged that there were no grounds for changing the remaining useful lives of fixed tangible assets at 31 December 2011, with the exception of one asset – the recreational facility in the town of Nessebar. The independent valuers suggested a reduction in the remaining useful life from 13 to 10 years. Management accepted the proposal and the remaining useful life was reduced by three years.

2.28.4. Materiality threshold for making revaluations and impairment of items of property, plant and

equipment The materiality threshold adopted by the Company for making revaluations of items of property, plant

and equipment is as follows: all assets for which the difference between the carrying amount and fair value exceeds the amount of BGN 10 thousand and 10 per cent (10%) vs. the carrying amount of the asset prior to the revaluation are revalued. The differences between the carrying amounts and fair values of the individual assets which fall bellow the threshold are not taken into consideration.

When impairing items of property, plant and equipment the Company adopted the following materiality threshold: all assets for which the difference between the carrying amount and the recoverable amount exceeds the amount of BGN 5 thousand and 5 per cent (5%) vs. the carrying amount of the asset were impaired. The differences between the carrying amounts and recoverable amounts of the individual assets which fall bellow the threshold are not taken into consideration (Note 13).

2.28.5. Write down of investments in subsidiaries

The Company classifies the shares held in other companies exceeding 50% of their capital as

investments in subsidiaries. They are measured at cost less any impairment losses. At the date of each set of financial statements management conducts analysis and evaluation of whether indications for impairment of its investments exist and what are the possible amounts of impairment losses. Management adopted the following as indications of impairment of its investments in subsidiaries:

• the decision for announcing a liquidation or insolvency proceedings for subsidiaries which have negative figure for their net assets or net assets that are insufficient to cover their liabilities;

• tenders carried out by the Bulgarian Stock Exchange for the sale of shares in subsidiaries held by Bulgartabac - Holding AD, for which no buyer has turned out, and the financial position and company’s figures have become worse (e.g. there are material past due liabilities to counterparts, banks and/or the State budget, negative net assets, etc);

• prices achieved in open-bid tenders for the sale of shares in subsidiaries held by Bulgartabac - Holding AD, which are less than the carrying amount of investments.

Management considered and adopted an approach whereby the amount of the impairment in the first case is up to 100% of the carrying amount of investments, in the second and third case – the difference between the carrying amount of the investment and the price levels proposed in the tenders of the Bulgarian Stock


29

Exchange, for which no buyer has turned out, and respectively, the achieved price levels in open-bid tenders that are lower than the carrying amount of the investment.

In the cases where a subsidiary becomes subject to control by the Government, court, administrator or a regulator, there is a loss of control with no change of the absolute levels of ownership. The loss of control enters into effect from the time when an insolvency proceeding is opened against a subsidiary. From that date on, the Company is no longer treated as a subsidiary and is not consolidated. It is accepted that the control has been terminated and transferred outside the Group. After that date investments in such companies are reported in the financial statements of Bulgartabac-Holding in accordance with IAS 39 (Note 2.14 and 2.15).

At 31 December 2011, based on the review performed, management of Bulgartabac-Holding AD judged that there were indications of impairment of an investment made in the subsidiary Bulgartabac-Trading EAD. The recoverable amount of the investment of Bulgartabac-Holding AD in the subsidiary was assessed with the assistance of independent valuers. Management of Bulgartabac-Holding AD decided to impair the carrying amount of the investment in Bulgartabac-Trading EAD to the assessed lower recoverable amount (Notes 9 and 15).

2.28.6. Write down of inventories Write-down of tobacco

At the end of each reporting period, the Company’s management organises a thorough review and analysis of the available tobacco by a commission composed of specialists from Bulgartabac - Holding AD and/or external independent experts. The commission reviews all existing tobacco with regard to their main parameters – uniformity, moisture contents, commercial appearance etc, and determines expert prices. The proposed prices take into account the achieved price levels of concluded sales contracts for the domestic and foreign markets, the supply-and-demand dynamics of tobacco markets as well as the latest price levels and trends in the deals in analogous tobacco. The net realizable value of separate tobacco types is calculated by deducting the estimated directly attributable transaction costs from the expert-determined selling price.

Based on the review, the commission makes a proposal for impairment of the existing tobacco unattached to sales contracts. The impairment is calculated as the difference between the book value of tobacco in the balance sheet before the review and their net realizable value determined on the basis of the expert prices in USD and/or EUR translated in the BGN equivalent at the closing exchange rate of USD at 31 December, and respectively, at the exchange rate of EUR to BGN as determined by the Bulgarian National Bank.

Tobacco attached to sales contracts is impaired only if the contractual price less the estimated costs to sell is lower than their book value (Note 2.17).

A review of the status and quality of tobacco owned by the Company was carried out by independent experts. Based on the review, the independent experts proposed presumable market prices for some of the tobacco lots. A commission composed of experts of Bulgartabac-Holding AD had conducted a thorough review and analysis of the available tobacco at 31 December 2011. Based on the review for impairment and the analysis, the commission of Bulgartabac-Holding AD proposed that part of the available tobacco, not attached to sales contracts, to be impaired. Management of Bulgartabac-Holding AD decided to recognize the proposed impairment. In 2010, no impairment of tobacco was made (Notes 9 and 22).


30

2.28.7. Impairment of financial assets Management estimates at the date of each set of financial statements the losses from doubtful and bad

debts. Receivables which are not collected within the initially set contractual terms and where difficulties in collecting are observed are subject to analysis in order to determine the actually collectible portion therefrom while the remaining portion to the nominal value is recognized in the statement of comprehensive income as an impairment loss (Notes 9, 17, 21, 23 and 24).

For the purpose of presenting a correct fair value, the accounting estimate of short-term receivables

adopted by the Company is based on the analysis of the total credit exposure of the debtor and its financial ability to settle the obligations. When the payment is past due compared to the contracted maturity, this also represents an indicator for impairment (Notes 23 and 24).

In assessing the collectability of receivables management has applied the following criteria: • regarding receivables from subsidiaries – management performs analysis of the total exposure of

receivables for each subsidiary at the reporting period end with a view of assessing the actual collectability. The analysis is made in case of actual default or non-payment based on the prior experience of the Company, information on existing financial difficulties and on worsening of the Company’s financial indications, information on the probable announcement of the debtor insolvency etc. Where the collectability of receivables is highly uncertain, an estimate is made on what portion thereof is secured (pledge, mortgage), as also an analysis of the quality of the existing collateral (liquidity, fair value) and it is judged to what extent the collectability of receivables is guaranteed, including through the future realization of collateral;

• regarding receivables from other counterparts – management performs an analysis of the collectability and security of receivables which are not collected within the initially set contractual terms. Additionally, management analyses the quality of the existing collateral and judges the extent of guaranteed collectability, including through the future realization of collateral. Receivables, or part thereof, for which management has judged that there is high uncertainty as to their

collectability are 100 % impaired and recorded as impairment expenses for uncollected receivables. The carrying amount of the receivables judged as requiring impairment is adjusted by using an

allowance account in which all impairment amounts are accumulated while the sum of the impairment loss for the period is recognised in the statement of comprehensive income under “recovered and accrued impairment of assets”. In case of subsequent recovery of an impairment loss, the latter is stated as part of the same indicator against a decrease in the allowance account.

Investments available for sale are impaired when the Company finds out that their carrying amount is higher than the estimated recoverable amount. Where conditions for impairment are found out and the impairment amount is determined, the latter is recognized in the current period result. Investments in subsidiaries classified as available and for sale due to the loss of control thereon by the parent company are impaired in full as management has judged that there is high uncertainty as to their collectability (Note 16).


31

2.28.8. Property under operating lease The Company leases out (under operating lease) part of its administrative building. The property is not

treated as investment property due to the following reasons: • the leased-out area represents an insignificant part of the total administrative area of the building (about

6%); • the leased-out area of the property cannot be differentiated from the part used in the company’s

operations; • the rental agreement is concluded for a definite period of time (5 years) and it is not certain that this part

of the building will be permanently leased-out. The Company leases out (under operating lease) garage cases and parts of warehouses in its property

located in the town of Asenovgrad. The properties are not treated as investment properties because: • the rental agreements are concluded for a definite period of time (1 month) and it is not certain that they

will be permanently leased out; and/or • the leased-out area (parts of warehouses) cannot be differentiated.

The Company leases out a company apartment. The property is not treated as investment property as it has been leased out to an employee of the Company.

The bigger part of properties is used in the Company’s activities (Notes 13 and 32).

3. REVENUE 2011 2010 BGN '000 BGN '000 Dividends from subsidiaries 32,035 1,108

Payments for rights of trademarks (royalties) 13,173 10,862 Fees under trade representation contracts with subsidiaries 9,722 8,647 Tobacco sales 7,293 21,433

Interest and penalties on loans 29 27

Total 62,252 42,077

The total amount of revenue includes income from subsidiaries – 93 % ( 2010: 81 %) (Note 33.2).

Revenue structure is as follows:

2011 2010 BGN '000 BGN '000 Domestic market 51,221 27,373 Export 11,031 14,704 Total 62,252 42,077


32

Dividends originate from the following subsidiaries:

2011 2010 BGN '000 BGN '000 „Blagoevgrad BT” АD 26,559 1,046 „Sofia BT” АD 5,476 62 Total 32,035 1,108

Revenue gained on the basis of trade representation contracts includes:

2011 2010 BGN '000 BGN '000 Cigarettes export 7,270 6,882 Tobacco import and export 1,437 1,037 Import of auxiliary materials 876 638

Import of spare parts 113 75 Sale of tobacco in the domestic market 26 15 Total 9,722 8,647 4. OTHER OPERATING GAINS AND LOSSES 2011 2010 BGN '000 BGN '000

Interest income on undue taxes 651 - Rental income 237 322 Interest and penalties under contracts 102 277

Income from services for tobacco storage and preparation for trade 73 12

Interest on current accounts 63 45 Income from social activity 54 54

Refunded litigation expenses 23 -

Revenue from sale of fixed tangible assets 33 -

Carrying amount of fixed tangible assets sold (22) -

Sales result 11 -

Income from subscription and advertising in Bulgarian Tobacco magazine 7 9

Revenue from sale of goods 7 12 Carrying amount of goods sold (5) (11) Sales result 2 1

Insurance indemnities 2 1 Revenue from sale of materials 99 10 Carrying amount of materials sold (99) -


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Sales result - 10 Liabilities written off - 54 Tobacco in excess - 12 Foreign exchange differences on trade receivables and liabilities and current accounts, net

(9) 100

Other 5 3

Total 1,221 900

5. COSTS OF MATERIALS

Costs of materials include: 2011 2010 BGN '000 BGN '000 Tobacco – raw material 14,509 11,402 Non-current assets below the value threshold 295 298 Fuel and energy 262 230 Stationery and consumables 116 83 Spare parts 13 6 Water 10 13 Materials used in tobacco storage 1 4

Materials used in the preparation of tobacco lots for export 1 - Other - 2 Total 15,207 12,038 6. PERSONNEL EXPENSES

Personnel expenses include: 2011 2010 BGN '000 BGN '000 Salaries and wages 5,885 5,075 Social allowances and payments 2,032 2,093 Social security contributions 705 668 Severance pay 612 583 Accruals for long-term retirement benefits 305 450 Accruals for unused paid leaves 135 118 Accruals for social security contributions on unused paid leaves (2) (7) Total 9,672 8,980


34

Long-term retirement benefits accrued for the period (Note 28) comprise:

2011 2010 BGN '000 BGN '000 Current service costs 188 228 Interest expenses 145 208 Past service costs 137 138 Net actuarial (gain)/loss recognized for the period (165) (124) Total 305 450 7. COSTS OF HIRED SERVICES

Costs of hired services include: 2011 2010 BGN '000 BGN '000 Advertising 6,232 5,278 Industrial processing of tobacco 3,597 2,233 Administrative costs of tobacco processing and tobacco buy-up 941 424

Trademarks registration 780 498 Consulting services 608 332 Operating lease of motor vehicles 322 311 Commissions on tobacco exports 225 - Security 206 218 Communication services 185 169 Tobacco storage 177 188 Remunerations under civil contracts 177 135 Local taxes and charges 168 139 Repair and maintenance 168 138 Rents 123 99 Tax on expenses 64 57 Tobacco transportation for export 57 - Translation / interpretation services 51 29 Bank charges on transfers 37 31 Insurances 34 34 Non-deductible expense under the tax law 29 11 Subscription 23 26 Bulgarian Tobacco magazine 20 21 Sample tasting 19 13 Service related to the workmanship of food vouchers 14 24 Notary fees 13 4 Tobacco and cigarettes analysis 12 9 Membership fees 11 10


35

Preparation of tobacco lots for sale 9 16 Other transport services 7 7 Labour medicine 4 3 Media publications 1 - Other 8 6 Total 14,322 10,463

At 31 March 2011 Bulgartabac-Holding AD finished with the purchase of tobacco, crop 2010 – large

leaf tobacco of sort group Burley and oriental tobacco of sort group Kaba Koulak from the region of Northern Bulgaria, and of oriental tobacco of sort group Basma from the region of South Bulgaria. In December 2011, the purchase of large leaf tobacco of sort group Burley and oriental tobacco of sort group Basma, crop 2011, commenced. The buy-up and processing of tobacco, crop 2010 and 2011, were assigned to the subsidiary “Pleven BТ” АD.

Expenses on industrial processing amounting to BGN 3,597 thousand, crop 2010, and administrative expenses on industrial processing and tobacco buy-up amounting to BGN 941 thousand (incl.: BGN 919 thousand for crop 2010 and BGN 22 thousand for crop 2011) were recognized in the statement of comprehensive income for the current period. The expenses on tobacco – crops 2009 and 2010, reported in 2010, were as follows: expenses on industrial processing of BGN 2,233 thousand for crop 2009 and administrative expenses of BGN 424 thousand (incl.: BGN 418 thousand for crop 2009 and BGN 6 thousand for crop 2010).

Expenses on services provided to the Company by the registered auditors were recognized in the statement of comprehensive income for the current period, as follows: for independent financial audit of the annual financial statements of the Company for 2010 and of the annual consolidated financial statements of Bulgartabac Group for 2010, in the total amount of BGN 59 thousand (2010: for 2009 BGN 59 thousand) and training – BGN 2 thousand (2010: BGN 4 thousand). 8. BOOK VALUE OF GOODS SOLD

The book value of goods sold includes the carrying amount of tobacco sold. In 2011, there were no sales of tobacco (2010: BGN 11 thousand).

9. ACCRUED / (REVERSED) IMPAIRMENT OF ASSETS, NET The impairment of assets includes: 2011 2010 BGN '000 BGN '000 Write down of tobacco 1,767 -

Write down of investments 1,510 -

Write down of trade receivables 729 -

Write down of receivables from subsidiaries 561 85

Write down of other receivables 43 3

Reversed write down of other receivables (1) (1)

Reversed write down of receivables (79) (119)

Total 4,530 (32)


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The impairment to net realizable value of part of tobaccos available as at 31 December 2011 was made on the basis of the assessed estimated selling price of tobacco, less the estimated direct costs of sale (Notes 2.28.6 и 22).

The impairment of the investment in the subsidiary „Bulgartabac-Trading” ЕАD was made on the basis of the recoverable amount determined by independent valuers. Upon the preparation of the evaluation, the team of valuers has determined the value in use through assessment of the future cash flows that are expected to be received from the asset. Based on market observations, valuers are of the opinion that there are no grounds to believe that the so-determined value in use would exceed significantly the fair value, less the costs of sale of the investment in the subsidiary „Bulgartabac-Trading” ЕАD (Notes 2.28.5 and 15).

The write down of receivables was made on the basis of an analysis of the overall exposure of the receivables from each company at the end of the reporting period in view of assessing the actual possibility for their collection (Notes 2.28.7, 23 and 24).

Receivables written down in previous periods were collected in 2011 and accordingly, reversal of write down amounting to BGN 79 thousand was recognised, as follows: “Pleven BТ” АD – BGN 34 thousand, „Dupnitsa Tabac” АD – BGN 27 thousand, ”Haskovo Tabac” АD - in liquidation – BGN 11 thousand, “Asenovgrad Tabac” AD – in liquidation - BGN 4 thousand, and “Helios SV 2” – BGN 3 thousand (2010: BGN 119 thousand, including from, “Pleven BТ” АD – BGN 52 thousand, „Dupnitsa Tabac” АD – BGN 22 thousand, “Helios SV 2” – BGN 26 thousand, and “Shumen Tabac” AD – BGN 17 thousand).

10. OTHER OPERATING EXPENSES

Other operating expenses include: 2011 2010 BGN '000 BGN '000 Business trip expenses 300 208 Wasted and scrapped inventories 217 104 Donations 214 33 Entertainment expenses

128 110 Participation in conferences and training courses 103 42 Scrapped non-current assets 67 1 Written off receivables with expired periods of limitation 6 12 Other 6 2 Total 1,041 512 11. INVESTMENT GAINS AND LOSSES 2011 2010 BGN '000 BGN '000 Interest on deposits 1,652 1,757 Foreign exchange differences related to deposits, net (1) (7) Total 1,651 1,750


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12. INCOME TAX (BENEFIT) / EXPENSE 2011 2010 BGN '000 BGN '000 Statement of comprehensive income (profit or loss for the year)

Tax profit for the year as per the tax return 1,011 - Current income tax expense for the year – 10% (2010: 10%) 101 - Discount of the current income tax used (1 %) (1) - Deferred income taxes: Related to occurrence and reversal of temporary differences (238) 531 Total income tax (benefit) / expense reported in the statement of comprehensive income (in the profit or loss for the year) (138) 531

2011 2010 BGN '000 BGN '000 Reconciliation of income tax (benefit) / expense determined vs. the accounting result Accounting profit for the year 31,171 6,356 Income taxes – 10% (2010 : 10%) 3,117 636 Non-deductible items as per tax returns: increases – BGN 150 thousand (2010: BGN 66 thousand) 15 6

decreases – BGN 32,685 thousand (2010: BGN 1,108 thousand) (3,269) (111)

Discount of the current income tax used (1 %) (1) -

Total income tax (benefit) / expense reported in the statement of comprehensive income (in the profit or loss for the year)

(138) 531

The tax effects on the other components of comprehensive income are as follows:

2011 2010

Pre-tax amount

Tax benefit

Amount, net of tax

Pre-tax amount

Tax benefit

Amount, net of tax

BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000

Reserve from property revaluation

(134)

13

(121)

-

-

-

Total other comprehensive income for the year

(134)

13

(121)

-

-

-


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13. PROPERTY, PLANT AND EQUIPMENT

Land and buildings Plant and equipment Other FTA in progress Total 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010

BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000

Book value Balance at 1 January 22,041 22,018 203 198 3,886 3,508 145 48 26,275 25,772 Additions - 23 6 5 131 46 578 461 715 535 Transfer among accounts -. - - - 661 364 (661) (364) - - Impairment (235) - - - - - - - (235) -

Disposals (23) - (22) - (559) (32) - - (604) (32)

Balance at 31 December 21,783 22,041 187 203 4,119 3,886 62 145

26,151 26,275 Accumulated depreciation Balance at 1 January 5,451 4,806 147 114 2,933 2,186 - - 8,531 7,106

Depreciation charge for the year 646 645 32 33 636 777 - - 1,314 1,455

Depreciation written-off (1) - (22) -

(550) (30) - - (573) (30) Impairment (101) - - - - - - - (101) -

Balance at 31 December 5,995 5,451 157 147 3,019 2,933 - - 9,171 8,531

Carrying amount at 31 December 15,788 16,590 30 56 1,100 953 62 145

16,980

17,744

Carrying amount at 1 January 16,590 17,212 56 84 953 1,322 145 48

17,744

18,666

At 31 December 2011, properties comprised: land amounting to BGN 4,438 thousand (31 December

2010: BGN 4,438 thousand) and buildings with a carrying amount of BGN 11,350 thousand (31 December 2010: BGN 12,152 thousand).

At 31 December 2011, fixed tangible assets in progress included advertising equipment – shelves amounting to BGN 60 thousand (31 December 2010: BGN 145 thousand) and hardware – BGN 2 thousand (31 December 2010: Nil).

Review for revaluation At 31 December 2011, management of Bulgartabac-Holding AD performed a review of the fair values,

determined by the independent certified valuers, of land, buildings, plant, equipment, motor vehicles and fixtures and fittings in order to identify whether revaluation is needed. As a result of the review it had been established that for the bigger part of the assets their fair value did not exceed their carrying amount and for the


39

assets where deviations had been found out, the differences did not exceed the value thresholds set by the Company for the purpose of revaluation. Based on the review performed, management of Bulgartabac - Holding AD decided that there were no indications to make revaluation (31 December 2010: Nil) (Note 2.28.2).

Review for impairment At 31 December 2011, independent certified valuers performed a review of land, buildings, plant,

equipment, motor vehicles and fixtures and fittings in order to identify whether indications of impairment occurred. The valuers’ opinion is that for one asset (the recreational facility in the town of Nessebar) there are indications that the carrying amount of the asset exceeds its recoverable amount. The excess of the carrying amount of the asset over its recoverable amount determined by the valuers is by BGN 134 thousand. In general, the recreational facility in the town of Nessebar is depreciated due to its use according to its function for many years now, as also to the effect of weather conditions. The sanitary and hygiene conditions of use of the building are very bad. There are obstacles to obtaining a category for the building in accordance with the Ordinance on the Categorisation of Tourist Sites. Due to the above reason, the operations of the facility were suspended in 2011. Considering the status of the building, the lack of perspectives as to its future use, as well as the fact that the Company does not hold the property rights over the terrain, the future potential of the building is vey small. An impairment was made as of 31 December 2011, the effect of which was the reduction of the revaluation reserve formed as a result of previous revaluations (31 December 2010: Nil) (Note 2.28.3).

Review of useful life At 31 December 2011 the useful lives of fixed tangible assets were also reviewed jointly with

independent certified valuers on the basis of which the Company’s management judged that no changes were necessary for the remaining useful life of the assets, with the exception of one asset – the recreational facility in the town of Nessebar. The independent valuers suggested a reduction in the remaining useful life from 13 to 10 years. Management accepted the proposal and the remaining useful life was reduced by three years (Note 2.28.3).

Properties leased out under operating lease The Company leases out the following assets or parts thereof, as follows: • a part of its administrative building; • 4 garage cases in the town of Asenovgrad; • a company apartment in Sofia city; • parts of warehouse premises in the town of Asenovgrad (Notes 2.28.8 and 31).

Other data The book value of fully depreciated fixed assets which are still in use in the Company’s operations is

BGN 1,875 thousand (31 December 2010: BGN 1,776 thousand), incl.: hardware – BGN 247 thousand (31 December 2010: BGN 235 thousand), plant and equipment – BGN 2 thousand (31 December 2010: BGN 25 thousand), motor vehicles – BGN 224 thousand (31 December 2010: BGN 242 thousand), and fixtures and fittings – BGN 1,402 thousand (31 December 2010: BGN 1,274 thousand).

A property (switch gear unit) of the carrying amount of BGN 11 thousand (31 December 2010: BGN 12 thousand) was included in the financial statements as of 31 December 2011. The Company does not have a valid title deed for this property.


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The Company’s statement of financial position as at 31 December includes a property – a warehouse in the city of Burgas with a carrying amount of BGN 450 thousand (31 December 2010: BGN 562 thousand), for which there are unclear issues in regard with the right of construction as well as of the ownership of the first floor of the building. The carrying amount of the disputable part of the property at 31 December 2011 was about BGN 76 thousand (31 December 2010: about BGN 95 thousand).

On part of the fixed tangible assets included in the Company’s statement of financial position as at 31 December 2011 encumbrances are imposed. In order to secure tax liabilities under a Tax Assessment Deed, in 2008 an interdiction of properties – tobacco warehouses Corpus 1 and 2 with a carrying amount of BGN 2,326 thousand was imposed to the benefit of TD “Large Taxpayers and Insurers” - Sofia (31 December 2010: BGN 2,490 thousand). By a decision of the Supreme Administrative Court – Sofia city, the Tax Assessment Deed was repealed in full and by a Decree for the Cancelation of Enforcement Measures Imposed issued by TD “Large Taxpayers and Insurers” - Sofia on 10 January 2012 the foreclosure on the properties was released.

14. INTANGIBLE ASSETS Trademarks Software Other Total

2011 2010 2011 2010 2011 2010 2011 2010

BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000

Book value

Balance at 1 January 4,030 4,030 88 82 139 4,118 4,251 Additions 34 - 27 6 - 25 61 31 Disposals - - (44) - - (164) (44) (164)

Balance at 31 December 4,064 4,030 71 88 - - 4,135 4,118 Accumulated amortization Balance at 1 January 4,030 3,435 67 57 - - 4,097 3,492 Amortization charge for the year 8 595 14 10 - - 22 605 Disposals - - (44) - - - (44) - Balance at 31 December 4,038 4,030 37 67 - - 4,075 4,097

Carrying amount at 31 December 26 - 34 21 - - 60 21

Carrying amount at 1 January - 595 21 25 - 139 21 759

Based on royalties received, the most sellable trademarks are as follows: • domestic market – Victory, E♥A, ММ, GD, Sredets and Melnik; • for export – Prestige, ММ, Victory and E♥A.


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Jointly with other persons, Bulgartabac - Holding AD has registered the following cigarette trademarks: US Mild ultra smoker and Charlie.

Review for impairment

At 31 December 2011 management of Bulgartabac - Holding AD had concluded that there were no

conditions for impairment as the intangible assets – cigarettes trademarks - owned by the Company were

impaired in full (with zero carrying amount), with the exception of one trademark acquired in 2011.

Software used includes mainly Microsoft products and software for the purposes of accounting, payroll

and document turnover management.

15. INVESTMENTS IN SUBSIDIARIES

Name of the company Country Date of

acquisition 31.12.2011 BGN’ 000 Share %

31.12.2010 BGN’ 000 Share %

„Bulgartabac-Trading” AD Bulgaria 11.08.2006

4,089

100,00

4,089

100,00 Impairment (1,510) - “Blagoevgrad BТ” АD Bulgaria 01.01.1994 2,304 85,24 2,304 85,24 „Haskovo Tabac” АD – in liquidation Bulgaria 01.01.1994 967 91,77 967 91,77 Impairment Bulgaria (967) (967) “Sofia BТ” АD Bulgaria 01.01.1994 952 78,22 952 78,22

“Asenovgrad Tabac” AD – in liquidation

Bulgaria 01.01.1994

442

82,71

442

82,71

“Shumen Tabac” AD Bulgaria 01.01.1994 368 85,60 368 85,60 “Pleven BТ” АD Bulgaria 01.01.1994 364 85,60 364 85,60 Total amount of investments 7,009 8,519

Bulgartabac-Holding AD holds the control over the above companies.

The object of activity of the subsidiaries is as follows:

• Bulgartabac-Trading ЕАD: distribution of tobacco products and trade;

• Blagoevgrad-BT AD: manufacturing and trade in tobacco and tobacco products.

• Sofia-BT AD: manufacturing and trade in tobacco and tobacco products.

• Asenovgrad Tabac AD – in liquidation: manufacturing and trade in tobacco and tobacco products.

• Shumen Tabac AD: manufacturing and trade in tobacco and tobacco products.

• Pleven BT AD: manufacturing and trade in tobacco.

• Haskovo Tabac AD – in liquidation: manufacturing and trade in tobacco and tobacco products.


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A decision was taken at the extraordinary General Meeting of Shareholders of Asenovgrad Tabac AD

(held on 01 September 2011) to terminate the activity and initiate a liquidation procedure with regard to the

company. The decision was registered with the Trade Register at the Registry Agency on 05 October 2011

(Note 34).

In 2010, 487 thousand shares of the capital of Bulgartabac-Trading AD were bought from Slantse Stara

Zagora Tabac AD sold to Bulgartabac-Holding AD for the amount of BGN 529 thousand. After the transaction,

Bulgartabac-Holding AD became the owner of 100% of the capital of Bulgartabac-Trading AD (4,047 thousand

shares in the amount of BGN 4,089 thousand). The legal form of the trader was changed as well, from

Bulgartabac-Trading АD to Bulgartabac-Trading ЕАD.

At 31 December 2011, investments in subsidiaries were stated at cost, less any impairment. The cost is

the nominal value of the shares held by Bulgartabac-Holding AD in the registered share capital of its

subsidiaries – BGN 1 per share, except for the investment in the capital of Bulgartabac-Trading ЕАD amounting

to BGN 1.01 per share after the acquired additional shares.

Review for write down of investments in subsidiaries

Some of the subsidiaries are in poor and/or worsening financial position, and two of them are

undergoing a liquidation procedure. The investment in „Haskovo Tabac” AD – in liquidation was impaired in

full (100%) in prior periods (Note 34).

At 31 December 2011, a review for impairment of the investment in subsidiaries was carried out. Based

on internal and external sources of information, management judged that there were indications of impairment

of an investment made in the subsidiary Bulgartabac-Trading EAD. Based on the opinion of the independent

valuers, management of Bulgartabac-Holding AD decided to impair the carrying amount of the investment in

the subsidiary to the assessed lower recoverable amount. Impairment of BGN 1,510 thousand was reported in

the financial result for the period (Note 9). After an analysis of the financial status of the subsidiary

„Asenovgrad Tabac” АD – in liquidation, it was concluded that there were no indications of impairment in view

of the fact that the company has positive net assets that are sufficient to cover its liabilities.

Investments in the other companies have not been impaired as management judged that considering the

current market and economic conditions their fair value could not be measured reliably at the balance sheet date

neither through market price quotations – because of the lack of an active market, nor through other valuation

methods – due to the uncertainty as to the future development of these companies (Note 2.28.5).


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16. AVAILABLE-FOR-SALE INVESTMENTS

Name of the company Country 31.12.2011 Share 31.12.2010 Share BGN’ 000 % BGN’ 000 %

„Dulovo Tabac” AD – in insolvency Bulgaria 118

99,98 118

99,98

Impairment (118) (118)

International Asset Bank AD Bulgaria 100

0,50 100

0,50 Total 100 100

At 31 December 2011 available-for-sale investments were measured at cost which is the nominal

amount of the shares held by Bulgartabac - Holding AD in the registered share capital, except for the investments in subsidiaries undergoing insolvency procedures that had been impaired in full (100%).

Review for impairment

Review for impairment of the value of available-for-sale investments is carried out in the current

period. Available-for-sale investments have not been impaired as far as their fair value cannot be measured

reliably at the balance sheet date neither through market price quotations – because of the lack of an active

market, nor through other valuation methods. Management believes that their carrying amounts do not exceed

their probable recoverable amounts (Note 2.28.7).

17. LONG-TERM RECEIVABLES FROM RELATED PARTIES 31.12.2011 31.12.2010 BGN’ 000 BGN’ 000 Book value 125 437 Impairment - (14) Carrying amount 125 423

In accordance with an agreement of 2005 between “Pleven BТ” АD and Bulgartabac - Holding AD the

debt of the company, formed by unsettled trade payables at the nominal value of BGN 1,546 thousand, was

deferred pursuant to a repayment schedule with the ultimate maturity being 31 January 2013. The due payments

after 31 December 2012 with book value of BGN 21 thousand are presented as long-term receivables from

related parties. The difference between the nominal amount of the receivable and its present value is accounted

for as impairment (31 December 2011: Nil). The calculation of the amortised cost of the debt is made by

applying a discount factor of 9.40%. The receivable is secured by a mortgage of real estate (Note 23).

On 01 November 2009 an agreement between “Shumen Tabac” AD and Bulgartabac - Holding AD was

concluded, in accordance with which the dividend due by the Company from the 2008 profit amounting to BGN


44

357 thousand was deferred pursuant to a repayment schedule with the ultimate maturity being 30 April 2011.

The initial repayment schedule was renegotiated. The maturity date, in accordance with the effective repayment

schedule, is 30 April 2013. The due payments after 31 December 2012 with book value of BGN 104 thousand

are presented as long-term receivables from related parties. At the date of preparation of these financial

statements the receivable is secured by a mortgage of real estate (Note 23).

18. LONG-TERM LOANS TO EMPLOYEES

Bulgartabac - Holding AD granted long-term loans to its employees in accordance with the terms and conditions provided for in the Collective Labour Agreement (CLA). At 31 December 2011 the nominal amount of these receivables was BGN 5 thousand and the carrying amount was BGN 5 thousand. The maturity of the loans is the year 2013. The due payments after 31 December 2012 amounting to BGN 2 thousand are presented as long-term receivables on loans to employees. The interest rate applicable to these amounts equals 1/3 of the basic interest rate, in accordance with the terms and conditions of the then effective CLA.

The receivables are presented at amortised cost using the effective interest rate method and the expected cash flows as per the loan agreements are discounted at the effective interest rate stated by BNB for long-term household loans in BGN. The difference between the book value of receivable and its net present value is accounted for as impairment. 31.12.2011 31.12.2010 BGN’ 000 BGN’ 000 Book value 2 6 Impairment - (1) Carrying amount 2 5 19. DEFERRED TAX ASSETS AND LIABILITIES

Deferred income taxes at 31 December relate to the following balance sheet items: temporary

difference tax temporary

difference tax

31.12.2011 31.12.2011 31.12.2010 31.12.2010 BGN '000 BGN '000 BGN '000 BGN '000

Write down of investments (2,508) 251 (998) 100 Write down of receivables (2,427) 243 (1,520) 152 Write down of inventories (1,767) 177 - - Long-term retirement benefit obligations (1,480) 148 (1,502) 150 Depreciation of property, plant and equipment (1,414) 141 (1,283) 128 Impairment property, plant and equipment (995) 99 (995) 100 Intangible assets (863) 86 (1,138) 114 Payables under contracts (437) 44 - - Accruals for unused paid leaves (411) 41 (446) 45 Accrued income of individuals (130) 13 (133) 13


45

Tax loss - - (2,175) 217 Total deferred tax assets (12,432) 1,243 (10,190) 1,019

Property, plant and equipment, incl. 4,712 (471)

4,982 (498)

Revaluation reserve 4,712 (471) 4,982 (498) Total deferred tax liabilities 4,712 (471) 4,982 (498) Net balance of deferred income taxes (assets / liabilities) (7,720) 772 (5,208) 521

The movements in the balance of deferred taxes for the year are as follows:

Deferred tax assets/(liabilities) Balance on 1 January

2011

Recognised in the profit

or loss for the year

Recognized in other

comprehensive income

Balance on 31 December

2011

BGN '000 BGN '000 BGN '000 BGN '000

Tax loss 217 (217) - Write down of receivables 152 91 243 Long-term retirement benefit obligations 150 (2) 148 Depreciation of property, plant and equipment 128 13 141

Intangible assets 114 (28) 86 Write down of investments 100 151 251 Impairment of property, plant and equipment 100 (1) 99 Accruals for unused paid leaves 45 (4) 41 Accrued income of individuals 13 - 13 Write down of inventories - 177 177 Payables under contracts - 44 44 Property, plant and equipment (498) 14 13 (471) Total 521 238 13 772

Deferred tax assets/(liabilities) Balance on

1 January 2010

Recognised in the profit

or loss for the year

Recognized in other

comprehensive income

Balance on 31 December

2010

BGN '000 BGN '000 BGN '000 BGN '000

Tax loss 585 (368) 217 Write down of receivables 322 (170) 152 Write down of investments 155 (55) 100 Long-term retirement benefit obligations 115 35 150 Impairment of property, plant and equipment 100 - 100 Intangible assets 85 29 114 Depreciation of property, plant and 80 48 128


46

equipment Accrued income of individuals 65 (52) 13 Accruals for unused paid leaves 56 (11) 45 Write down of inventories 1 (1) - Property, plant and equipment (512) 14 - (498)

Total 1,052 (531) - 521

No deferred tax assets have been recognized on:

temporary difference

tax temporary difference

tax

31.12.2011 31.12.2011 31.12.2010 31.12.2010 BGN '000 BGN '000 BGN '000 BGN '000

Write down of intangible assets (397) 40 (397) 40 Write down of investments (87) 9 (87) 9 Trade and other receivables (46) 5 (46) 5 Other (105) 10 (105) 10 Total (635) 64 (635) 64

On recognizing deferred tax assets, the probability of a reversal of the individual differences and the

abilities of the Company to generate sufficient taxable profit have been taken into account. There was no tax losses recognised as at 31 December 2011(31 December 2010: BGN 2,175 thousand,

originating from 2009). Pursuant to the effective legislation, the tax loses can be deducted from taxable profits during the next

five tax periods. 20. OTHER NON-CURRENT ASSETS

Other non-current assets of the amount of BGN 4,085 thousand (31 December 2010: BGN 571

thousand) include: • cash transferred by Bulgartabac - Holding AD to special escrow accounts in relation to agreements

concluded under court cases in the territory of the USA – BGN 585 thousand (31 December 2010: BGN 571 thousand);

• pledge on receivables of Bulgartabac-Holding AD for the positive balance on the deposit account in accordance with the Privatisation contract for sale of shares of the capital of Bulgartabac-Holding AD. The pledge was established in favour of the Agency of Privatisation and Post Privatisation Control for a term of 5 years as of 30 November 2011 – BGN 3,500 thousand (31 December 2010: None).

In 2004, the State of Louisiana and the State of Tennessee, and in 2005, the Virginia Community, USA, initiated civil cases against Bulgartabac - Holding AD claiming unpaid amounts to the Official guarantee fund in relation to cigarette sales in the territory of the State (the Community). The cases were closed by concluding agreements between the Company and the State of Louisiana, the State of Tennessee, and respectively, the Virginia Community (in 2008, 2007 and 2006, respectively), in execution of which the Company deposited amounts in escrow accounts through an assigned thereby escrow agent (Sun Trust Bank). The amount of the


47

agreement with the State of Louisiana is USD 93 thousand (BGN 141 thousand) – for a term of 19 years, the amount of the agreement with the State of Tennessee is USD 197 thousand (BGN 297 thousand) – for a term of 25 years, and the agreement with the Virginia Community amounts to USD 97 thousand (BGN 147 thousand) – for a term of 18 years.

The escrow agent - Sun Trust Bank – invests and reinvests all amounts in the escrow accounts in the

Fund (of the escrow agent) operating with American treasury securities and instruments in the American cash market. The interest rate is determined with a floating interest (yield) of the Fund.

In 2011 interest received on the deposited amounts total BGN 0.06 thousand (2010: BGN 0.3 thousand). In connection with commitment to secure forfeit payment for investments by the buyer of shares in the

capital of Bulgartabac – Holding AD, on 30 November 2011, a special pledge amounting to BGN 3,500 thousand was established in favour of the Agency for Privatisation and Post Privatisation Control. 21. LONG-TERM TRADE RECEIVABLES 31.12.2011 31.12.2010 BGN’ 000 BGN’ 000 Book value 434 699 Impairment (383) (620) Carrying amount 51 79

Long-term trade receivables at 31 December 2011 include receivables on deferred payment agreements

concluded between Bulgartabac - Holding AD, on the one hand, and Dupnitsa Tabac” AD, on the other hand.

The agreement with „Dupnitsa Tabac” AD was signed in 2005 with the aim to settle past due trade

payables of the company owed to Bulgartabac - Holding AD. Due to the failure to observe the repayment

schedule, the receivable had been written down in previous periods and the initially agreed repayment schedule

was renegotiated. The ultimate maturity pursuant to the repayment schedule is 31 July 2013. The due payments

after 31 December 2012 amounting to BGN 434 thousand are presented as long-term trade receivables. The

receivable is secured by a mortgage of real estates (Note 24).

22. INVENTORIES 31.12.2011 31.12.2010 BGN '000 BGN '000 Tobacco – finished products 16,920 6,735 Tobacco - raw material 1,252 302 Advertising materials 984 1,151 Tobacco – goods 617 625 Cigarettes 93 100 Materials and consumables 10 9 Goods 5 4 Total 19,881 8,926


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Tobacco – finished products and goods Tobacco – finished products and goods available at 31 December are presented in the statement of

financial position at: 31.12.2011 31.12.2010 BGN '000 BGN '000 Acquisition cost (cost) 5,872 7,360 Net realizable value 11,665 - Total 17,537 7,360

In 2011, impairment of tobacco amounting to BGN 1,767 thousand was made. A commission of experts

of the Company conducted a review and determined the estimated selling price of the tobacco, based on which management judged that impairment was needed (Notes 2.28.6 and 9). No impairment of tobacco was made in 2010.

The tobacco inventories owned by the Company include Bulgarian tobacco (including large leaf tobacco of sort group Burley and oriental tobacco of sort groups Basma and Kaba Kulak).

Tobacco – raw materials bought-up by Bulgartabac - Holding AD at 31 December 2011 included

tobacco of crop 2011: large leaf tobacco - sort group Burley, for the amount of BGN 947 thousand, oriental tobacco of sort group Basma for the amount of BGN 239 thousand, and expenses incurred in relation to their purchase – BGN 66 thousand. The agreed quantities of large leaf tobacco (sort group Burley) and oriental tobacco were transferred by „Pleven BТ” АD, by virtue of annexes, to Bulgartabac - Holding AD, and the company purchased the tobacco on its behalf and on its account.

Tobacco – raw materials at 31 December 2010 included large leaf tobacco of crop 2010, sort group Burley for the amount of BGN 285 thousand and the expenses incurred in relation to the purchase – BGN 17 thousand.

The advertising materials amounting to BGN 984 thousand (31 December 2010: BGN 1,151 thousand)

include: • advertising equipment (shelves, illuminated boxes, cash trays, etc.) for distribution to

commercial outlets amounting to BGN 264 thousand (31 December 2010: BGN 455 thousand); • other - advertising materials to be distributed in the course of advertising campaigns for the

trademarks owned by the Company amounting to BGN 720 thousand (31 December 2010 : BGN 696 thousand).

The cigarettes are of various brands produced by the subsidiaries. They are used for advertising

purposes and are presented in the statement of financial position at 31 December 2011 at cost amounting to BGN 93 thousand (31 December 2010: BGN 100 thousand).

The goods at 31 December 2011 include an energy drink, Victory Energy Drink, with carrying amount

of BGN 5 thousand (31 December 2010: BGN 4 thousand).


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23. RECEIVABLES FROM RELATED PARTIES Name of the Company 31.12.2011 31.12.2010 BGN '000 BGN '000

”Haskovo Tabac” AD – in liquidation 6,736 6,559 „Shumen Tabac” АD 2,478 2,334 „Blagoevgrad BT” АD 1,121 5,370 „Sofia BT” АD 773 2,503 „Pleven BТ” АD 411 543 „Asenovgrad Tabac” AD - in liquidation 311 227 Write down of receivables: (9,014) (8,363) Total 2,816 9,173

The receivables from related parties as at 31 December include:

Type of receivable 31.12.2011 31.12.2010 BGN '000 BGN '000 Sales receivables 6,740 12,863 Impairment (4,602) (4,626) Receivables as interest and penalties on loans 1,828 1,708 Impairment (1,823) (1,582) Loans granted 1,698 1,665 Impairment (1,665) (1,665) Dividends 237 180 Advances given 12 64 Other receivables 1,315 1,056 Impairment (924) (490) Total receivables from related parties 11,830 17,536 Total impairment (9,014) (8,363) Total 2,816 9,173

The Company has set a common credit period for its receivables from related parties from 30 to 180 days. The credit period for receivables under cash loans granted by Bulgartabac - Holding AD and/or on deferral of dividend receivables is determined acording to specifically agreed terms (usually on a monthly basis, pursuant to a repayment schedule).

In case of delay after the common credit period (and even earlier for companies in poor financial condition) management conducts an analysis of the overall exposure of the receivables from each subsidiary at the balance sheet date with view to judge the actual ability to collect them and if there is a risk as to their recoverability, an impairment is charged (Note 2.28.7).

At 31 December 2011, the receivables from related parties which are regular and not matured at this date are assessed as risk-free with regard to their collectability and amount to BGN 2,572 thousand (31 December 2010: 8,573 thousand).


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The age structure of past due receivables from related parties based on the agreed payment periods from the date of their occurrence, for which no impairment has been charged, is as follows:

31.12.2011 31.12.2010 BGN '000 BGN '000 From 31 to 180 days 34 54 From 181 to 360 days 32 85 Over 361 days 178 461 Total 244 600

The age structure of the receivables from related parties based on the agreed payment periods from the date of their occurrence, judged as bearing risk of being uncollectible and therefore, impaired, is as follows:

31.12.2011 31.12.2010 BGN '000 BGN '000 Within 30 days 29 15 From 31 to 180 days 91 73 From 181 to 360 days 148 121 Over 361 days 8,746 8,154 Accumulated impairment (9,014) (8,363) Total - -

At 31 December 2011, the receivables from related parties judged as bearing risk of being uncollectible

and therefore, impaired, comprised current receivables from a company in liquidation with a book value of BGN 15 thousand and impairment charged of BGN 15 thousand (31 December 2010 : a company in liquidation with book value of BGN 15 thousand and impairment of BGN 15 thousand).

The average share of the receivables occurred throughout the year which become past due compared to all other fallen due receivables originating in this period is 0.54% (31 December 2010: 1.93%).

Movement of allowance for impairment

31.12.2011 31.12.2010 BGN '000 BGN '000

Balance at the beginning of the year 8,363 8,200 Impairment reported for the period 686 200 Transfer from impairment of non-current portion 14 34 Reversed impairment (49) (71) Balance at the end of the year 9,014 8,363


51

The receivables from related parties are secured as follows: 31.12.2011 31.12.2010 BGN '000 BGN '000 Receivables with combined collateral (mortgage and pledge) 1,629 1,596 Receivables secured by mortgage 2,220 2,163

Total secured receivables at book value 3,849 3,759 Accumulated impairment (3,331) (3,351)

Non-secured receivables 7,981 13,777 Accumulated impairment (5,683) (5,012)

Total receivables at car rying amount 2,816 9,173 The total amount of collateral provided in favour of Bulgartabac - Holding AD in relation to receivables

from related parties (pledge of fixed tangible assets and mortgage) is BGN 6,642 thousand (31 December 2010: BGN 6,609 thousand), including pledge of fixed tangible assets (plant) in the amount of BGN 479 thousand (31 December 2010: BGN 446 thousand) and mortgaged properties in the amount of BGN 6,163 thousand (31 December 2010: BGN 6,163 thousand). Collateral provided cover the amount of long-term receivables from related parties – BGN 125 thousand (31 December 2010: BGN 437 thousand) and of current receivables – BGN 3,849 thousand (31 December 2010: BGN 3,759 thousand). The amount of the mortgaged properties was their determined market value at the time of signing the contract (establishing the collateral). The amount of the pledged fixed tangible assets (plant) was their carrying amount as at the last period closed prior to the date of signing the pledge contract.

The policy for accepting collateral is that the latter should cover from 100 to 150% of the amount of the receivable. The accepted collateral is periodically assessed in order to determine whether their fair value corresponds to the value of the receivables they secure. If necessary, management undertakes measured to secure additional collateral.

The fair value of collateral at 31 December 2011 was as follows:

Collateral amount upon establishment

Fair value Amount of the secured

receivable Total 6,642 5,351 3,974 Included : Mortgaged property 6,163 5,029 3,845 Fixed tangible assets (plant) 479 322 129

At the date of preparation of these financial statements there are no other collateral which are in a

process of realisation.


52

The loans granted to subsidiaries at 31 December were as follows:

31.12.2011 31.12.2010

BGN '000 BGN '000 „Haskovo Tabac” AD – in liquidation 1,500 1,500 „Shumen Tabac” АD 165 165 „Asenovgrad Tabac” AD – in liquidation 33 - Impairment (1,665) (1,665) Total 33 -

Purpose of the loans: to finance the current operations of the companies, and mainly the activities

related to the tobacco buy-up. Part of the loans granted to companies in a poor financial position was to cover their current expenses for salaries and/or past due payments to suppliers or other creditors.

Annual interest rate: for regular principals - 75% of the statutory interest (BIR + 10 points) at the date of signing the agreement.

Annual interest rate: for past due principals – 7.2 %. Collateral provided (at the date of signing the agreement): includes mortgage of fixed tangible assets,

pledge of inventories and of fixed tangible assets at the rate of 150 % of the principal and issued promissory note in an amount equal to the sum of the principal and interest thereon under the loan contract pursuant to a repayment schedule.

In 2011 Bulgartabac-Holding AD granted a loan of BGN 33 thousand to its subsidiary „Asenovgrad Tabac” AD – in liquidation. The annual interest rate is 7.5 %. No cash loans were granted to subsidiaries in 2010.

The advances granted to related parties at 31 December 2011 amounting to BGN 12 thousand were

granted to the subsidiary „Pleven BТ” АD in relation to a contract for buy-up oriental tobacco sort group Basma, crop 2011, in the name and on account of Bulgartabac - Holding AD. At the date of preparation of these financial statements the advance granted was utilized (31 December 2010: BGN 64 thousand in relation to a contract for buy-up oriental tobacco and Burley, crop 2010).

The dividend amounting to BGN 237 thousand represents the short-term portion of a receivable for

dividend from the 2008 profit from „Shumen Tabac” АD (31 December 2010: BGN 180 thousand). Other receivables from subsidiaries include mainly receivables for re-invoiced services, materials and

other expenses with a book value of BGN 1,315 thousand (31 December 2010: BGN 1,056 thousand) and carrying amount of BGN 391 thousand (31 December 2010: BGN 566 thousand).

Review for impairment At 31 December 2011, management reviewed and assessed all receivables from related parties from the

perspective of their collectability. For the purposes of the impairment analysis and for the purpose of defining the concentration of the risk of uncollectability of receivables (credit risk) at 31 December 2011, the receivables from subsidiaries were classified in two major groups:

• Receivables from companies which had regularly served their liabilities during the period. No impairment was charged on these receivables for the current period. The book value of these receivables was


53

BGN 2,305 thousand (31 December 2010: BGN 8,416 thousand), their carrying amount was BGN 2,291 thousand and BGN 14 thousand prior periods impairment of receivables (31 December 2010: carrying amount of BGN 8,382 thousand and impairment of BGN 34 thousand);

• All other receivables originated from companies which had suffered shortage of financial resources, experienced financial difficulties or were undergoing a liquidation procedure and did not repaid their liabilities on a regular basis. The book value of the receivables of this group was BGN 9,525 thousand (31 December 2010: BGN 9,120 thousand) and their carrying amount was BGN 525 thousand (31 December 2010: BGN 791 thousand). As a result of the analysis performed, indications of serious uncertainty as to the collection of these receivables from “Shumen Tabac” AD was established, due to the poor financial status of the debtor, the existence of public liabilities and the unfavourable market situation in case of sale of assets. Thus, impairment of the unsecured receivables from “Shumen Tabac” AD amounting to BGN 498 thousand was made. The remaining part of receivables that have been impaired in the current period belongs to a company in liquidation (Notes 2.28.7 and 9). 24. TRADE RECEIVABLES 31.12.2011 31.12.2010 BGN '000 BGN '000

Receivables from clients 2,023 1,295 Impairment (747) (18) Advances to suppliers 188 43 Loans granted 127 28 Impairment (127) (28) Receivables as interest and penalties on loans 137 14 Impairment (111) (12) Other receivables 394 335 Impairment (382) (326) Total trade receivables at book value 2,869 1,715 Accumulated impairment (1,367) (384) Total 1,502 1,331

The Company has defined a common credit period as follows: • from 30 to 90 days – for receivables from tobacco sales; • up to 30 days – for all other receivables.

The loans granted are interest-bearing and additional interest for delay is charged thereon in case of past due of a single payment in accordance with the agreed repayment schedule.

Based on its historical experience, the Company has accepted that a delay exceeding 180 days after the date of the common credit period is an indicator for uncollectability of receivables after the expiry of which (and even earlier in certain cases) an analysis is made with a view of the actual possibility for collection, including through realization of the collateral and, where necessary, impairment of the receivables or of a part thereof.

At 31 December 2011, the trade receivables that were current and not yet matured amounted to BGN 1,502 thousand (31 December 2010: BGN 1,331 thousand).


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At 31 December 2011, there were no past due and non-impaired trade receivables (31 December 2010: Nil).

The age structure of the trade receivables based on the agreed payment periods from the date of their occurrence, judged as bearing risk of being uncollectible and therefore impaired, is as follows:

31.12.2011 31.12.2010 BGN '000 BGN '000 up to 30 days 242 1 from 31 to 180 days 29 1 from 181 to 360 days 733 2 over 360 days 363 380 Accumulated impairment (1,367) (384) Total - -

At 31 December 2011, the trade receivables judged as bearing risk of being uncollectible and therefore impaired included mainly licensing fees, receivables related to trade representation, cash loans granted, interest, penalties under such loans, and other receivables from companies that are no longer part of the Group – in the total amount of BGN 1,334 thousand (31 December 2010: BGN 351 thousand). Due to the existence of indications for uncertainty as regards the collectability of these receivables, the latter were impaired in the current and previous periods (Note 2.28.7.).

Movement of allowance for impairment

2011 2010 BGN '000 BGN '000

Balance at the beginning of the year 384 5,682 Impairment reported for the period 773 38 Transfer to impairment of long-term portion 237 25 Reversed impairment (27) (22) Amounts written off as uncollectible - (5,339) Balance at the end of the year 1,367 384

The trade receivables are secured as follows:

2011 2010 BGN '000 BGN '000 Receivables secured by a mortgage 998 1,307 Total secured receivables at book value 998 1,307 Accumulated impairment (968) (25) Non-secured receivables 1,871 408 Accumulated impairment (399) (359) Total receivables at car rying amount 1,502 1,331


55

The total amount of properties mortgaged to the benefit of Bulgartabac - Holding AD and provided as collateral on trade receivables is BGN 5,122 thousand (31 December 2010 : BGN 5,122 thousand), including to secure the amount of long-term trade receivables – BGN 434 thousand (31 December 2010: BGN 699 thousand) and the amount of current trade receivables – BGN 998 thousand (31 December 2010: BGN 1,307 thousand).

The amount of the mortgaged properties is their determined market value at the time of signing the contract (establishing the collateral). At the date of the financial statements the fair values of collateral were BGN 4,425 thousand securing trade receivables in the amount of BGN 1,432 thousand.

Management believes that their fair value at the date these financial statements is not less than the value of the receivable they secure.

The policy for accepting collateral is that the latter should cover from 100 to 150% of the amount of the

receivable. Receivables from clients presented in the statement of financial position at 31 December 2011

include: • in BGN: Nil (31 December 2010 : BGN 1,277 thousand); • in foreign currency: BGN 1,276 thousand (31 December 2010 : Nil), incl. EUR 652 thousand (31

December 2010 : Nil). Receivables from clients relate to:

31.12.2011 31.12.2010 BGN '000 BGN '000 Receivables from local clients, incl.: - 1,277 Royalty and trade representation 729 1,276 Other - 1 Impairment (729) - Receivables from foreign clients, incl.: 1,276 - Export of tobacco 1,276 - Royalty 18 18 Impairment (18) (18) Total 1,276 1,277

The receivables from local clients include mainly receivables from a subsidiary sold amounting to BGN 729 thousand. Due to the existence of indications of uncertainty as to the collection of the receivables, these receivables have been impaired in the current reporting period (31 December 2010: BGN 1,277 thousand, incl. BGN 1,276 thousand receivables from a subsidiary sold).

The receivables from foreign clients include mainly tobacco sales amounting to BGN 1,276 thousand (EUR 652 thousand).

The loans granted and receivables form interest and penalties include loans originating from previous

periods granted to a subsidiary sold and to a company wherein Bulgartabac - Holding AD has lost its control

due to they undergoing insolvency procedures. These loans were impaired in full because of being past due and

their repayment is highly uncertain. Part of interest and penalties related thereto were impaired as well, because

of being past due, as follows:


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31.12.2011 31.12.2010 BGN '000 BGN '000 Unpaid principle on loans 127 28 Unpaid interest and penalties on loans 137 14 Impairment (238) (40) Total 26 2

Advances to suppliers

31.12.2011 31.12.2010 BGN '000 BGN '000 Advances for services 167 40 Advances for materials 19 3 Advances for fixed assets 2 - Total 188 43

The advances granted are mainly under contracts for advertising and promotional services, audit and consulting services– BGN 164 thousand (31 December 2010 : contracts for audit, evaluation and marketing services BGN 34 thousand).

Other receivables include forfeit payments under contracts, interest accrued on agreements, re-invoiced services and materials to subsidiaries wherein Bulgartabac - Holding AD has lost its control (companies sold and companies undergoing insolvency proceedings) and receivables from other debtors amounting to BGN 394 thousand in total, which have been impaired to the amount of BGN 382 thousand in current and previous reporting periods (31 December 2010 : BGN 335 thousand and impairment of BGN 326 thousand).

Review for impairment Based on the review performed regarding the ability to collect receivables past due at 31 December

2011 and the analysis of the information available at the date of preparation of the financial statements, the Company’s management judged that the ability to collect its receivables amounting to BGN 769 thousand from Slantse Stara Zagora – Tabac AD should be assessed to zero. The receivables are classified as bad debts as these are receivables not collected within the initially agreed deadlines, and out of the analysis of the quality of available collateral, the Company’s management was not able to obtain reasonable assurance that these amounts would be repaid in future years. The remaining portion of impaired receivables amounting to BGN 4 thousand originates from a company in insolvency (Notes 2.28.7 and 9).


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25. OTHER CURRENT ASSETS 31.12.2011 31.12.2010 BGN '000 BGN '000

Taxes refundable 2,069 2,041 Interest on undue taxes 651 - Court and awarded receivables 360 320 Impairment (141) (210) Prepayments 148 104 Receivables from social security entities 58 54 Deposits provided to contractors 32 5 Short-term portion of loans to employees 3 3 Total 3,180 2,317

Taxes refundable

31.12.2011 31.12.2010 BGN '000 BGN '000 Corporate income tax 1,372 1,344 VAT refundable 674 674 Other taxes 23 23 Total 2,069 2,041

In relation to a Tax Assessment Deed (TAD) issued by TD "Large Taxpayers and Insurers", Sofia,

as a result of a full-scope tax audit of the Company (confirmed partially by a Decision of the Director of „Appeals and Execution Management” Directorate – Sofia), VAT refundable amounting to BGN 674 thousand and corporate income tax amounting to 925 thousand were offset (Note 31). The findings made in TAD (the confirmed portion pursuant to a Decision of AEM) had been appealed before the Administrative Court - Sofia. The Sofia Administrative Court had honoured partially the appeal of Bulgartabac-Holding AD. The decision was appealed-against to the Supreme Administrative Court. The offset was made with the aim to secure the payables under TAD until the closure of the case. By a decision of the Supreme Administrative Court, the decision of the Sofia Administrative Court was repealed, in the part rejecting the appeal of Bulgartabac-Holding AD. The decision is final and cannot be appealed against. Taxed offset shall be refunded together with interest due thereon.


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Court and awarded receivables

31.12.2011 31.12.2010 BGN '000 BGN '000 Awarded receivables 7 164 Court receivables 353 156 Impairment (141) (210) Total 219 110

The court receivables of the Company are as follows:

• in connection with executive and civil cases – BGN 7 thousand (31 December 2010: Nil);

• court charges and consideration for procedural representation and defence before the Administrative

Court – Sofia in relation to appealing TAD 990000138 dated 16 June 2008: Nil (31 December 2010 :

BGN 64 thousand) and TAD 290800348 dated 06 April 2009: Nil (31 December 2010 : BGN 27

thousand);

• principal, interest and charges on cases against “Trakiya Tabac” ЕООD (the legal successor of

„Topolovgrad BТ” АD) brought to the Yambol District Court and the Arbitration Court with the

Bulgarian Chamber of Commerce and Industry, Sofia: Nil (31 December 2010: book value of BGN 73

thousand, for which impairment of BGN 66 thousand was accrued;

The awarded receivables of the Company are as follows:

• Directorate „ AEM” at the Headquarters of NRA - BGN 200 thousand (31 December 2010: Nil);

• in connection with executive and civil cases – BGN 153 thousand, for which impairment of BGN 141

thousand was accrued in previous periods (31 December 2010: book value of BGN 156 thousand, for

which impairment of BGN 144 thousand was accrued).

Prepayments

31.12.2011 31.12.2010 BGN '000 BGN '000 Advertising 106 60 Insurances 27 13 Subscription 2 7 Medical service 1 15 Other 12 9 Total 148 104

These expenses will be recognized on a straight-line basis as current expenses over the next 12 months, except for the advertising costs which will be recognized on the execution of the contracts.

The short-term portion of loans to employees amounts to BGN 3 thousand (31 December 2010 : BGN

3 thousand).


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26. CASH AND CASH EQUIVALENTS

31.12.2011 31.12.2010 BGN '000 BGN '000 Bank deposits 19,440 45,316 Current accounts 1,878 4,201 Cash in hand 54 43 Interest receivables on deposits 47 126 Food vouchers 1 - Blocked cash - 43 Total 21,420 49,729

The cash and cash equivalents available as at 31 December 2011 were in the Company’s accounts with

the following banks: UniCredit Bulbank AD, First Investment Bank AD, Corporate Commercial Bank AD, DSK Bank, Eurobank EFG (Bulgaria).

The structure of cash and cash equivalents is as follows: • in BGN – BGN 11,293 thousand (31 December 2010 : BGN 19,717 thousand); • in foreign currency – BGN 10,127 thousand (31 December 2010: BGN 30,012 thousand). Cash and cash equivalents in foreign currency are denominated in USD – USD 24 thousand (31

December 2010 : USD 241 thousand); in EUR – EUR 5,158 thousand (31 December 2010 : EUR 15,162 thousand); in CHF – CHF 1 thousand (31 December 2010: CHF 1 thousand).

Short-term deposits provided at 31 December are denominated in BGN and in foreign currencies, as

follows: • deposits in BGN – BGN 9,760 thousand (31 December 2010 : BGN 16,066 thousand); • deposits in foreign currency – BGN 9,680 thousand being the BGN equivalent of EUR 4,940

thousand and USD 12 thousand (31 December 2010 : BGN 29,250 thousand being the BGN equivalent of EUR 14,946 thousand and USD 12 thousand);

• interest on deposits – BGN 47 thousand, incl. EUR 3 thousand (31 December 2010 : BGN 126 thousand, incl. EUR 45 thousand). The original maturity of the deposits denominated in BGN and in foreign currency is from one to three

months. Blocked cash Restricted cash as of 31 December 2011 – Nil (31 December 2010: BGN 43 thousand, being the BGN equivalent of USD 29 thousand, and representing a cash guarantee to secure issued credit cards).


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Cash for the purposes of the cash flow statement Interest accrued on term deposits with original maturity of up to 3 months and the permanently blocked

cash (to secure bank guarantees) are not included as part of cash when preparing the cash flow statement. 31.12.2011 31.12.2010 BGN '000 BGN '000

Cash and cash equivalents presented in the statement of financial position 21,420

49,729

Blocked cash - (43) Interest receivables on deposits (47) (126) Cash and cash equivalents in the cash flow statement 21,373 49,560 27. CAPITAL AND RESERVES 31.12.2011 31.12.2010 BGN’ 000 BGN’ 000 Share capital 7,367 7,367 Statutory reserves 27,215 26,632 Revaluation reserve 5,105 5,226 Retained earnings 32,352 54,614 Total 72,039 93,839

At a regular annual General Meeting of the Shareholders of Bulgartabac - Holding AD a decision was taken to distribute dividends from the 2010 profits in the amount of BGN 4,194 thousand, incl. BGN 18,596 thousand from retained earnings and BGN 30,193 thousand from other reserves (31 December 2010 : BGN 2,301 thousand from the 2009 profit). The dividend distributed to the State amounted to BGN 42,298 thousand (31 December 2010 : BGN 1,837 thousand). Dividend per share amounts to BGN 7.19 (31 December 2010 : BGN 0.31).

Share capital - at 31 December 2011 the registered share capital of Bulgartabac - Holding AD

amounted to BGN 7,367 thousand, distributed in 7,367,222 ordinary dematerialized registered voting shares with a nominal value of BGN 1 each.

The main shareholder of the Company is BT Invest GmbH, which holds 79.83 % of the capital. Statutory reserves amounting to BGN 27,215 thousand (31 December 2010: BGN 26,632 thousand) are

set aside from profit distribution and include only amounts allocated to the Reserve Fund. The revaluation reserve – for property, plant and equipment amounting to BGN 5,105 thousand (31

December 2010: BGN 5,226 thousand) is formed from the positive difference between the carrying amount of property, plant and equipment and their fair values at the dates of the respective revaluations. The deferred tax effect on the revaluation reserve was taken directly to this reserve (Note 2.24).

Retained earnings – they comprise mainly: retained earnings of the Company from prior periods and

the current period profit (Note 2.24).


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Basic earnings per share

2011 2010 Average weighted number of shares 7,367,222 7,367,222 Net profit for the year (BGN’000) 31,309 5,825 Basic earnings per share (BGN) 4,25 0,79

28. RETIREMENT BENEFIT OBLIGATIONS

Payables to personnel include the present value of the Company’s obligation to pay indemnities to its

employees at 31 December 2011 (respectively at 31 December 2010) upon reaching the retirement age. Pursuant

to the provisions of the Labour Code and the Collective Labour Agreement (CLA) of the Company, the

employer is to pay an indemnity to its workers and employees upon retirement in the amount of 1 (one) gross

salary for each calendar year worked out with the Company, as also for the months worked out, as each month

worked out shall be multiplied by 1/12 part of one gross salary.

Due to the amendment of the CLA concerning the terms and conditions of the amount to be paid upon

retirement due to old age, length of service and illness, effective 01 November 2008 past service costs have been

calculated as well.

The Company took a decision to recognise past service costs regarding the payments upon retirement

for the average term to retirement (of 19 years) as of the date of entry into force of the plan, i.e. 01 November

2008. The past service costs on retirement due to illness are recognised immediately in accordance with the

requirements of IAS 19 Employee Benefits.

For the purpose of establishing the amount of its long-term payables to personnel, the Company has

assigned an actuarial valuation by using the services of a certified actuary. On the basis of the actuarial report, a

payable of BGN 1,480 thousand (31 December 2010 : BGN 1,502 thousand) was reported as at 31 December

2011.

During the reporting period, the accumulated and unrecognized actuarial gain was beyond the 10%-

corridor of the liability amount at the year-end and an actuarial gain amounting to BGN 174 thousand was

reported, being the portion of the accumulated and unrecognized actuarial gain exceeding the 10%- corridor of

the liability amount at the year-end over the adopted term of recognition of 5 years. Since the payments upon

retirement due to illness are reported as other long-term benefits, the actuarial gain of BGN 9 thousand formed

at the end of 2011 in relation to retirement due to illness was recognized immediately in compliance with the

requirements of the Standard (2010 – a recognized loss of BGN 9 thousand) (Notes No. 2.23 and 2.28.1).


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The movement in the retirement benefit obligation recognised in the balance sheet is as follows:

2011 2010

BGN'000 BGN '000 Present value of the obligations at 1 January 2,390 3,022

Unrecognized actuarial (loss) at 1 January 697 (147)

Unrecognized past service cost at 1 January (1,585) (1,723)

Liability recognized in the balance sheet at 1 January 1,502 1,152 Expense recognized in the income statement for the period (Note 6) 305 450

Payments for the period (327)

(100)

Liability recognized in the balance sheet at 31 December 1,480 1,502 Unrecognized actuarial gain at 31 December 894 697 Unrecognized past service cost at 31 December (1,447) (1,585)

Present value of the liabilities at 31 December 2,033 2,390

The movement in the present value of the retirement benefit obligations and the determination of the actuarial (gain) / loss are as follows:

2011 2010

BGN'000 BGN '000 Present value of the obligations at 1 January 2,390 3,022

Current service costs for the period 188 228

Interest expense for the period 145 208

Payments for the period (327) (100)

Actuarial gain for the period (363) (968)

Present value of the obligations at 31 December 2,033 2,390

The following actuarial assumptions were used in calculating the present value of the liabilities at 31 December 2011:

• mortality rate - in accordance with the table issued by the National Statistics Institute for the total mortality rate of the population in the Republic of Bulgaria for the period 2008 – 2010 (2010: period 2007 – 2009);

• staff turnover rate - from 0 % to 16 % for the five age groups formed with the Company (2010: between 0% and 13%);

• discount factor - the rate applied is based on the effective annual interest rate i = 5.7% (2010: 6.5%). It is grounded on the market yield on the long-term government securities (of 10-year maturity). Considering that the average term to pensioning is longer than 10 years, the discount rate has been established through extrapolation;

• the assumption for the future level of the salaries is based on the information provided by the Company's management and amounts to 2% annual growth compared to the prior reporting period for the first year and 4% annual growth compared to the prior reporting period for each subsequent year (2010: 4 % ).


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29. TRADE AND OTHER PAYABLES 31.12.2011 31.12.2010 BGN ‘000 BGN ‘000 Payables to suppliers 1,133 233

Accruals for expenses 370 292 Advances received 238 304 Total trade payables 1,741 829 Tax liabilities 397 1,808 Dividend payables 266 184 Deposit - guarantee under a real estate rental agreement 41 41 Deductions from salaries 21 33 Payables on credit cards

4 - Other payables 1 -

Total other current liabilities 730 2,066 Total 2,471 2,895

Advances received are denominated in foreign currency under contracts for the sale of tobacco and amount to EUR 122 thousand, or BGN 238 thousand (31 December 2010: EUR 155 thousand, or BGN 304 thousand).

Advance payables are settled accounting to the contractual clauses – until the tobacco quantities are withdrawn and by the deadline - 31 December 2012. After the expiry of this term, the unutilised amount of the advance is not subject to refund.

Accruals for expenses include:

31.12.2011 31.12.2010 BGN ‘000 BGN ‘000 Advertising 275 222 Materials 39 8 Security 18 42 Consulting services 15 3 Communication services 11 15 Other expenses 12 2 Total 370 292

Accruals for expenses are regular, interest-free and have been repaid by the date of preparation of the

statement of financial position. Payables to suppliers amount to BGN 1,133 thousand (31 December 2010: BGN 233 thousand)

include: • payables in BGN: BGN 943 thousand (31 December 2010: BGN 226 thousand);


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• payables in foreign currency: BGN 190 thousand (31 December 2010: BGN 7 thousand), including: USD 6 thousand (31 December 2010: USD 3 thousand) and EUR 92 thousand (31 December 2010: EUR 2 thousand).

Payables to suppliers are regular, interest-free and have been repaid by the date of preparation of the statement of financial position. They relate to supplies of materials, advertising, legal services, patent services, telecommunication services and other services.

The common credit period for which no interest is due by the Company in the accounts with its counterparts is from 30 to 180 days.

Tax liabilities include:

31.12.2011 31.12.2010 BGN '000 BGN '000 VAT 271 1,756 Individual income taxes 123 49 Withholding and other taxes 3 3 Total 397 1,808

By the date of approval for issue of the financial statements the following inspections and audits were performed:

• under VAT Act - covering the period until 30 April 2007; • a full-scope tax audit - covering the period until 31 December 2006; • National Social Security Institute (expenses) - until 30 June 2007. • National Social Security Institute (income) - until 30 June 2002. A tax audit is carried out within five-year term as of the expiry of the year in which the tax return for the

respective liability has been filed. The tax audit confirms finally the tax liability of the relevant entity – tax liable person, except for the cases expressly provided for in law.

Following an order of TD “Large Taxpayers and Insurers”, in 2007 a full-scope tax audit was initiated for the period from 1 January 2003 to 31 December 2006 and under VAT Act for the period from 1 May 2006 to 30 April 2007. A Tax Assessment Deed (TAD) No. 990000138 dated 16 June 2008 was issued by TD “Large Taxpayers and Insurers”, Sofia. The Tax Assessment Deed was appealed in accordance with the procedure under Art.Art. 152-155 of the Tax and Social Security Code (TSSC) as a result of which a Decision No. 1565 dated 24 October 2008 of the Director of Directorate “Appeals and Execution Management” (AEM) – Sofia was handed over. By means of the decision, part of the findings made in TAD was confirmed and part was revised, and in the part of the corporate tax liabilities for 2004 TAD was repealed and mandatory instructions were issued for conducting a new tax audit. The confirmed part of findings were appealed before the Administrative Court - Sofia – through the Director of AEM Directorate, a case was formed - Administrative case No. 7464/2008. By a decision No. 3947 dated 01 December 2010 the appeal of Bulgartabac-Holding AD was partially honoured, namely in its part of the additionally assessed liabilities under VATA /repealed/ – unrecognized input VAT amounting to BGN 145 thousand – principal, BGN 26 thousand – interest and additionally assessed corporate income tax under CITA /repealed/ for 2003, 2005 and 2006 amounting to BGN 974 thousand – principal and the corresponding part of interest thereon. The other part of the appeal was rejected. The decision was appealed against before the Supreme Administrative Court. By a decision No 14975 of 16 November 2011 of the Supreme Administrative Court, the decision of the Administrative Court - Sofia


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was repealed in the part rejecting the appeal of Bulgartabac-Holding AD and the Directorate “Appeals and Execution Management” – Sofia was convicted to pay to Bulgartabac-Holding AD the amount of BGN 146 thousand being the costs incurred in relation to the case. The decision is final and cannot be appealed against.

In 2008, by virtue of an order of TD “Large Taxpayers and Insurers”, a new tax audit was initiated to assess the corporate tax liabilities for 2004. A Tax Assessment Deed (TAD) No 290800348 dated 06 April 2009 was issued by TD “Large Taxpayers and Insurers”, Sofia. The Tax Assessment Deed was appealed in accordance with the procedure under Art.Art. 152-155 of TSSC, as a result of which a Decision No. 911 dated 07 July 2009 of the Director of Directorate “Appeals and Execution Management” – Sofia was handed over. By means of the decision the findings in the TAD were confirmed. The confirmed part of findings were appealed before the Administrative Court - Sofia – through the Director of AEM Directorate, a case was formed - Administrative case No. 5673/2009. By a decision No. 774 dated 21 January 2011 the appeal of Bulgartabac-Holding AD was honoured in full. The decision may be appealed before the Supreme Administrative Court. By a decision No 1537 of 31 January 2012 of the Supreme Administrative Court, the decision of the Administrative Court – Sofia was confirmed and the Directorate “Appeals and Execution Management” – Sofia was convicted to pay to Bulgartabac-Holding AD the amount of BGN 26 thousand being the costs incurred in relation to the case. The decision is final (Note 31).

Dividend liabilities refer to years from 2005 to 2010 to physical persons - BGN 264 thousand (31 December 2010: BGN 183 thousand) and legal entities - BGN 2 thousand (31 December 2010: BGN 1 thousand). Payables are denominated in BGN and are interest-free.

30. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY 31.12.2011 31.12.2010 BGN '000 BGN '000 Payables to personnel 1,852 1,093 Social security payables 141 130 Total 1,993 1,223

Payables to personnel The payables to personnel include: • the net amount of the outstanding remunerations for the month of December 2011 – BGN 953

thousand (31 December 2010 : BGN 295 thousand); • accruals for unused paid annual leaves of personnel - BGN 585 thousand (31 December 2010 :

BGN 650 thousand); • provisions for liabilities under the Collective Labour Agreement – BGN 270 thousand (31

December 2010: Nil); • accruals for remuneration for final formation of staff salaries for the forth quarter of 2011 – None

(31 December 2010 : BGN 105 thousand); • vouchers for food to personnel - BGN 30 thousand (31 December 2010 : BGN 32 thousand); • deposited remunerations - BGN 9 thousand (31 December 2010 : BGN 9 thousand), and • civil contracts – BGN 5 thousand (31 December 2010 : BGN 2 thousand).


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Payables for social security The payables for social security include: • accrued social security contributions on salaries for the month of December 2011 – BGN 93

thousand (31 December 2010 : BGN 76 thousand); • accruals for social security contributions on unused paid annual leaves of personnel - BGN 45

thousand (31 December 2010 : BGN 47 thousand); • accruals for social security contributions on the remunerations for final formation of staff salaries

for the forth quarter of 2011 – Nil (31 December 2010 : BGN 6 thousand); • accruals for social security contributions on civil contracts – BGN 3 thousand (31 December 2010 :

BGN 1 thousand). 31. CONTINGENT LIABILITIES AND COMMITMENTS

Operating lease Operating lease liabilities – Bulgartabac - Holding AD as a lessee

At 31 December the Company is a party to operating lease agreements as a lessee:

2011 2010

Rented motor vehicles for the Company’s activities – term of the rental agreement up to 3 years as of 26 October 2009. The monthly rent is determined depending on the number and makes of the rented motor vehicles. Rented motor vehicles for the Company’s activities – term of the rental agreement up to 3 years as of 11 November 2011. The monthly rent is determined depending on the number and makes of the rented motor vehicles.

Rented motor vehicles for the Company’s activities – term of the rental agreement up to 3 years as of 26 October 2009. The monthly rent is determined depending on the number and makes of the rented motor vehicles.

None

Rented storage area for a warehouse by „Tabac Trading” ООD – term of the rental agreement 5 years as of 02 January 2008. It may be terminated by means of a one-month advance notice.

Rented storage area for a warehouse by „Tabac Trading” ООD – term of the rental agreement 4 years as of 02 January 2008. It may be terminated by means of a one-month advance notice.

Rented storage area for the storage of tobacco in the field of Aydarovo village, town of Blagoevgrad. The monthly rent is determined depending on the actual number of days of tobacco storage and tonnage. The term of the rental agreement is 3 years as of 18 February 2010 and it may be terminated by means of a one-month

Rented storage area for the storage of tobacco in the field of Aydarovo village, town of Blagoevgrad. The monthly rent is determined depending on the actual number of days of tobacco storage and tonnage. The term of the rental agreement is 1 year as of 18 February 2010 and it may be terminated by means of a one-month


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advance notice. advance notice.

Rented storage area for a warehouse by „Tabac Trading Partner Nord” ООD – term of the rental agreement 3 years as of 17 June 2009. It may be terminated by means of a one-month advance notice.

Rented storage area for a warehouse by „Tabac Trading Partner Nord” ООD – term of the rental agreement 2 years as of 17 June 2009. It may be terminated by means of a one-month advance notice.

A rented van for the Company’s activities – term of the rental agreement 1 year as of 12 January 2011. It may be terminated by means of a one-month advance notice.

A rented van for the Company’s activities – term of the rental agreement 1 year and 4 months as of 28 August 2009. It may be terminated by means of a one-month advance notice.

The future minimum rentals under operating leases are as follows:

31.12.2011 31.12.2010 BGN '000 BGN '000

Within 1 year 590

403 After 1 year but not more than 5 years 249 350

Total 839 753

Receivables under operating lease – Bulgartabac - Holding AD as a lessor

At 31 December the Company concluded contracts for lease out of property as follows:

2011 2010

Part of the administrative building - for office of Bank DSK EAD - total leased area of 300 sq.m. with a term of the contract of up to 5 years as of 13 January 2007. After that date, the contract was continued for an indefinite term. Condition for termination - by a 1-month advance notice.

Part of the administrative building - for office of Bank DSK EAD - total leased area of 300 sq.m. with a term of the contract of up to 5 years as of 13 January 2007. Condition for termination - on expiry of the contract term or by a 6-month advance notice.

Parts of tobacco warehouses in the town of Asenovgrad - total leased area of 1,200 sq.m. under a contract dated 1 September 2008. Term of the contract – termless. Condition for termination – by one-month advance notice.

Parts of tobacco warehouses in the town of Asenovgrad - total leased area of 1,200 sq.m. under a contract dated 1 September 2008. Term of the contract – termless. Condition for termination – by a one-month advance notice.

Garage cells in the town of Asenovgrad - total rented area of 216 sq.m. with terms of the contracts of one month. Condition for termination – on expiry of the contract term or by a 5-day written advance notice. Apartment – a company apartment. – Term of the contract – termless. Condition for termination – by

Garage cells in the town of Asenovgrad - total rented area of 288 sq.m. with terms of the contracts from one month to one year. Condition for termination – on expiry of the contract term or by a 5-day/one-month written advance notice. Apartment – a company apartment. – Term of the contract – termless. Condition for termination – by a


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a one-month advance notice. Motorcar – term of the contract of 2 months as of 01 November 2011. Condition for termination – by a one-week advance notice in writing.

one-month advance notice. None

The properties are treated as used in Company's operations (Notes 2.10 and 2.28.8).

The future minimum lease receivables under operating lease rental are as follows:

31.12.2011 31.12.2010 BGN '000 BGN '000 Within 1 year 418 421 After 1 year but not more than 5 years 1,668

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Total 2,086 513

Court and executive cases

1. Cases initiated against Bulgartabac - Holding AD

A civil case was brought to Sofia City Court against Bulgartabac - Holding AD by an individual in relation to a dispute concerning intellectual property. The case is pending.

A case was brought to Asenovgrad Regional Court against Bulgartabac - Holding AD by an individual in relation to a property dispute. The case is pending.

In Bulgaria, a case was brought by Buhler and Berger Bulgaria EOOD to the Sofia Regional Court against Bulgartabac - Holding AD for the payment of outstanding amounts on invoices issued in relation to a long-term loan contract, together with the statutory interest due on the amount claimed. The case is pending.

2. Proceedings related to rights of trademarks The company is a party to disputes for rights of trademarks in the country and abroad. Part of the cases

are initiated by Bulgartabac – Holding AD for deletion of rights of trademarks registered by foreign persons, for which Bulgartabac – Holding AD has either made the registration already. The constituted cases under appeals by and against Bulgartabac-Holding AD related to rights of trademarks are as follows:

In Turkey, 2 cases were brought to the Mersin Regional Court against European Tobacco Inc. for the annulment of their trademarks Prestige and Prestage. The decisions were in favour of Bulgartabac-Holding AD and were appealed against to the Supreme Court – Ankara by European Tobacco Inc. The cases are pending.

In Turkey, 2 cases were brought to the Intellectual and Industrial Rights Court Mersin against European Tobacco Inc. for the annulment of their trademarks President. The cases are pending.

In Turkey, before the Court for Intellectual Property – Ankara, at an appeal of Bulgartabac - Holding AD a case was initiated against the Patent Authority – Turkey. The case was for the refusal to register the MM trademark. The case was closed with a decision in favour of Bulgartabac-Holding AD.

In Turkey, before the Supreme Court – Ankara 2 cases were initiated at an appeal of the Patent Authority against decisions of the Court for Intellectual Property – Ankara claiming the rejection of decisions for the registration of the trademarks Privace Prestige and Protocol Prestige in relation to the registration of the


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trademark Prestige of Bulgartabac - Holding AD. The cases were closed with decisions in favour of Bulgartabac-Holding AD.

In Turkey, against the Patent Authority, a case was initiated in relation to the revocation of the registration of the E♥A slims of Bulgartabac - Holding AD. The case was brought to the Court for Intellectual Property - Ankara. The decision was not in favour of Bulgartabac-Holding AD and was appealed against to the Supreme Court – Ankara. The case is pending.

In Turkey, at a request of European Tobacco Inc. - Turkey a case was brought to the Mersin Civil Court for cancellation of registration of 5 trademarks Prestige of Bulgartabac - Holding AD. The case is pending.

In Turkey, at the request of Bulgartabac - Holding AD 2 cases were brought to the Intellectual and Industrial Rights Court – Ankara against the Patent Agency of Turkey and European Tobacco. The subject-matter of the cases was the refusal to annul 2 trademarks President of European Tobacco. The decisions were in favour of Bulgartabac-Holding and were appealed by the Patent Authority. The cases are pending.

In Turkey, at the request of Bulgartabac - Holding AD a case was brought to the Intellectual and Industrial Rights Court – Ankara against the Patent Agency of Turkey and European Tobacco Inc.. The subject-matter of the case was the refusal to annul the trademark President of European Tobacco Inc. The decision was in favour of Bulgartabac-Holding AD and was appealed against by the Patent Agency of Turkey and European Tobacco Inc. The case is pending.

In Turkey, at the request of Bulgartabac - Holding AD a case was brought to the Intellectual and Industrial Rights Court – Ankara against the Patent Agency of Turkey and European Tobacco Inc. The subject-matter of the case was the refusal to annul the trademark President of European Tobacco. The case is pending.

In Turkey, at the request of Philip Morris Brand Sarl – Switzerland a case was brought to the specialised Intellectual and Industrial Rights Court – Istanbul against Bulgartabac - Holding AD. The subject-matter of the case was the annulment of the registration the trademarks Prestige и Prestige Slims of Bulgartabac - Holding AD in Turkey. The case is pending.

In Turkey, at a request of Bulgartabac-Holding AD a case was brought to the Intellectual and Industrial Rights Court – Istanbul against Liens S.A. and European Tobacco Inc. The subject-matter of the case was the suspension of the disloyal use of the trademark Premier Point, confiscation and destruction of the cigarettes bearing the trademark Premier Point, and publication of the decision. The case is pending.

In Turkey, at a request of Bulgartabac-Holding AD a case was brought to the Intellectual and Industrial Rights Court – Istanbul against UFT Ltd. and European Tobacco Inc. The subject-matter of the case was the suspension of the disloyal use of the trademark Private Point, confiscation and destruction of the cigarettes bearing the trademark Private Point, and publication of the decision. The case is pending.

In Greece, a case was brought to the Administrative Court of Athens for the trademark E♥A Rose against Bulgartabac-Holding AD and the Patent Agency initiated at the appeal of Philip Morris Products. The decision was in favour of Bulgartabac – Holding AD. The term of appealing the decision is ongoing.

In Greece, 2 cases were brought against the Patent Agency initiated by Bulgartabac – Holding AD for the refusal of registration of the trademarks Bulgartabac and Femina of Bulgartabac - Holding AD. The proceedings are to be heard by the Administrative Court of Athens. The cases are pending.

In Bulgaria, a case was initiated on the grounds of an appeal of „Alpi” ООD to the Sofia Administrative Court against a decision of the Patent Authority for deletion of trademark Victoria. The decision was in favour of Bulgartabac - Holding AD. The decision of the Sofia Administrative Court was appealed against to the Supreme Administrative Court. The case was closed in favour of Bulgartabac-Holding AD.

In Austria, a case was initiated to the Supreme Court in relation to the claim of Philip Morris Products rejected by the Trade Court – first instance in Vienna, for prohibiting the sales of the mark E♥A slims of


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Bulgartabac-Holding AD in the territory of Austria. The decision was issued in favour of Bulgartabac - Holding AD and had been appealed against by Philip Morris Products to the Trade Court of second instance in Vienna. The appeal was honoured. Bulgartabac - Holding AD filed an appeal to the Supreme Court of Austria. The appeal of Bulgartabac - Holding AD was honoured by the Supreme Court which repealed the decision of the previous instance and returned the case for new hearing to the Trade Court of second instance. The decision of the Trade Court of second instance was in favour of Bulgartabac - Holding AD. Philip Morris Products – Switzerland filed an appeal to the Supreme Court against the decision. The appeal was rejected. The case was closed in favour of Bulgartabac - Holding AD.

In Poland, a case was initiated to the Administrative Court Warsaw on the grounds of an appeal of Bulgartabac – Holding AD against the Patent Authority in relation to the revocation of the registration of the trademark Prestige slims. The case is pending.

In Lithuania, a case was brought to the District Court of Vilnius on the grounds of an appeal filed by Philip Morris Products against the registration of the trademark E♥A slims of Bulgartabac - Holding AD in Lithuania. Bulgartabac - Holding AD was the defendant on the case. The Patent Authority of Lithuania was attached as an interested party. The decision was in favour of Bulgartabac - Holding AD. The decision was appealed against by Philip Morris Products to the Appellate Court of Vilnius. The case is pending.

In Bulgaria, a case was brought to the Sofia City Court against „Fraport Twin Star Airport Management” AD and „Plovdiv Airport” ЕAD for violating the rights of trademarks owned by Bulgartabac - Holding AD. The claim was honoured in favour of Bulgartabac - Holding AD. The decision was appealed by „Fraport Twin Star Airport Management” AD in its part dealing with the expenses. No motion was passed on the appeal of „Fraport Twin Star Airport Management” AD. The decision of Sofia City Court was appealed against by „Fraport Twin Star Airport Management” AD to the Sofia Appellate Court. The case was closed in favour of Bulgartabac - Holding AD.

In Romania, at an appeal of Bulgartabac - Holding AD a case was brought to the Appellate Court of Bucharest against a decision of the Patent Agency to refuse the registration of the trademark E♥A slims in Romania. The appeal of Bulgartabac - Holding AD was rejected. The case was closed.

In Romania, at a request of Bulgartabac - Holding AD a case was brought to an Appellate Court against Gallaher Canarias S.А., Spain, for the annulment of trademark Victoria in Romania in relation to the registration of the trademark Victory of Bulgartabac - Holding AD. The decision was in favour of Bulgartabac - Holding AD. The decision was not appealed against and entered into force.

In Argentina, at a request of Bulgartabac - Holding AD a case was brought to the National Federal Court on Civil and Commercial Cases of First Instance against the Patent Agency and Philip Morris in relation to the refusal of registration of the trademark E♥A slims. The case is pending.

In Greece, at a request of Bulgartabac - Holding AD two cases were brought to the Administrative Court of Athens for the obliteration of the registration of trademark Victory in Greece of Philip Morris Products S.А. – Switzerland by reason of being unused. The decisions are in favour of Bulgartabac - Holding AD.

In Greece, at a request of Bulgartabac - Holding AD a case was brought to the Administrative Court of Athens against the Patent Agency of Greece for the refusal to register the trademark Victory. The case is pending.

In Germany, at a request of Societe National de Kemics to the Federal Patent Court against the Patent Agency for the obliteration of the registration of the trademark Orient Express owned by Bulgartabac - Holding AD. Bulgartabac - Holding AD is an interested party to the case. The case is pending.

At a request of Philip Morris Products S.А., a case was brought to the Supreme Court of Israel against the decision of the Patent Agency – Israel by virtue of which the objection of Philip Morris Products S.А against


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the request of Bulgartabac - Holding AD for registration of the trademark E♥A slims in Israel was rejected. The appeal of Philip Morris Products S.А. was honoured. A term of appealing the decision by Bulgartabac - Holding AD is ongoing. The decision is not in favour of Bulgartabac - Holding AD and is final.

In Portugal, a case was brought to the Commercial Court of Lisbon at an appeal of Cita Tabacos de Canarias – S.L. against the decision of the Portuguese Patent Agency for registration of the trademark Victory slims of Bulgartabac - Holding AD. The case is pending.

In Portugal, a case was brought to the Commercial Court of Lisbon at an appeal of Empresa Madeirence de Tabacos S.A. against the decision of the Portuguese Patent Agency for registration of the trademark Victory slims of Bulgartabac - Holding AD. The case is pending.

In Bulgaria, a case was brought to the Sofia City Court at an appeal of the company “Reemtsma” GmbH, Germany, against a decision of the Patent Agency for obliteration of the international registration of trademark ТIR. Bulgartabac - Holding AD was an interested party to the case. The decision was in favour of Bulgartabac - Holding AD and was appealed against to the Supreme Administrative Court by “Reemtsma” GmbH, Germany, and ITC – Iran. The decision is in favour of Bulgartabac - Holding AD.

In Bulgaria, at an appeal of the company “Japan Tobacco” Inc., Japan, 2 cases were initiated to the Sofia City Court against decisions of the Patent Authority for revocation of the registration of trademarks Mild Seven and Seven Star. The appeal was honoured. Bulgartabac - Holding AD filed an appeal against the decision to the Supreme Administrative Court. A decision was issued by virtue of which the appeal was rejected.

In Bulgaria, a case was brought to the Sofia City Court at an appeal of Bulgartabac – Holding against SERPI (SAS). The claim is for the prohibition of use of the Community trademark MV Prestige in the territory of the Republic of Bulgaria. The case is pending.

3. Cases initiated by Bulgartabac - Holding AD Executive cases have also been initiated for collecting of receivables from other persons totalling BGN

352 thousand. Two cases were brought to the Sofia City Court against Board – 17 АD for infringement of exclusive

intellectual property rights over the trademark Victory of Bulgartabac - Holding AD. The proceeding on one of the cases was suspended until the closure with an effective decision of the dispute on the other case. The claim was rejected. The decision was appealed against the Sofia Appellate Court. The cases are pending.

In 2008, a case was initiated before the Sofia Administrative Court as a result of the appeal filed by Bulgartabac - Holding AD against a Tax Assessment Deed from June 2008. The Tax Assessment Deed was appealed in its part of the additionally assessed liabilities under VAT Act /repealed/ - a non-recognised input VAT amounting to BGN 145 thousand – principal, BGN 26 thousand – interest, and in the part of the additionally assessed corporate income tax under CITA /repealed/ for 2003, 2005 and 2006 amounting to BGN 2,392 thousand – principle and BGN 416 thousand – interest. By a decision of the Sofia Administrative Court dated 1 December 2010, the appeal of Bulgartabac - Holding AD was honoured partially, in its part dealing with the additionally assessed liabilities under VATA – a non-recognised input VAT in the amount of BGN 145 thousand – principal, BGN 26 thousand – interest and additionally assessed corporate income tax under CITA for 2003, 2005 and 2006 amounting to BGN 974 thousand – principle and the associated portion of interest thereon. The other part of the appeal was rejected. The decision was appealed against to the Supreme Administrative Court. By a decision of the Supreme Administrative Court, the decision of the Administrative Court Sofia City was repealed in its part dealing with the rejection of the appeal of Bulgartabac - Holding AD and the Appeal and Enforcement Management Directorate – Sofia city was convicted to pay to Bulgartabac -


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Holding AD the amount of BGN 146 thousand being the costs incurred in relation to the case. The decision is final and cannot be appealed against.

In 2009, a case was initiated before the Sofia Administrative Court as a result of the appeal filed by Bulgartabac - Holding AD against Tax Assessment Deed from April 2009. The Tax Assessment Deed was appealed in its part of the additionally assessed corporate income tax under CITA for 2004 amounting to BGN 1,251 thousand – principle. By a decision of the Sofia Administrative Court dated 21 February 2011, the appeal of Bulgartabac - Holding AD was honoured in full. The Director of Appeal and Enforcement Management Directorate – Sofia city was convicted to pay to Bulgartabac - Holding AD the amount of BGN 33 thousand being the costs incurred in relation to the case. The decision was appealed against to the Supreme Administrative Court. By a decision of the Supreme Administrative Court, the decision of the Administrative Court – Sofia was confirmed and the Directorate “Appeals and Execution Management” Directorate – Sofia was convicted to pay to Bulgartabac-Holding AD the amount of BGN 26 thousand being the costs incurred in relation to the case. The decision is final.

A case was initiated to the Supreme Court of Cassation at an appeal filed by Bulgartabac - Holding AD in relation to distribution for use of a mutual property - a building located in Burgas, 7 Graf Ignatiev Street. The case was returned for new hearing to the Burgas District Court. The decision of the Burgas District Court was in favour of Bulgartabac - Holding AD. The decision was appealed against to the Supreme Court of Cassation.

A case was initiated to the Yambol District Court against Topolovgrad BT AD on the grounds of a claim for actual enforcement of obligations of Topolovgrad– BT AD for dividends and other payments. The request of Bulgartabac - Holding AD was rejected. The decision was appealed against the Appellate Court of Burgas. The appeal of Bulgartabac - Holding AD was rejected. The decision of the Appellate Court of Burgas was appealed against to the Supreme Court of Cassation. A decision was issued by virtue of which the claim was rejected.

A case was initiated to the Arbitration Court at the BCCI against „Trakiya Tabac” ЕООD on the grounds of a claim for actual enforcement of contractual obligations. The case is pending.

A case was initiated before the Commercial Court of the USA, the South Region of New York by Bulgartabac-Holding AD against the Republic of Iraq, the State Tobacco Group, the Central Bank of Iraq, and Rafidan bank. The case was initiated in relation to trade receivables of Bulgartabac - Holding AD under contracts for export of cigarettes and spare parts dated 1987. The claim was rejected due to the expired period of limitation. The decision was appealed against to the Appellate Court of New York. The appeal of Bulgartabac - Holding AD was rejected.

4. Cases whereto the obliterated Supervisory Board of Bulgartabac - Holding AD is a party At an appeal of Bulgartabac - Holding AD, a case was brought to the Sofia City Court against a decision

of the Sofia Regional Court, by virtue of which the claim of Bulgartabac - Holding AD against CD TAB EOOD for the establishment of the voidness of a decision of the Supreme Administrative Court was rejected, and thus, the Supervisory Board of Bulgartabac - Holding AD was recognized as an administrative body. The appeal of Bulgartabac - Holding AD was rejected. A cassation appeal was filed to the Supreme Court of Cassation against the decision of the Sofia City Court.

5. Other cases Supreme Administrative Court. The Board of Directors of Bulgartabac - Holding AD – claimant, and

CD TAB EOOD, Dulovo - defendant. Appeal against the decision of the Administrative Court – Sofia city, by


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means of which a silent refusal, followed by the express refusal of the Supervisory Board of Bulgartabac - Holding AD on a bid of CD TAB EOOD for the purchase of 99.98% of the capital of Dulovo Tabac AD, was declared null and void.

Supreme Administrative Court. CD TAB EOOD, Dulovo – claimant, the Board of Directors of Bulgartabac - Holding AD – defendant. Appeal against a ruling of the Administrative Court – Sofia city, by means of which the proceedings against the Supervisory Board of Bulgartabac - Holding AD was terminated for the lack of action on the part of the Supervisory Board with respect to the performance of its obligations under paragraph 5 of the Additional Provisions of the Privatisation and Post-Privatisation Act, objectivated in the non-filing of a request to the public enforcer at the State Receivables Agency, the Regional Directorate of Varna, for the suspension of the enforcement collection actions towards public liabilities of Dulovo Tabac AD. The case is closed.

6. Court cases whereto Bulgartabac - Holding AD is an interested party In Bulgaria, before the Supreme Administrative Court, at an appeal of the Partnership “Equal rights for

the people laid off by Plovdiv Yurii Gagarin BT AD” (at present, “Yurii Gagarin AD”) a case was initiated against the refusal of the Discrimination Commission to establish a record. Bulgartabac - Holding AD is an interest party to the case. The Supreme Administrative Court – a three-member panel repealed the decision of the Discrimination Commission and returned the case for a new investigation. The decision was appealed against by “Yurii Gagarin AD” Plovdiv to the Supreme Administrative Court – a five-member panel. The Supreme Administrative Court – a five-member panel returned the case for new hearing. The case is pending.

Pursuant to the opinions of the lawyers/ attorneys-at-law of the Company, it is highly probable that the

outcome of all cases whereto the Company is a defendant will be to the benefit of Bulgartabac - Holding AD, and on the grounds of these opinions management decided that there are no grounds to accrue provisions in the financial statements.

Collateral provided At 31 December 2011 the Company provided the positive balance of a bank account to serve as a pledge

to secure the penalties under the Privatisation contract for the sale of shares of the capital of Bulgartabac-Holding AD. The pledge matures on 30 November 2016.

Warrants and guarantees provided

The Company avaled a promissory note maturing on 31 March 2013 in the amount of BGN 40 thousand

to the benefit of Diners Club Bulgaria AD, issued as collateral to credit cards received.


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32. RELATED PARTIES

32.1. SUBSIDIARIES The data about the subsidiary joint-stock companies as at 31 December are presented in Note 1.3 and

Note 15. 32.2. RELATED PARTY TRANSACTIONS All related parties of the company are part of Bulgartabac Group. Related parties within the Group are as follows:

Related parties Type of relationships Period of relationships Bulgartabac – Trading ЕАD Subsidiary 2010 and 2011

Blagoevgrad BT AD Subsidiary 2010 and 2011

Haskovo Tabac AD – in liquidation Subsidiary 2010 and 2011

Sofia BT AD Subsidiary 2010 and 2011

Asenovgrad BT AD – in liquidation Subsidiary 2010 and 2011

Shumen Tabac AD Subsidiary 2010 and 2011

Pleven BT AD Subsidiary 2010 and 2011

Foundation for Funding the Social Costs of Bulgartabac-Holding AD Privatisation (Fund)

General member of managing bodies 2010 and 2011

The data about the subsidiary joint-stock companies as at 31 December are presented in Note 1.3 and

Note 15. The company treats the Foundation for Funding the Social Costs of Bulgartabac-Holding AD

Privatisation (Fund) as a related party as it has been established by Bulgartabac-Holding AD for purposes relating to the Group’s restructuring and by the beginning of November 2011 its day-to-day operations were managed by General Manager who was also a Vice Chairman of Board of Directors of Bulgartabac-Holding AD (Note 32.4.).

The company does not treat as a related party Dulovo Tabac АD – in insolvency, although it holds 99.98% of its capital, due to the loss of control over the company (Note 16).

The transactions of Bulgartabac-Holding AD with its related parties for both periods presented are only with subsidiaries and are as follows:

2011 2010 BGN ‘000 BGN ‘000 1. Sales of products and goods for: Subsidiaries within Bulgartabac Group, incl.. 3,193 13,617

· Tobacco 3,094 13,606 · Materials 99 10


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· Goods - 1 2. Sales of services for: Subsidiaries within Bulgartabac Group, incl.. 23,063 19,725

· royalties 13,173 10,862 · trade representation (commissions) 9,722 8,647

· penalties for overdue payments on cash loans 131 131 · interest on postponed dividends and other 27 27 · advertising in Bulgarian tobacco magazine 6 6

· rents 4 45 · tobacco storage - 7

3. Dividends received from subsidiaries: 32,035 1,108 4. Supply of goods from: Subsidiaries within Bulgartabac Group, incl.. 135 70

· cigarettes 132 70 · fixed assets 2 - · materials 1 -

5. Rendering of services from: Subsidiaries within Bulgartabac Group, incl. 5,904 3,211 · tobacco processing 3,597 2,233 · expenses on tobacco buyout 767 17 · administrative expenses on tobacco processing 671 418 · advertising 497 457 · administrative expenses on tobacco buyout 270 6 · rents 90 61 · tobacco storage 10 15

· preparation of tobacco lots for sale 2 4

6. The closing balances of receivables from and payables to related parties are as follows: 6. 1 Receivables from subsidiaries 2,941 9,596

A more detailed presentation of outstanding balances by type and by counterpart is presented in Notes 17 and 23.

In 2011 and 2010 there were no decisions of the Board of Directors of Bulgartabac-Holding AD to make donations to the Fund to finance its activity and to facilitate the achievement of its goals.

In accordance with signed licence agreements with Bulgartabac-Holding AD for licences for the trademarks owned by Bulgartabac-Holding AD, the subsidiaries pay licence fees (royalty) determined as a percentage of the selling price.

The subsidiaries pay fees for trade intermediary for performed by Bulgartabac-Holding AD import and export at their account, determined as a percentage of the transaction amount.


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On sale and purchase of MFT between the subsidiaries and Bulgartabac-Holding AD, the prices are determined depending on: crop, variety, quality, uniformity of lots, and level of export prices for the respective origin at the transaction date as well as the demand and supply of the domestic and foreign markets and the existing stocks of analogous tobaccos.

On purchase and sale of cigarettes, the prices of the deals are determined on the basis of freely determined retail prices (only subject to registration) and deducting the trade discount from the retail price (VAT excluded).

The terms and conditions under which the transactions have been performed are at arm’s length. The positive balance (BGN 3,500 thousand) of a bank account was provided to serve as a pledge to

secure the penalties under the Privatisation contract for the sale of shares of the capital of Bulgartabac-Holding AD in relation to the commitment of the Buyer – the main shareholder of the company - to make investments.

32.3. KEY MANAGEMENT STAFF Members of the Board of Directors:

For the period from 01 January 2011 to 03 November 2011 1. Alexander Dimitrov Manolev – Chairman of the BD 2. Georgi Serafimov Kostov – Member of the BD and Deputy Chairman 3. Ivan Atanasov Bilarev – Member of the BD and Executive Director For the period from 04 November 2011 to 31 December 2011 1. Alexander Jurjevich Romanov - Chairman of the BD 2. Yavor Nikolaev Draganov - Member of the BD and Vice Chairman of the BD 3. Vencislav Zlatkov Cholakov – Member of the BD and Executive Director 4. Angel Dimitrov Dimitrov – Member of the BD and Executive Director 5. Miglena Petrova Hristova - Member of the BD Procurator: Ivan Atanasov Bilarev The remunerations of the key managing staff, including the social security contributions are:

2011 2010 BGN ‘000 BGN ‘000 Remunerations and other short-term benefits 200 81 Tantiemes 5 - Total 205 81


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32.4. FOUNDATION FOR FUNDING THE SOCIAL COSTS OF BULGARTABAC-HOLDING AD PRIVATISATION

On 23 July 2004, by virtue of decisions of the Supervisory Board and Managing Board of the Company, and the achieved tripartite agreement between representatives of Bulgartabac-Holding AD, the Independent Trade Union of Tobacco Workers to the CITUB and the National Trade Union of Tobacco Industry "Podkrepa", and in execution of the mandatory instructions of the Strategy for Bulgartabac- Holding AD Privatisation approved by a decision of the National Assembly dated 10 December 2003, Bulgartabac-Holding AD shall provide BGN 100 thousand constituent fund for the establishment of Foundation for Funding the Social Costs of Bulgartabac-Holding AD Privatisation ('the Fund').

Foundation for Funding the Social Costs of Bulgartabac-Holding AD Privatisation was registered with the registry of non-profit-making legal entities by a decision No. 1 dated 9 September 2004 of Sofia City Court, with a seat and address of management at Sofia, Sredets Municipality, 62, Graf Ignatiev Street.

The objectives of the Foundation are as follows:

• To overcome the social consequences of the privatisation and restructuring of Bulgartabac-Holding AD and the other companies of Bulgartabac Group.

• To support the social integration and personal realisation of workers and employees of Bulgartabac- Holding AD and the companies of Bulgartabac Group.

• To improve the social status of persons occupied in the tobacco industry as provided in the Strategy for Bulgartabac-Holding AD privatisation. The Foundation is not limited by time and is established to perform activities of public interest. The managing bodies include a 7-member board and a manager. The manager of the Foundation is Mr.

Georgi Kostov – until 03 November 2011 he was a member of the Board of Directors of Bulgartabac-Holding AD - Vice Chairman.

33. FINANCIAL RISK MANAGEMENT Structure of the financial assets and liabilities by categories:

Loans and receivables Available-for-

sale assets

Total

BGN’000 BGN’000 BGN’000

31 December 2011 Financial assets

Investments available-for-sale - 100 100 Long-term receivables from related parties 125 - 125 Other long-term financial assets 4,138 - 4,138 Receivables from related parties 2,804 - 2,804 Trade receivables 1,314 - 1,314 Cash and cash equivalents 21,420 - 21,420 Other receivables 35 - 35 Total 29,836 100 29,936


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Other financial liabilities BGN’000

Total

BGN’000 Financial liabilities Trade payables 1,503 1,503 Other liabilities 311 311 Total 1,814 1,814

Loans and receivables Available-for-

sale assets

Total

BGN’000 BGN’000 BGN’000

31 December 2010 Financial assets

Investments available-for-sale - 100 100 Long-term receivables from related parties 423 - 423 Other long-term financial assets 655 - 655 Receivables from related parties 9,109 - 9,109 Trade receivables 1,288 - 1,288 Cash and cash equivalents 49,729 - 49,729 Other receivables 8 - 8 Total 61,212 100 61,312

Other financial liabilities BGN’000

Total

BGN’000

Financial liabilities Trade payables 525 525 Other liabilities 225 225 Total 750 750

The Company does not have the practice of working with derivative instruments. In the ordinary course of its business activities, the Company is exposed to a variety of financial risks

the most important of which are market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The general risk management is focused on the difficulties of forecasting the financial markets and minimizing the potential negative effects that might affect the financial results and position of the Company. The financial risks are currently identified, measured and monitored through various control mechanisms introduced in order to establish adequate prices for the services, provided by the Company, to appropriately assess the market circumstances related to its investments and the forms for maintenance of free liquid funds through preventing undue concentration of a particular risk.

Risk management in the Company is currently executed by the management and the respective structural units, depending on the type and specific features of various risks to which the Company is exposed in its operations.


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Below are presented the various types of risks to which the Company is exposed upon performing its commercial transactions as well as the adopted approach for managing these risks.

Market risk Currency risk The main part of the economic operations of the Company is executed in BGN or EUR. At the same time, in its activities the Company performs sales to foreign clients while a significant part

thereof is contracted in USD. Thanks to the currency board introduced in Bulgaria and the fixed exchange rate of the Bulgarian lev to EUR, the EUR-based currency risk is immaterial. Therefore, the Company is exposed to currency risk mostly in relation to its USD exposure.

An immaterial part of the Company’s financial assets and liabilities are denominated in USD (incl. cash deposited for long time in escrow accounts (other long-term financial assets)).

For the purpose of monitoring its currency risk, the Company has developed and implemented a system to

plan and monitor on daily basis the movements of USD exchange rate and to exercise control over the

forthcoming payments to and from the Company.

The tables below summarise the Company's exposure to currency risk: Foreign currency structure analysis

31 December 2011

В EUR В USD In other foreign

currency

In BGN Total

BGN’000 BGN’000 BGN’000 BGN’000 BGN’000

Financial assets

Investments available-for-sale - - - 100 100

Long-term receivables from related parties - - - 125 125

Other long-term financial assets - 585 - 3,553 4,138

Receivables from related parties - - - 2,804 2,804

Trade receivables 1,276 - - 38 1,314

Cash and cash equivalents 10,088 36 2 11,294 21,420

Other receivables 15 - 7 13 35

Total financial assets 11,379 621 9 17,927 29,936

Financial liabilities

Trade payables 181 9 - 1,313 1,503

Other liabilities 4 - - 307 311

Total financial liabilities 185 9 - 1,620 1,814


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31 December 2010

В EUR В USD In other foreign currency

In BGN Total

BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 Financial assets

Investments available-for-sale - - - 100 100

Long-term receivables from related parties - - - 423 423

Other long-term financial assets - 571 - 84 655

Receivables from related parties - - - 9,109 9,109

Trade receivables - - - 1,288 1,288

Cash and cash equivalents 29,655 355 2 19,717 49,729

Other receivables - - - 8 8 Total financial assets 29,655 926 2 30,729 61,312 Financial liabilities Trade payables 3 4 - 518 525 Other liabilities

- - - 225 225

Total financial liabilities 3 4 - 743 750

Foreign currency sensitivity analysis At 31 December 2011, 2.07% of the Company’s financial assets are in USD (31 December 2010: 1.51%).

The table below demonstrates the Company's sensitivity to a 10% increase/decrease in the current exchange rate of BGN against USD based on the structure of foreign currency assets and liabilities as at 31 December with assumption that the influence of all other variables is ignored. The effect is measured and presented as impact on the financial result after taxes and respectively, on equity - though profit.

USD

2011 2010 BGN’000 BGN’000

Financial result (profit) + 55 83 Equity (component - retained earnings) + 55 83 Financial result (loss) - (55) (83) Equity (component - retained earnings) - (55) (83)

An increase by 10% in the exchange rate of the USD to the BGN as at 31 December 2011 would increase the Company's profit (after tax) by BGN 55 thousand (2010: BGN 83 thousand) due to the effect of the increased BGN value of financial assets - other long-term financial assets and cash and cash equivalents, less the effect of the increase in the BGN value of trade payables. The analysis is based on the structure of the currency exposures in USD at the end of the reporting period, with all other variables held constant, including interest rates. Respectively, the 10% increase in the exchange rate would have the same effect also on equity through the


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component 'retained earnings' (through the current profit or loss) since the equity components of the Company are not affected by the foreign currency assets and liabilities, the revaluation of which is reported as other comprehensive income or directly in the equity.

A decrease by 10% of the exchange rate of USD to BGN would have an equal and reciprocal effect of the one stated above, on the Company's profit (after tax) and equity.

In management's opinion, the presented above sensitivity analysis based on the structure of foreign currency assets and liabilities at the date of the reporting period is representative for the currency sensitivity of the Company for the respective period (reporting year) as well.

Post-tax profit for 2011 is less sensitive to currency risk compared with the prior year due to the decrease in the Company's exposure in foreign currency assets denominated in USD, net of foreign currency liabilities denominated in USD (USD 405 thousand) compared to the net exposure in year 2010 (USD 626 thousand).

Interest rate risk Interest rate risk is the risk that the fair value or the future cash flows of the financial instruments, held

by the Company, will vary due to changes in market interest rates. Instruments with fixed interest are exposed to interest fair value risk - the price of Group's fixed-rate financial assets will decrease with the increase in the market interest rate, and vice versa.

Floating-rate financial assets and liabilities are exposed to a cash flow risk - the future cash flows from floating-rate financial instruments will vary due to changes in market interest rates.

In general, interest-bearing fixed-rate financial assets have a significant share in the structure of the Company’s assets and are represented primarily by bank deposits, cash, and fixed-rate loans granted. At the same time, the Company neither holds nor maintains interest-bearing liabilities. Therefore, the operating cash flows depend to a large extent to the changes in market interest rates.

With regard to interest-bearing assets, such as fixed-rate deposits with commercial banks, the Company applies the following procedures for current control and risk management:

- the deposit contracts concluded with commercial banks are short-term ones (usually of up to 1 month) with a maximum term of up to 3 months; - best practices are followed when selecting a bank for the purpose of achieving best interest rates, as at the same time taking into consideration the financial soundness of commercial banks and the need to diversify the risk of concentration of financial resources in the separate banks; - market conditions are constantly analysed with the support of a special department of the Company and the exposure of interest-bearing assets of the Company is controlled.

The Company holds interest-bearing assets with floating interest rates that are exposed to risk of cash

flows. These assets comprise amounts deposited (in USD) through an escrow agent hired by the Company (Notes 18, 20 and 26).


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31 December 2011

Interest-free

With floating

interest %

With fixed interest %

Total

BGN’000 BGN’000 BGN’000 BGN’000

Financial assets Available-for-sale investments 100 - - 100 Long-term receivables from related parties 21 - 104 125 Other long-term financial assets - 587 3,551 4,138 Receivables from related parties 2,534 - 270 2,804 Trade receivables 1,314 - - 1,314 Cash and cash equivalents 55 18 21,347 21,420 Other receivables 32 3 - 35 Total financial assets 4,056 608 25,272 29,936 Financial liabilities Trade payables 1,503 - - 1,503 Other liabilities 311 - - 311

Total financial liabilities 1,814 - - 1,814

31 December 2010

Interest-free

With floating

interest %

With fixed interest %

Total

BGN’000 BGN’000 BGN’000 BGN’000

Financial assets Available-for-sale investments 100 - - 100 Long-term receivables from related parties 248 - 175 423 Other long-term financial assets - 576 79 655 Receivables from related parties 8,929 - 180 9,109 Trade receivables 7 - 1,281 1,288 Cash and cash equivalents 42 18 49,669 49,729 Other receivables 5 3 - 8 Total financial assets 9,331 597 51,384 61,312 Financial liabilities Trade payables 525 - - 525 Other liabilities 225 - - 225

Total financial liabilities 750 - - 750


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Funds in the current accounts bear interest rates according to the tariffs of the relevant banks, which remain relatively constant for a longer period of time, although they are affected by the changes in the basic interest rate.

The Company's management currently monitors and analysis the exposure against changed interest rates, and measures the impact on the financial result and equity in case of change with set points or percentage of interest. For each simulation, the same assumption for interest rate shift is used for BGN and USD.

The Company’s management has performed an analysis of interest sensitivity of interest-bearing assets (with floating interest rate) as at the end of both reporting periods while preserving the respective structure of assets and liabilities, assumption for change in the interest rate for USD and BGN by 50 basis points and ignoring the influence of other factors. The change in increase of the interest rate on long-term deposits (escrow contracts) in USD and long-term receivables in BGN by 50 basis points would result in a profit (after tax) in the statement of comprehensive income of BGN 3 thousand (2010: BGN 3 thousand). Respectively, the same increase in the interest rate would have the same effect also on equity through the component 'accumulated profits' (through the net profit or loss for the year) since the equity components of the company are not affected by interest-bearing assets, the revaluation of which is reported as other comprehensive income and in the equity.

A decrease by 50 basis points of the interest rate on long-term deposits (with floating interest rate) in USD and of long-term receivables (with floating interest rate) in BGN would have an equal and reciprocal effect on the Company's (post-tax) profit and equity.

Price risk The Company is not exposed to a price risk of adverse changes in the prices of goods and services,

subject to its operations, because the goods are not traded in stock exchange and as per the contractual arrangements with clients and suppliers, prices are periodically analysed and discussed for revision and update in accordance with market changes. The major sales transactions executed by the Company cover sales of goods and finished products (tobacco), services - commissions related to purchase of raw materials, materials, and sales of finished products to subsidiaries, as well as the service to provide a licence for trademarks for the production of tobacco products. As far as the licensing service is directly related to the value of tobacco products (determined as a percent of the final selling price), management believes that no price risk exists considering that the prices to tobacco products in the domestic market are determined by the market and are only subject to registration.

In order to manage the price risk as regards the cigarette prices, the Company currently monitors the status and dynamics of the market (monitors the behaviour of the other market participants) for the purposes of adequate pricing of cigarettes depending on the market environment.

With regard to the raw tobacco bought-out, in 2011 and 2010 the Council of Ministers of the Republic of Bulgaria did not determine minimal purchase prices of tobacco, crops 2011 and 2010, and therefore, the purchase prices had been set by a decision of the Company’s management, which minimized this type of risk. Moreover, the Company is exposed to possible negative changes in the tobacco prices in the global market.

The price risk to negative changes in prices is minimized by performing periodic analyses and discussions of the contractual relations in order to re-review and update the prices vs. the market changes.

The Company does not hold a significant portfolio of available-for-sale investments in terms of amount and the available-for-sale investments held by the Company are not traded in a stock exchange; therefore, the Company is not exposed to risk of changes in the stock prices of securities (Notes 2.15 and 16).


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Credit risk Upon performing its activities, the Company is exposed to credit risk related to the risk that some of its

counterparts might not be able to discharge their obligations in full and within the normally established deadlines. The Company’s receivables are presented in the statement of financial position net, less any impairment. Such impairments have been accrued for receivables where and when there have been events identifying losses due to uncollectability based on previous experience.

The Company's financial assets are concentrated primarily in the following groups: other long-term financial assets, investments available-for-sale, and cash – cash in hand and in bank accounts (current and deposit), trade receivables, and receivables from related parties (subsidiaries), and other receivables. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets as disclosed herein (Structure of financial assets and financial liabilities by categories). A significant part of the Company’s financial assets is secured by collateral (related party receivables, trade receivables, incl. long-term ones), the fair value of which is higher than the carrying amount of the secured receivables, as disclosed in Notes 23 and 24.

In view of the credit risk of cash flows in bank accounts (current and deposit), the risk management in the case of active transactions with temporarily free cash includes the activities on identifying, measuring and controlling any potential events or situations, which could impact negatively the achievement of the company goal to ensure additional stable source of income. The object of analysis is the possible negative consequence (income outflow) which could occur as a result of an unfavourable event and the resources that will be required to overcome this event. The Company has adopted best practices and methods for selection of financial organizations to provide cash and cash equivalent management services, as also payments and other services related thereto. They have been developed on the basis of the applied Rules for the procedure, methods and criteria for selection of financial organizations providing cash and cash equivalent management services, payment and related services, financing, purchase of specific financial instruments, hedging transactions and other financial services. By working with a number of financial organizations selected according to this procedure, the concentration of risks for the Company has been minimised and its stability and steadiness has been guaranteed. The Company does not have a significant concentration of credit risk, except for the receivables from related parties being risk-bearing due to the worsened financial position. In relation to the credit risk of failure to collect the receivables from these companies (under cash loan contracts, trade representation contracts, etc) the Company undertakes the following security measures:

• under the loan agreements - collateral is required (usually at 150% of the principal) on their concluding, which includes pledge of fixed tangible assets, mortgage of real estate, etc. In addition, in some cases it is required a promissory note to be issued in favour of Bulgartabac-Holding AD - at an amount equal to the sum of principal and interest under the loan agreement as per the repayment schedule.

• with regard to trade and other receivables, which are past due and have not been secured on their origination, agreements are being concluded for their deferral and collateral is agreed at an amount not less than the initially recognised amount of the receivable. The collateral usually represents an established mortgage of property(ies);

• regarding the other agreements, which have nor been secured in advance, the following common actions are undertaken in the event of overdue payment by the debtor company - setoff of payables to the company against overdue receivables and where the payable amount is not sufficient to cover the receivable of Bulgartabac-Holding AD, then other out-of-court options are sought to settle the


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receivables (transactions related to purchases of assets owned by the debtor, which are settled by setoff).

In the Company, the servicing of receivables, the reasons for them being past due and the changes in the financial abilities of debtor companies are currently monitored and analysed, and the status and quality of collateral provided are subject to control as well. Regarding the other clients, the Company's policy is that deferred payments (credit sales) are offered as an exception only to clients having long account of business relations with the Company, good financial position and no history of credit terms violations. Receivables are controlled jointly by the trade and financial departments of the Company, by following the established common practices and monitoring the observance of contractual terms and conditions. Sales to other clients are performed mainly through advance payments (partial or full) or through payment on the transaction date.

Liquidity risk

Liquidity risk is the adverse situation when the Company encounters difficulties in meeting unconditionally its obligations within their maturity.

The liquidity management policy of the Company's is conservative maintaining a constant optimal liquid reserve, cash and a good capability for funding its business activities, continuous control monitoring of the actual and forecasted cash flows by periods ahead, and matching maturity profiles of assets and liabilities. The Company usually maintains optimal quantity of available cash so that it is able to meet its obligations at any time pursuant to their maturity. The Company generates and operates sufficient working capital and does not use borrowed credit resources to finance its operating activities.

Maturity analysis The financial and accounting departments monitor currently the maturity and the timely payments by

maintaining day-to-day information about the available cash and by analysing the forthcoming payments. Free cash is invested usually in short-term deposits with commercial banks.

The Company's financial non-derivative assets and liabilities at the end of the reporting period are presented below. The table is prepared on the basis of undiscounted cash flows and the earliest date on which the receivable and respectively, the payables, become due for payment. The amounts include principal and interest.

The Company's assets and liabilities, analysed in terms of the remaining useful lives as of the end of the reporting period, are as follows:


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31 December 2011

On demand within 1 month 1-3 months 3-6

months 6-12 months 1-2 year 2-5 years over 5

years With no maturity Total

BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000

Financial assets

Available-for-sale investments - - - - - - -

- 100 100

Long-term receivables from related parties - - - - - 125 - - - 125

Other long-term financial assets - - - - - 53 3,500 585 - 4,138

Receivables from related parties - 1,971 169 150 528 - - - - 2,818

Trade receivables - 1,278 8 4 24 - - - - 1,314

Cash and cash equivalents 1,952 19,497 - 54 - - - - - 21,503

Other receivables - - 1 1 1 - - - 32 35

Total financial assets 1,952 22,746 178 209 553 178 3,500 585 132 30,033


Trade payables - 1,503 - - - - - - - 1,503

Other liabilities 266 4 - - - - - - 41 311

Total financial liabilities 266 1,507 - - - - - - 41 1,814


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Capital risk management The capital management objectives of the Company are to build and maintain capabilities to continue its

operation as a going concern and to provide return on the investments of shareholders and economic benefits to other stakeholders and participants in its business, as well as to maintain an optimal capital structure to reduce the cost of capital.

The Company currently monitors the availability and structure of its capital. It is a characteristic feature that it traditionally funds its activities from its own generated profits and working capital.

Fair values Fair value is generally the amount for which an asset could be exchanged, or a liability settled in an

arm's length transaction between independent, willing and knowledgeable parties. The Company's policy is to disclose in its financial statements mostly the fair value of these assets and liabilities for which market quotations are available.

The fair value of financial instruments, which are not traded in active markets, is determined through valuation methods based on various valuation techniques and management assumptions made in accordance with the market circumstances as at the balance sheet date.

31 December 2010 On

demand within 1 month 1-3 months 3-6 months 6-12

months 1-2 year 2-5 years over 5 years With no

maturity Total

BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000

Financial assets

Available-for-sale investments - - - - - - - - 100 100 Long-term receivables from related parties

- - - - -

415 22

- - 437

Other long-term financial assets - - - - - 82 3 571 - 656 Receivables from related parties - 3,255 5,142 171 575 - - - - 9,143

Trade receivables - 136 256 384 512 - - - - 1,288 Cash and cash equivalents 4,262 45,547 - - - 43 - - - 49,852

Other receivables - - 1 1 1 - - - 5 8 Total financial assets 4,262 48,938 5,399 556 1,088 540 25 571 105 61,484


Trade payables - 525 - - - - - - - 525 Other liabilities 184 - - - - - - 41 225 Total financial liabilities 184 525 - - - - - - 41 750


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The fair value concept presumes realization of the financial instruments through sales. However, in most cases especially with regard to trade receivables and payables as well as provided loans and deposits, the Company expects to realize these financial assets also through their total refund or respectively, settlement over time. Therefore, they are presented at their amortised cost which is accepted as being close to their fair value.

In addition, the large part of the financial assets and liabilities are either short-term in their nature (trade receivables and payables) or are presented in the balance sheet at market value (deposits placed with banks) and therefore, their fair value is almost equal to their carrying amount. The available-for-sale investments for which neither market exists nor objective conditions for a reliable fair value measurement form an exception to this rule. Therefore, they are presented at acquisition cost (cost), which could be accepted conservatively as not materially different from their fair value.

As far as no sufficient market experience, stability and liquidity exist with regard to purchases and sales of certain financial assets and liabilities, still no adequate and reliable quotes of market prices are available thereof. The Company's management has judged that the estimates of the financial assets and liabilities presented in the balance sheet are as reliable, adequate and trustworthy as possible for financial reporting purposes under the existing circumstances in the country. 34. PRIVATISATION, LIQUIDATION AND INSOLVENCY PROCEDURES

PROCEDURE FOR THE PRIVATISATION OF BULGARTABAC-HOLDING AD By a decision of the National Assembly of the Republic of Bulgaria dated 17 December 2008

(promulgated in the State Gazette (SG), issue 109/2009) the Strategy for the privatization of Bulgartabac-Holding AD, adopted by a decision of the National Assembly dated 10 December 2003, was revoked.

By virtue of §99 of the Transitional and Final Provisions (TFP) of the State Budget Act of the Republic of Bulgaria for 2010 (promulgated in the SG, issue 110/2009) the Privatisation and Post-privatisation Control Act was amended, whereby i.1 of the List – Note No. 2 to Art. 35а., Para.1 of the Privatisation and Post-privatisation Control Act (Bulgartabac-Holding AD was taken out of the List of commercial companies with more than 50 per cent of State interest in their capital which are important to the Bulgaria’s national security) was revoked.

As a result of the publicly announced tender, in pursuance of a decision № 3219-П dated 18 April 2011 (promulgated in the State Gazette, issue 34 of 10 May 2011) of the Agency of Privatisation and Post Privatisation Control (APPC), a privatisation contract between APPC and BT Invest GmbH, Austria, was signed on 12 September 2011 for the privatisation of 79.83% of the capital of Bulgartabac-Holding AD, Sofia.

On 14 October 2011, the Agency, in its capacity of a seller, transferred to BT Invest GmbH, Austria, 5,881,380 shares, or 79.83% of the capital of Bulgartabac-Holding AD.

Citigroup Global Markets Limited was selected by the Agency of Privatisation and Post Privatisation Control to be the consultant on the transaction.


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LIQUIDATION AND INSOLVENCY PROCEDURES

Аsenovgrad Tabac AD (in liquidation) By a decision of the General Meeting of Shareholders of the Company held on 01 September 2011 the

following decisions were made: to terminate and announce the liquidation of the company, to discontinue the powers of the Board of Directors, to determine a deadline for completion of the liquidation – one year as of the date of announcing the invitation to creditors to claim their receivables, and to appoint a liquidator.

The decision was registered with the Trade Register at the Registry Agency on 05 October 2011. The sale of the property, plant and equipment, owned by Asenovgrad Tabac AD, is forthcoming.

Haskovo Tabac AD (in liquidation) The decision of the General Meeting for winding-up of the company and starting a liquidation

procedure was entered with a decision of Haskovo District Court dated 31 March 2006. On 11 July 2006 the creditors were invited by a published invitation by liquidators to request their receivables within a three- month period as of that date. Encashment of company's property was forthcoming for their settlement. With a decision of the General Meeting of Shareholders, dated 9 May 2007, the initial financial statements and the balance sheet at the liquidation date were approved. Initially, the liquidation deadline was 12 January 2008 and had been extended for a number of times.

By a decision of the General Meeting of Shareholders held on 04 January 2012 the deadline for completion the company's liquidation was extended by 12 (twelve) months as of 11 January 2012.

Dulovo Tabac AD (in insolvency) By a decision No 32 dated 22 January 2010 issued in relation to a commercial case No 105/2009 in the

inventory of the Silistra District Court, the following decisions were taken: • the insolvency of „Dulovo Tabac” AD was announced, effective 17 November 2008; • an insolvency proceeding was opened as regards the company; • collateral is allowed in the form of pledge and interdiction imposed on the entire property of the company; • the activity of the entity „Dulovo Tabac” AD was terminated; • „Dulovo Tabac” AD was announced insolvent; • the case proceedings was stopped.

The decision was appealed against by the State Receivables Collection Agency but only in its part

concerning the effective date of the company’s insolvency and the revocation of this part only was claimed. By a decision No 47 dated 28 April 2010 of the Varna Appellate Court, the initial date of insolvency of

Dulovo Tabac AD was repealed and a new initial date of insolvency was set, namely 26 April 2002. In January 2011, two appeals were filed for the re-initiation of proceedings – by the National Revenue

Agency and CD TAB EOOD, as well as an application for the suspension of the proceeding by CD TAB EOOD. At present, procedures on passing judgements on the applications filed are ongoing.


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35. EVENTS AFTER THE END OF THE REPORTING PERIOD

At its meeting held on 23 January 2012, the Board of Directors of Bulgartabac-Holding AD approved the new organizational and management structure, which had been changed by a decision of the same body dated 29 February 2012.

There were no other significant events after the end of the reporting period to the date of approval of the financial statement, which could have an impact on the assets, liabilities, income and expenses of the Company. 36. CLAIMS TO THE COMPANY

Claims of the Russian Federation Regarding Properties of the Group Companies The Embassy of the Russian Federation in Bulgaria delivered four notes (97/28.11.2001, 29/04.04.2002,

4357/11.06.2002 and 9336-n/3ed/17.12.2002) to the Ministry of External Affairs whereby it laid claims of the Russian Federation in regard of the title of ownership on assets of companies belonging to the Group.

The Russian Federation grounded that claim on the decisions of the Berlin Conference of the Three Powers dated from year 1945 and the Law of the Bulgarian Government for Delivery of the Ownership on the German Properties in Bulgaria to the Soviet Union (State Gazette, issue 120/31 May 1946).

On 11 July 2002, the Ministry of External Affairs delivered a note to the Embassy of the Russian Federation in Sofia stating the official position of the Bulgarian party with regard to the claims of the Russian Federation for assets of companies belonging to Bulgartabac Group. The note stated that the inspection performed had found out that the said companies and assets had been transferred to the Bulgarian party gratuitously, unconditionally and ultimately based on a series of international agreements related to the peace treaties after the World War II. Therefore, they could not be subject to negotiations between the Republic of Bulgaria and the Russian Federation. In this sense, the Bulgarian party regards as unjustifiable the claims related to the so called 'rights over part of the assets of Bulgartabac Holding AD'.

This official position of the Ministry of External Affairs of the Republic of Bulgaria was also confirmed in note Ref. No. 55-64-186/27 December 2002, addressed to the Embassy of the Russian Federation in Sofia. The Bulgarian party expressed its opinion that the Russian party in its note dated 17 December had not provided new legal or factual information to serve as grounds for change in the position of the Bulgarian party with regard to the claims to the assets of Bulgartabac Holding AD, expresses in previous notes, and that one-side termination of the 'Agreement of 4 July 1953' could only be made if legal grounds for that exist.

By a letter Ref. No. 26-Б-50/05.03.2006, the Ministry of Economy and Energy confirmed that it did not have information for new documents received and/or new circumstances occurred, which could change the position that the claims of the Russian party for the assets of companies belonging to Bulgartabac Group, were unjustifiable.

In the same letter, the Ministry of Economy and Energy informed us that: • By a letter of 14 February 2007, the Embassy of the Republic of Bulgaria in Moscow notified about a

publication in the semi-official paper Rossiyskaya Gazeta of the same date in the section for orders of the government of the Russian Federation, regarding an approved decision for terminating the validity of the Agreement to grant on lease to the Republic of Bulgaria enterprises and properties, signed between the Chief Office for Soviet Property Overseas at the Ministry of Internal and External Trade of the USSR and the Ministry of Finance of the Republic of Bulgaria (in its part referring to tobacco industry objects) on 4 July 1953 in Sofia.


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• It had the position of the International Law Directorate to the Ministry of External Affairs of the Republic of Bulgaria dated 27 December 2002 according to which the stated Agreement could not lead to legal conclusions other than the already stated by the Bulgarian party since a subsequent valid international agreement existed, which settled the same issues.

By a letter Ref. No. T-26-Б-26 dated 08 February 2011, the Ministry of Economy and Energy confirmed that at the present moment it had not been provided with new documents and information, which could be used as arguments to change the position that the claims of the Russian party for the assets of companies belonging to Bulgartabac Group, were unjustifiable.

By a letter Ref. No. 21-00-22 dated 28 January 2011, the Ministry of External Affairs informed the management of Bulgartabac-Holding AD that it did not have information about facts and circumstances that should necessitate change in the position expressed in the note to the Embassy of the Russian Federation in Sofia of 11 July 2002, which stated the official position of the Bulgarian party.

On 27 September 2011, the Ministry of Economy, Energy and Tourism informed the management of Bulgartabac-Holding AD that it had received a letter (ref. № of MEET No Т 99-00-93 dd. 29 August 2011) by the law firm CMS, Russia, regarding claims of the Russian Federation towards the property of Bulgartabac-Holding AD and Sofia-BT AD.

I, the undersigned ........................................., hereby certify the correctness of the translation made by me from Bulgarian into English of the document herewith enclosed / Annual Separate Financial Statements of Bulgartabac – Holding AD for 2011. The translation consists of 93 (ninety-three) pages. Translator: ________________ ....................................................

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